chapter 15

Union Budget  2025-26 : A Historic Tax Relief for Middle-Class Taxpayers.Article No 5 : 02 /02 / 2025#Incometaxindia#Unionbudget#vkspagesThe Union Budget for 2025-26, presented on February 1, 2025, by the Hon’ble Finance Minister Ms. Nirmala Sitharaman, brought unprecedented tax relief to middle-class taxpayers. This budget stands out as one of the most revolutionary in India’s tax history, significantly reducing the tax burden and simplifying the taxation system.1. Enhanced Tax Exemptions and Rebates:(i) Basic Exemption Limit Increased:For the first time, the basic exemption limit under the new tax regime has been raised to   Rs. 4,00,000, providing direct relief to lower-income individuals.(ii) 100% Tax Rebate Up to  Rs. 12,00,000 Income :A 100% rebate has been introduced for individuals with annual income up to ₹12,00,000. This effectively means that taxpayers earning up to this limit will not pay any tax, leading to substantial savings.(iii) Rationalized Tax SlabsThe government has rationalized tax rates under the new tax regime, making the structure more progressive and taxpayer-friendly.    Income Range (Rs)       Tax Rate     Up to   Rs.   400000         NILRs. 400001 -     800000           5%Rs. 800001 -   1200000         10%Rs. 1200001 - 1600000        15%Rs. 1600001 - 2000000        20%Rs. 2000001 - 2400000        25%Above ₹24,00,000                30%With this revised structure, the highest tax rate of 30% is now applicable only for income above Rs. 24,00,000 from the existing limit of Rs. 15,00,000, reducing the tax burden on middle-income earners.2. Tax-Free Income for Salaried Employees Up to Rs. 12,75,000: Considering the rebate and standard deductiaon, salaried employees earning up to Rs. 12,75,000 per annum will pay zero tax, ensuring significant savings for the working class. 3. Relief in TDS on Interest Income(i) Threshold for TDS on Bank Term Deposit Interest: Raised from  Rs. 40,000 to Rs. 50,000 per annum for the general public.(ii) Senior Citizens’ Exemption: The threshold for non-deduction of TDS on term deposits for senior citizens has been doubled to Rs.  1,00,000 from Rs. 50,000.4. Higher Exemption on Rental Income : The TDS exemption threshold on rental income has been increased from Rs. 2,40,000 to Rs. 6,00,000 per annum, benefiting landlords and property owners, especially those dependent on rental income.5. The Evolution of Tax Rates in India:Historically, India had one of the highest marginal tax rates, reaching 97.75% in 1973-74 for incomes above Rs. 2,00,000. In simple terms, this meant that for every Rs. 100 you earned above Rs. 2,00,000, you could get just Rs. 2.25. What an injustice by the Government. For earning an income of just  Rs. 2,250, you should pay whopping tax of Rs. 97,750 to the Government. Can you believe this? This might be the main reason for increase of corruption in the tax departments.The policies of various Governments ruled our country, saw taxation as “major instrument to achieve greater equality of incomes and wealth”.  Unbelievably,  the policy was to tax small pool of people heavily, instead of widening the tax net. That did not work. Finally, large scale tax evasion forced the policy to be withdrawn within years based on the report by the ‘Direct Taxes Enquiry Committee’  which  made the findings that, the large-scale tax evasion was mainly  due to   the exorbitant tax rates ,among other reasons. It was also observed that, prevalence of high tax rates is the first and foremost reason for tax evasion because this is what makes the evasion so profitable and attractive in spite of the attendant risk.6.   O ver the years, the rates have been rationalized:1974 - 75 : Highest rate reduced to 77%1985 - 86 : Highest rate reduced to 50%1992 - 93 :  Highest rate reduced to 40% and Simplified to three slabs - 20%, 30%, and 40%.1997 - 98 : Highest rate reduced to 30% with reduced slab rates to 10%, 20%, and 30%.2025 - 26: A balanced structure, capping the highest rate at 30% above ₹24 lakh.These reforms reflect a shift from over-taxation to broadening the tax base, ensuring better compliance and economic growth.  The government and policy makers should have realised that, decrease in tax rates increased the tax collections.7. MR, AI & Data Analytics for Better Compliance:The Income Tax Departments is now fully equipped with Machine Reading (MR), Artificial Intelligence (AI), and Data Analytics (DA) to analyse data captured from return filed by the tax payers.   Data is automatically gathered from banks, stock brokers, property registrars, Forex dealers and international authorities, making tax evasion difficult. Any discrepancy in tax filings can now be detected in seconds, with immediate issuance of tax notices to the tax payers. Sometime, it is surprised to receive the notice by the tax payer for such discrepancies within a minute from the filing and asking the tax payer to rectify the same.8. A Trust-Based Taxation SystemIn her speech, Ms. Sitharaman emphasized the principle of "Trust First, Scrutinise Later", ensuring that tax filings are accepted without mandatory scrutiny, except in cases of discrepancies.  Over the past 10 Years, the Government has implemented several reforms for convenience tax payers, such as faceless assessment, rationalisation of penalty provisions such as levy of nominal and mandatory penalty without any discretenery powers, tax payer charter, faster refunds etc.   Sometimes refund were credited tax tax payer's account  within a few minutes of filing his returns. This trust-based approach encourages voluntary compliance and reduces harassment of genuine taxpayers and almost 99 per cent returns being accepted without further scrutiny.9. ConclusionThe Union Budget 2025-26 is a landmark reform, providing historical tax relief to the middle-class population. With higher exemption limits, rationalized tax slabs, and advanced compliance mechanisms, this budget ensures a simplified, fair, and growth-oriented tax system. By prioritizing tax savings and financial ease for individuals, the government has strengthened the foundation for an inclusive and progressive economy.CA V. K. S. Shetty, Bangalore .