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Understanding the New Income Tax Regime Post-Budget 2025: Key Changes and Implications

Finance Minister Nirmala Sitharaman's Budget 2025 has unveiled several reforms in the income tax domain, focusing on reducing the tax burden for the middle class and promoting compliance. Let's explore the major changes:

1. Revised Income Tax Slabs

The government has restructured the income tax slabs to offer greater relief to taxpayers:

  • Income up to ₹4,00,000: NIL (No tax).
  • Income from ₹4,00,001 to ₹8,00,000: 5%.
  • Income from ₹8,00,001 to ₹12,00,000: 10%.
  • Income from ₹12,00,001 to ₹16,00,000: 15%.
  • Income from ₹16,00,001 to ₹20,00,000: 20%.
  • Income from ₹20,00,001 to ₹24,00,000: 25%.
  • Income above ₹24,00,000: 30%.

This revision ensures that individuals with an annual income up to ₹12 lakh are not liable to pay any income tax, thereby increasing disposable income.

2. Enhanced Rebate Under Section 87A

The rebate under Section 87A has been increased to ₹60,000 from the previous ₹25,000. This means taxpayers with a net taxable income of up to ₹6 lakh can now avail of a full rebate, resulting in zero tax liability.

3. Introduction of Updated Income Tax Return (ITR-U)

To encourage voluntary compliance, the Budget 2025 introduces the Updated Income Tax Return (ITR-U). This provision allows taxpayers to rectify errors or omissions in their previously filed returns within two years from the end of the relevant assessment year. This initiative aims to reduce litigation and promote transparency.

4. Taxation of Unit-Linked Insurance Plans (ULIPs)

The Budget 2025 has revised the tax treatment of ULIPs. The tax exemption for NPS will now be extended to NPS Vatsalya too.

5. Tax Collected at Source (TCS) on Remittances

The threshold for TCS on remittances under the Liberalised Remittance Scheme (LRS) has been increased from ₹7 lakh to ₹10 lakh. Additionally, TCS on remittances for education purposes, when funded through loans from specified financial institutions, has been removed.

6. Removal of TCS on Sales Under Section 206C(1H)

The Budget 2025 has scrapped the provision requiring sellers to collect tax at source on sales under Section 206C(1H) with effect from March 31, 2025. This change aims to eliminate confusion arising from similar TDS provisions under Section 194Q.

7. Taxation of National Pension System (NPS) Vatsalya

The tax exemption for NPS will now be extended to NPS Vatsalya too.

Implications for Taxpayers

These reforms are designed to:

  • Reduce Tax Burden: Lower tax rates and enhanced rebates will decrease the overall tax liability for many individuals.
  • Encourage Compliance: The introduction of ITR-U provides an opportunity for taxpayers to correct past errors, promoting voluntary compliance.
  • Simplify Taxation: The removal of certain TCS provisions and the extension of tax exemptions aim to streamline the taxation process.

Conclusion

The Union Budget 2025 introduces several taxpayer-friendly measures, focusing on reducing the tax burden and simplifying the tax filing process. It's advisable for taxpayers to review these changes and consult with tax professionals to optimize their tax planning strategies.

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