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Our hon’ble FM Smt. Nirmala Sitharaman, today on February 1, 2025, presented her eighth Union Budget presentation in a row. In her Budget speech, FM acknowledged the admirable energy and ability of the middle class in nation building. She also remarked that the Government is committed to keeping an ear to the ground and a finger on the pulse, and responding, while balancing the nation-building efforts. The proposed amendments in the Finance Bill 2025, aim at substantially reducing the taxes of the middle class and leave more money in their hands, boosting household consumption, savings and investment. FM also informed that the draft of the new Income Tax Bill will also be introduced in the upcoming week. Balancing the Capex Outlay of Rs. 10.18 lac crores, the fiscal deficit is estimated to be pegged at 4.4% of GDP in fiscal 2025-26.

With a view to simplify the complex maze of plethora of deduction claims of the individuals and HUF taxpayers, the Government of India, introduced the New Personal Tax/ Alternative Tax Regime, w.e.f. FY 2020-21 and onwards with reduced tax rates under a new section 115BAC of the Income Tax Act.

The compulsory requirement of foregoing of the majority of the available specified deductions by the individuals and HUFs opting for the new personal tax regime viz. deductions u/s 80C, 80D, 80E, 80G, 80QQB, 80TTA, 80TTB, 80CCD(1)/(1B), HRA u/s 10(13A), interest on housing loan in respect of self-occupied property u/s 24(b), made the said new regime unpopular and with a very few takers.

In order to make the new regime more appealing to the taxpayers, several significant amendments in the new personal tax regime u/s 115BAC, have been introduced in gradual phases in the Finance Acts of 2023, 2024 and now in the Finance Bill 2025.

Amendments proposed in the Finance Bill, 2025

The Finance Bill 2025 proposes to further sweeten the new personal tax regime, with the reduced tax slab rates, applicable w.e.f. FY 2025-26, as under:

No Income Tax for Income upto Rs 12 lacs in New Regime

The Finance Bill 2025 also proposes that persons opting for the new personal tax regime w.e.f. FY 2025-26 and onwards, and having income (taxable at normal rate) upto Rs 12 lacs, will not be required to pay any income tax, after availing the rebate amount of upto Rs. 60,000/- under section 87A of the Income Tax Act.

Only Normal Rate Incomes Eligible for Section 87A Rebate

The Finance Bill 2025 further proposes to insert a second proviso to section 87A rebate section, with the objective of providing that rebate under this section will be available only for incomes taxable at normal rates and not to special rates incomes like short term capital gain income taxable @ 20% u/s 111A and long term capital gain income taxable @12.5% u/s 112A of the Income tax Act. The Explanatory Memorandum to the Finance Bill 2025, also clarifies this proposition.

Thus, the increased rebate amount of Rs. 60,000 u/s 87A, from the existing rebate amount of Rs. 25,000, pursuant to an increase in threshold limit of income from Rs 7 lacs to Rs 12 lacs in the new personal tax regime, applicable w.e.f. FY 2025-26, will be available only in respect of incomes taxable at normal rate and all special rates incomes including long term and short term capital gains income shall be excluded for calculating rebate u/s 87A.

Break-Even Point Analysis to Make an Informed Choice between the Old & the New Personal Tax Regime, amended as per Finance Bill, 2025

In order to make an informed choice between the Old and the New Personal tax regime, as per the Break-Even Point analysis, the exact amount of specified deductions which are required to be claimed by the individual and HUF taxpayers in the old regime, at different levels of income, to break-even with the reduced tax liability in the new personal tax regime, proposed to be amended as per the Finance Bill, 2025, have been worked out, and the same are tabulated below:

Table 1 Break Even Point Analysis for Salaried Class  

[Updated as per the Finance Bill, 2025]

Concluding Remarks: As is evident from the above ‘Break-Even Point Table’, the requirement of having such substantial and higher amounts of break-even level of eligible deductions in the old regime, to break-even with the reduced tax liability in the new regime, as amended by the Finance Bill, 2025, signifies an inevitable switch to the new personal tax regime in the upcoming FY 2025-26. The common eligible deductions u/s 80C with a cap of Rs. 1.5 lacs coupled with the HRA deduction u/s 10(13A) capped at 50% of the basic salary, may no longer be able to equal or beat the above break-even points of higher deductions needed for the old regime to become more beneficial. Thus, perhaps, it is time to bid an adieu to the old personal tax regime, finally.

This Article has also been published in Taxmann.