In the Union Budget 2025 presented on February 1, 2025, Finance Minister Nirmala Sitharaman announced significant reforms to the income tax system, introducing new tax slabs and marginal relief measures aimed at providing substantial tax relief to the middle class and boosting economic growth.

New Income Tax Slabs

Under the new tax regime, the income tax slabs have been revised as follows:

• Income up to ₹4 lakh: No tax

• Income between ₹4 lakh and ₹8 lakh: Taxed at 5%

• Income between ₹8 lakh and ₹12 lakh: Taxed at 10%

• Income between ₹12 lakh and ₹16 lakh: Taxed at 15%

• Income between ₹16 lakh and ₹20 lakh: Taxed at 20%

• Income between ₹20 lakh and ₹24 lakh: Taxed at 25%

• Income above ₹24 lakh: Taxed at 30%

For salaried individuals, the nil tax limit is effectively ₹12.75 lakh per annum, considering the standard deduction of ₹75,000. This means that individuals with an annual income of up to ₹12.75 lakh will not have to pay any income tax. The highest tax rate of 30% will now be applicable on incomes exceeding ₹24 lakh, providing substantial tax savings and encouraging investment.

Marginal Relief

The concept of marginal relief has been introduced to prevent individuals with income slightly above the nil tax threshold from facing a disproportionately high tax burden. Previously, those earning just over ₹12 lakh would have been subject to a significant tax liability compared to those earning just below ₹12 lakh. With marginal relief, the tax liability for such individuals will be significantly reduced.

For example, for a person with an income of ₹12,10,000, without marginal relief, the tax liability would have been ₹61,500. However, with marginal relief, the actual tax payable is only ₹10,000. The rationale behind marginal relief is to ensure that the post-tax income of individuals earning just above the threshold remains comparable to those earning exactly ₹12 lakh, who pay no tax at all. It is important to note that the maximum rebate available is ₹60,000, applicable to taxpayers earning up to ₹12 lakh, and marginal relief is only admissible for incomes up to approximately ₹12.75 lakh. Beyond this, regular tax slabs apply without additional relief.

Impact and Significance

These changes are expected to provide substantial tax relief to the middle class, leaving more money in their hands for household consumption, savings, and investment. It is estimated that individuals earning up to ₹25 lakh will receive a tax benefit of up to ₹1.1 lakh. The government aims to boost economic growth by enhancing the financial security and disposable income of taxpayers. The Finance Minister emphasized that the middle class plays a crucial role in India's economic development and that these tax reforms are a recognition of their contribution. The revised tax slabs and marginal relief measures are expected to benefit a large number of taxpayers and contribute to the overall economic well-being of the country.

Additional Tax Reforms

In addition to the revised income tax slabs and marginal relief, the Finance Minister announced several other tax reforms aimed at easing the compliance burden and providing further relief to taxpayers:

• Rationalisation of TDS and TCS: The tax deduction limit on interest for senior citizens has been doubled from ₹50,000 to ₹1 lakh. The annual TDS limit on rent has been increased from ₹2.40 lakh to ₹6 lakh, and the threshold for collecting tax on remittances under the RBI's Liberalized Remittance Scheme has been raised from ₹7 lakh to ₹10 lakh. The removal of TCS on educational remittances on educational remittances the Liberalized Remittance Scheme when funded by loans from financial institutions is also a significant reform.

• Easing Compliance Burden: The compliance burden for small charitable trusts and institutions will be eased by extending their registration period from 5 to 10 years. Taxpayers will be allowed to claim the annual value of two self-occupied properties as nil, without any conditions. The time limit for filing updated income tax returns for any assessment year will be extended from two years to four years.

Broader Economic Objectives

While the primary focus of these tax reforms is to provide relief to the middle class, they are also part of a broader strategy to stimulate economic growth and maintain fiscal discipline. The government has projected a fiscal deficit of 4.8% of GDP for FY25 and 4.4% for FY26, with net market borrowings estimated at ₹11.54 lakh crore for the upcoming fiscal year. The Budget identifies four key pillars to drive the nation’s economic momentum—agriculture, MSMEs, investment, and exports. These sectors will act as growth engines, fueled by targeted reforms and strategic government interventions.

Conclusion

The income tax reforms announced in the Union Budget 2025 are expected to have a significant positive impact on the middle class in India. The revised tax slabs and marginal relief measures will provide substantial tax relief, enhancing disposable income and stimulating consumption. These reforms are a crucial step towards achieving inclusive and sustainable economic growth in the country.