As the Union Budget 2025 approaches, a report by SBI Research has proposed sweeping reforms to India’s taxation system. Released ahead of Finance Minister Nirmala Sitharaman’s budget speech on February 1, 2025, the report suggests abolishing the old tax regime and transitioning entirely to the new system introduced in 2020. The recommendations aim to simplify taxation, encourage compliance, and stimulate economic growth.
Key Recommendations to Revamp Taxation
The SBI Research report highlights several measures to improve India’s taxation framework. It suggests increasing the National Pension System (NPS) contribution limit from ₹50,000 to ₹1 lakh, which would encourage higher retirement savings. Similarly, it proposes raising the deduction for health insurance premiums under Section 80D from ₹25,000 to ₹50,000 to provide taxpayers with greater relief for medical expenses.
The report also advocates a reduction in tax rates for incomes between ₹10 lakh and ₹15 lakh, lowering them from 20% to 15%. At the same time, it recommends retaining the highest tax rate of 30% for incomes above ₹15 lakh.
Simplifying Taxation for Deposits
SBI Research proposes a uniform 15% tax on income earned from bank deposits, regardless of their maturity periods. This move is aimed at simplifying compliance for deposit holders. Additionally, the report suggests increasing the tax exemption limit for interest earned on savings account deposits to ₹20,000, offering further relief to individual taxpayers.
Revenue Implications of Proposed Reforms
While these changes could simplify the tax system and boost consumer spending, they may also lead to a short-term revenue loss. The report estimates a potential loss of ₹50,000 crore, equivalent to 0.14% of India’s GDP. Despite this, Dr. Soumya Kanti Ghosh, SBI Group Chief Economic Advisor, believes the reforms would drive long-term gains. “The government can stimulate income growth and encourage consumption by transitioning fully to the new tax regime,” Dr. Ghosh noted.
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The Fate of the Old Tax Regime
The report highlights ongoing discussions about the future of the old tax regime. While no official announcements have been made, SBI Research suggests that exemptions under the old system could be absorbed into the new regime.
Despite the simplicity of the new tax structure, many taxpayers still prefer the old regime. This is largely due to the deductions offered under Sections 80C and 80D.
Calls for Broader Tax Adjustments
In recent years, there have been repeated appeals for adjustments to the new tax regime, including reduced rates and expanded exemptions. The proposed reforms align with these demands but represent a significant shift in India’s taxation landscape.
Balancing Revenue and Growth
The report underscores the delicate balance the government must strike between managing short-term revenue impacts and driving long-term economic benefits. Budget 2025 is poised to play a critical role in shaping India’s taxation framework, potentially setting the stage for a more streamlined and equitable system that supports both economic growth and individual prosperity.
