Will Government Increase Income Tax Exemption Limit To 18 Lakh In Budget 2025

In anticipation of the Union Budget 2025, Adhil Shetty, CEO of BankBazaar, has proposed significant reforms to India's income tax structure. He suggests raising the threshold for the 30% tax bracket from ₹15 lakh to ₹18 lakh, restructuring tax brackets, and introducing a standardized 30% deduction on gross income.

Raising the 30% Tax Slab to ₹18 Lakh

Shetty points out that the 30% tax slab has remained at ₹15 lakh since 2020, despite a 21% rise in the Cost Inflation Index. He proposes increasing this threshold to ₹18 lakh to account for inflation and provide relief to urban salaried individuals facing rising costs. This adjustment aims to distribute the tax burden more equitably among higher-income earners.

Restructuring Tax Brackets

Shetty emphasizes the importance of enhancing income tax brackets rather than solely increasing the basic exemption limit. He cautions that raising the tax-free income to ₹10 lakh could shift the tax burden to higher earners. According to data from Assessment Year 2023-24, just 2% of taxpayers contributed 77% of income tax. Shetty advocates for a balanced approach to ensure fairness across all income levels.

Introducing a 30% Flat Deduction to Encourage Savings

Shetty observes a decline in long-term savings and insurance adoption due to the absence of deductions in the new tax regime. He notes that life insurance penetration is decreasing, and Equity-Linked Savings Scheme (ELSS) inflows are falling despite strong equity performance. Additionally, fewer salaried individuals are participating in small savings schemes, and interest in the National Pension System (NPS) remains low. To address these concerns, Shetty recommends a 30% flat deduction on gross income with a ₹15 lakh ceiling on deductions. He believes that a simplified deduction structure would incentivize savings, insurance, and long-term financial planning, which are vital for household stability.

These proposals aim to modernize India's tax system, making it more equitable and encouraging financial prudence among taxpayers.