Budget 2025: Is It Time for Big Updates in the Old Tax Regime?

As we eagerly await Finance Minister Nirmala Sitharaman's announcement of the Union Budget on February 1, 2025, the salaried class is hoping for some good news specifically, potential income tax reliefs. The New Tax Regime, which was introduced in 2020, has caused a shift in how taxpayers approach tax planning, but many are still holding on to the Old Tax Regime. Let's take a closer look at what taxpayers are hoping for in the upcoming budget and whether the Old Tax Regime might get an update.

A Quick Look at the Tax Regimes

The New Tax Regime: A Simplified Yet Limited Option

Last year, in her 2024 budget speech, Finance Minister Nirmala Sitharaman introduced a revamped tax structure under the New Tax Regime, which became effective from April 1, 2024. This system offers lower tax rates but removes many of the exemptions and deductions that people were accustomed to in the Old Tax Regime. While this has made filing taxes simpler for some, others still prefer the Old Tax Regime due to its attractive deductions, such as those under Section 80C, Section 80D, and various home loan exemptions.

Why the Old Tax Regime Still Holds Relevance

Despite the allure of lower rates in the New Tax Regime, the Old Tax Regime continues to be a favorite for many taxpayers. This is primarily because of the numerous exemptions and deductions it offers. For example, deductions under Section 80C allow taxpayers to save on taxes by investing in instruments like Public Provident Fund (PPF), National Savings Certificates (NSC), and Equity Linked Savings Schemes (ELSS). This has made the Old Tax Regime more appealing to taxpayers with large investments or those claiming multiple exemptions.

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What Taxpayers Hope to See in the 2025 Budget

Will There Be Changes to the Old Tax Regime?

With the government's current focus on the New Tax Regime, it seems unlikely that major changes will be introduced to the Old Tax Regime. However, if the Old Tax Regime continues to remain an option, there may be an opportunity to address long-standing concerns. Many taxpayers are hoping to see an increase in the deduction limits under Section 80C, which currently stands at Rs 1.5 lakh, an amount that has not been revised since the 2014-15 financial year. Khyati Amlani, a corporate legal counsel in Mumbai, believes this amount is insufficient to meet taxpayers' growing financial needs.

A Possible Boost to the HRA Exemption Limit

Another area where taxpayers hope to see changes is in the House Rent Allowance (HRA) exemption. Currently, the HRA exemption limit is set at 50% of basic salary for employees in metro cities like Delhi, Mumbai, Chennai, and Kolkata, and 40% for those in other cities. Considering the rise of cities like Bangalore, Pune, Hyderabad, and Gurgaon, which are emerging as significant economic hubs, there is a proposal to increase the HRA exemption cap for these cities to 50% of basic salary.

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How the New Tax Regime is Changing the Game

Tax Slabs: An Ongoing Adjustment

The new tax regime has already undergone two revisions since its introduction, with adjustments made to the tax slabs to benefit the middle class. In the 2024-25 Budget, Finance Minister Sitharaman raised the standard deduction limit from Rs 50,000 to Rs 75,000 under the new system. Additionally, changes to the tax slabs led to a tax saving of Rs 17,500 for salaried individuals. The 2025 Budget is expected to continue this trend with further revisions.

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The NPS Contribution Benefit

One of the key updates from last year was the increase in the tax benefit on employers' contributions to employees' National Pension System (NPS), from 10% to 14%. This change is aimed at encouraging more employees to save for their retirement while reducing their taxable income.

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Conclusion: Will the Old Tax Regime Survive?

While it's still unclear whether the government will make significant changes to the Old Tax Regime, it is clear that taxpayers are eagerly waiting for updates. As the 2025 Budget approaches, all eyes will be on Finance Minister Sitharaman to see if any of these long-standing concerns are addressed. Regardless of the outcome, both tax regimes offer unique benefits, and understanding the differences will help taxpayers make the most of their tax-saving options.

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