Personal Income Tax Reform Proposals

Introduction

Budget 2025 introduces substantial reforms to the personal income tax framework, aiming to ease the burden on taxpayers while promoting greater compliance. Key proposals include a rationalisation of income tax slabs under the new regime, an increased rebate limit under Section 87A, and an extended window for filing updated returns. The budget also simplifies tax provisions for self-occupied properties, clarifies the taxation of Unit Linked Insurance Policies (ULIPs), and extends tax benefits for contributions to the NPS Vatsalya scheme. Additionally, exemptions have been proposed for withdrawals under the National Savings Scheme.

Rationalisation of Income Tax Rates and Slabs

For Assessment Year 2026–27, the income tax structure under the New Regime has been rationalised to provide broader relief and simplify compliance. The revised income tax slabs for individuals are outlined below:

Sl. No.	Total Income	Rate of Tax
1	Up to ₹4,00,000	Nil
2	₹4,00,001 to ₹8,00,000	5%
3	₹8,00,001 to ₹12,00,000	10%
4	₹12,00,001 to ₹16,00,000	15%
5	₹16,00,001 to ₹20,00,000	20%
6	₹20,00,001 to ₹24,00,000	25%
7	Above ₹24,00,000	30%

The income limit for availing tax rebate under Section 87A has been proposed to increase from ₹7 lakh to ₹12 lakh under the New Regime. Consequently, the maximum rebate available will rise from ₹25,000 to ₹60,000.

This implies that no income tax will be payable on income up to ₹12 lakh under the New Regime (excluding income taxed at special rates such as capital gains). For salaried taxpayers, considering the standard deduction of ₹75,000, this effective threshold increases to ₹12.75 lakh.

Taxpayer Benefit Examples under the New Regime:

Income of ₹12 lakh: Full tax rebate of ₹80,000, resulting in 100% relief compared to existing rates.
Income of ₹18 lakh: Tax saving of ₹70,000, which is 30% of the tax payable under current rates.
Income of ₹25 lakh: Benefit of ₹1,10,000, approximately 25% of tax payable under existing rates

Extension of Time Limit for Filing Updated Returns

Under the current provisions of Section 139(8A) of the Income Tax Act, taxpayers are allowed to file an updated return within 24 months from the end of the relevant assessment year. This provision encourages voluntary compliance, subject to payment of additional income tax as follows:

25% of the aggregate tax and interest payable if the updated return is filed within 12 months
50% if filed between 12 and 24 months

To further promote voluntary tax compliance, it is proposed to amend Section 139(8A) by extending the time limit to file an updated return from 24 months to 48 months from the end of the relevant assessment year.

The revised structure for additional income tax payable will be:

60% of the aggregate tax and interest for updated returns filed between 24 and 36 months
70% of the aggregate tax and interest for updated returns filed between 36 and 48 months

These amendments are proposed to be effective from April 1, 2025

Simplification of Annual Value for Self-Occupied Properties

Currently, taxpayers can claim a nil annual value for self-occupied properties only if specific conditions are met. To ease compliance and address challenges faced by taxpayers, it is proposed that the benefit of nil annual value be allowed for up to two self-occupied properties without any conditions.

Clarifying Income on Redemption of Unit Linked Insurance Policies (ULIPs)

It is proposed to streamline the provisions relating to ULIPs as follows:

ULIPs not eligible for exemption under Clause (10D) of Section 10 will be classified as a capital asset under Clause (14) of Section 2.
Profits and gains from the redemption of such ULIPs will be taxed as capital gains in accordance with Sub-section (1B) of Section 45.
These ULIPs will also be included in the definition of equity-oriented funds under Clause (a) of the Explanation to Section 112A

Deduction under Section 80CCD for Contributions to NPS Vatsalya

The NPS Vatsalya Scheme, launched on 18 September 2024, allows parents or guardians to open a National Pension Scheme (NPS) account for minors. This savings-cum-pension scheme is operated by the guardian solely for the benefit of the minor until they reach adulthood. Upon turning 18, the account is transferred to the child’s name, along with the accumulated corpus, and converted into an NPS Tier-1 Account (All Citizen Model) or another non-NPS scheme account.

To encourage contributions to NPS Vatsalya, it is proposed to extend the tax benefits under Section 80CCD of the Income Tax Act to contributions made to these accounts:

A deduction up to ₹50,000 will be allowed from the parent/guardian’s total income for amounts deposited in the minor’s NPS account, as per sub-section (1B) of Section 80CCD.
The amount on which the deduction was claimed, along with any accrued income, will be taxable when withdrawn if the deposit was made in the minor’s account.
In case the minor passes away and the account is closed, the amount received will not be treated as income of the parent/guardian.
The scheme permits partial withdrawals from the minor’s account for specific contingencies such as education, treatment of specified illnesses, or disability exceeding 75%. To accommodate this, a new clause (12BA) is proposed to be added to Section 10, exempting partial withdrawal income from the parent/guardian’s total income—provided the withdrawal does not exceed 25% of contributions and complies with rules under the Pension Fund Regulatory and Development Authority Act, 2013, and its regulations

Exemption of Withdrawals from the National Savings Scheme

It is proposed to amend Section 80CCA to exempt withdrawals made by individuals from National Savings Scheme (NSS) deposits—on which deductions were previously allowed—if the withdrawals occur on or after August 29, 2024. This exemption applies specifically to deposits made before April 1, 1992, along with the interest accrued thereon, as these amounts have already qualified for deductions.