Budget 2025: Expectations High For Income Tax Relief – What’s in Store For Middle Class? All Eyes on Sitharaman's Speech

New Delhi: Union Finance Minister Nirmala Sitharaman is set to present her record eighth consecutive Budget on Saturday, February 1, with taxpayers eagerly waiting for the much-needed relief. A revision or reduction in income tax rates and slabs is widely expected, aiming to alleviate the financial strain on the middle/salaried class grappling with inflation and stagnant wage growth.

The Budget for the upcoming fiscal year, commencing April 1, is likely to introduce measures to stimulate slowing economic growth while maintaining fiscal discipline. It is expected to prioritise boosting consumption while adhering to the fiscal deficit reduction roadmap.

This budget is also set against the backdrop of slower domestic consumption and activity, which is likely to be in focus in the announcements.

Emphasis will be on employment and skills with a focus on boosting incomes, supporting labour-intensive sectors, drawing in private sector players, and defending against a tougher geopolitical environment.

Will Sitharaman Announce Income Tax Relief For Salaried Class?

Expectations of relief on income tax, particularly for the lower middle class, are high after Prime Minister Narendra Modi invoked the goddess of wealth Lakshmi to elevate the poor and middle class.

"I pray to Goddess Lakshmi that the poor and the middle-class sections in the country are blessed by her," Modi said while speaking to reporters outside Parliament before the start of the Budget session.

Modi 3.0 government's first full-year budget in the third term will be presented against the backdrop of geopolitical uncertainties and an economic growth rate slowing to a year low, with new US President Donald Trump threatening tariffs against countries like India.

Revisiting Tax Slabs

Tax experts are advocating for a comprehensive overhaul of income tax slabs and rates under both the old and new regimes, citing the impact of inflation on purchasing power. A key recommendation is to increase the basic exemption limit under the new tax regime to ₹10 lakh.

If implemented, individuals earning up to ₹10 lakh annually would be exempt from paying income tax under the new regime. Currently, a tax rebate under Section 87A applies to annual incomes of up to ₹7 lakh under the new regime and ₹5 lakh under the old regime.

This move would not only enhance the appeal of the new tax regime but also put more disposable income in the hands of middle-class salaried taxpayers, thereby boosting liquidity.

Phasing Out the Old Tax Regime

Market expectations are high for an announcement on the timeline for phasing out the old income tax regime on February 1. For the assessment year 2024-25 (AY25), nearly 72% of the 9 crore income tax returns were filed under the new tax regime.

With limited deductions and fewer documentation requirements, the new regime simplifies tax filing. It has also been the default tax structure since FY 2023-24. Given these factors, experts believe the government may take steps to make the new tax regime the sole option for filing Income Tax Returns (ITR).   

Budget 2025: What Analysts Expect From Key Sectors

Analysts and experts expect some tax rationalisation, export push, better implementation of capital spending plans and a clear roadmap for structural reforms. They also see some expansion in the production-linked incentives, and increased allocation to some welfare schemes while continuing to focus on infrastructure creation/upgrade. Also, tariff cuts to encourage local manufacturing are expected.

Increased allocations to boost job creation and skills, lower customs duties on intermediaries and increase in agriculture investments are also high on the list of expectations. Measures for accelerating domestic demand and private consumption are also expected.

They all agree on one thing - the government will continue on the path of fiscal consolidation, with a projected fiscal deficit of 4.5 per cent of GDP for FY26 (April 2025 to March 2026) against 4.8 per cent in the current fiscal ending March 31.

Rumki Majumdar, Economist, Deloitte India, said the first quarter data points to a notable increase in private consumption and a modest improvement in investment activity. "We expect these two to be the fundamental growth pillars as global uncertainties weigh on net exports." "With the conclusion of the Indian elections, we anticipate that government spending will pick up, supporting growth in the coming quarters of FY2025," she said, adding the government is likely to continue to prioritise and enhance efforts towards skill development and employment generation.

Also, the focus may be on long-term solutions aimed at strengthening the agricultural value chain, incentivising production and addressing structural supply-side issues that add to the delivery cost to address sticky inflation.

"Following the US elections, the risk of volatility in global trade has increased, with potential measures, such as higher import tariffs and tax cuts to promote manufacturing in the US," she said, adding that the government may look to implement a range of measures to enhance the competitiveness of Indian products on the global stage.

These may include tariff rationalisation, duty exemptions and remission schemes, which would help lower the cost of Indian exports. Additionally, the government is likely to focus on simplifying export compliance procedures to reduce barriers and enhance exporters' efficiency.

EY expects increasing capital expenditure growth by at least 20 per cent to drive economic activity, particularly in sectors like manufacturing and infrastructure.

DK Srivastava, Chief Policy Advisor, EY India, said, "As we navigate a challenging economic landscape, the upcoming budget must balance fiscal prudence with growth-oriented measures. Increasing capital expenditure and putting more disposable income in the hands of consumers, particularly urban consumers, will be pivotal to uplifting growth in domestic demand".

While there may be challenges, such as global economic headwinds and pressure on the Indian rupee, some measures in the budget are seen to help India sustain its growth trajectory.

Revisiting tariff structures to support domestic manufacturing and reduce dependency on imports while helping manage exchange rate pressures are likely.

Government infrastructure spending has been crucial to India's strong growth in recent years, even though the Rs 11.11 lakh crore outlay for the current fiscal will likely fall short by one-fifth.

"We expect the central government to prioritise macro stability by sticking with the fiscal consolidation path and steer clear of populist measures," Radhika Rao, Senior Economist at DBS said. This will help keep additional spending and incremental inflationary impact in check. Instead, moves might include fine-tuning existing measures and focusing on medium-term demand boosts.