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According to Union Finance Minister Nirmala Sitharaman, individuals will not need to pay any income tax on earnings up to Rs 12 lakh, which extends to Rs 12.75 lakh when considering standard deductions. This announcement came during her presentation of the Union Budget for 2025 on Saturday, provoking enthusiastic applause and desk-thumping from BJP MPs, including Prime Minister Narendra Modi. Sitharaman also unveiled changes to the tax slabs, these modifications apply solely to the new tax regime. She emphasized that these measures would significantly lessen the tax load on the middle class, allowing them to retain more income. Additionally, she suggested that this initiative would enhance household spending, savings, and investments.

In her tax-related remarks, she indicated that the rates for tax deduction at source (TDS) would be streamlined, with the tax deduction limit for senior citizens increasing to Rs 1 lakh. Moreover, she proposed extending the time frame for filing updated tax returns from two years to four years.

This substantial announcement regarding personal income tax was preceded by the confirmation of a forthcoming direct tax code aimed at simplifying compliance for individual taxpayers, which is set to be introduced next week. Discussions regarding this new code began in July when she presented the complete 2024/25 budget, stating the intent to make the current income tax regulations easier to comprehend and to reduce the length of the Income Tax Act of 1961 by an impressive 60 percent. The existing Act encompasses aspects related to direct taxes—such as personal and corporate tax, along with taxes on securities transactions, gifts, and wealth—and is structured with 23 chapters and 298 sections.

One of the anticipated major reforms includes the elimination of the terms financial year (FY) and accounting year (AY), which have often been a source of confusion. There may also be the introduction of a 5 percent tax on income generated from insurance policies from the Life Insurance Corporation, which were not subject to taxation under the 1961 legislation. Additionally, the taxation of dividends, currently based on slab rates, might be standardized at a flat rate of 15 percent. Most notably, this new code will not provide a choice between the old tax regime and the new one.

Under the revised slabs, tax on income up to Rs 4 lakh is nil.
Between Rs 4 and Rs 8 lakh the tax will be five per cent.
Between Rs 8 and Rs 12 lakh it will be 10 per cent.
Between Rs 12 lakh and Rs 16 lakh it will be 15 per cent.
Between Rs 16 lakh and Rs 20 lakh it will be 20 per cent.
Between Rs 20 lakh and Rs 24 lakh it will be 25 per cent.
Above Rs 24 lakh it will be 30 per cent.