Union Budget 2025-26: Key Direct Tax Changes, Income Tax Rates & Reliefs Explained!

The Union Budget 2025, presented by Finance Minister Nirmala Sitharaman, brings important updates to India's direct tax system. From changes in income tax slabs to simplification of TDS and TCS compliances, this budget affects salaried individuals, businesses, and taxpayers alike. In this blog, we break down the key direct tax announcements that are proposed in the budget and their impact on your finances along with brief insights about GST, Customs and other finance related changes. Stay tuned for a simple and clear analysis of Budget 2025’s tax reforms.

Key highlights of Income- Tax Proposals

Income Tax Rates under New Regime (u/s. 115BAC) of Income Tax:

• The basic exemption limit is proposed to be increased from ₹ 3 Lakhs to ₹ 4 Lakhs.
• New tax rates would be applicable for Individual & HUF following the New Regime (u/s. 115BAC-Default tax Regime) for Income other that Special Income like Capital Gains, etc.

Note -

• There are no changes in tax rates for Special Incomes like Capital Gains, etc.
• These rates will be applicable from F.Y. 2025-26.
• Rebate u/s 87A under New Tax Regime
• For claiming Tax Rebate u/s 87A, the Income limit is increased from ₹ 7 Lakhs to ₹ 12 Lakhs. So, if a Resident Individual earns Income up-to ₹ 12 Lakhs, No Tax will be payable.
• Please note that the Rebate is available only for the Tax payable on Income other than Special Income like Capital Gains, Winnings, etc.
• Standard Deduction:
  • For All Salaried Individuals, the benefit of Standard deduction of ₹ 75,000 is available.
  • This means that the Resident Individuals having salary up-to ₹ 12,75,000 will no longer need to pay any tax.
• Tax Saving Comparison - Tax for earlier year vs Proposed Tax:

Income Tax Rates under Old Regime of Income Tax:

• There are no changes proposed under the Old Regime of Income Tax.
• Below are the Income Tax Rates for your reference.

New Income-tax Bill:

• A new Income Tax Bill will be introduced and placed in the Parliament for discussion in second week of Feb 2025.
• The main objectives of the new bill would be:

o  Simplification of Direct Taxes.

o  Reduced tax litigation.

Relief for Individuals:

• The existing tax provisions for claiming Nil annual value for two Self-occupied properties has now been simplified.
• From F.Y. 2025-26, parents and guardians can invest on behalf of minor(s) in NPS and claim deduction for the same.
• Now, NPS Vatsalya accounts will also get the same tax treatment as normal NPS accounts

Updated Return:

• The time limit to file an Updated Tax Return (u/s. 139(8A)) is extended from 2 years to 4 years.
• The rates of additional taxes on updated returns will be as follows:

To know more about Updated Return in detail, visit our blog here.

Taxation on Transactions of Virtual Digital Assets:

• Earlier, any undisclosed money, bullion, jewellery was considered as Undisclosed Income. Now, any undisclosed Virtual Digital Asset will also fall under same category and similar tax penalties will apply.
• The Scope of Virtual digital asset was expanded to be more inclusive.

Relaxation in TDS and TCS Compliances:

• The basic limits for TDS applicability on interest (u/s. 194A):
  • For Senior citizens, raised to ₹1,00,000 from ₹50,000.
  • For others, raised to ₹ 50,000 from ₹40,000.

• TDS on rent:
• Till FY 2024-25, Exemption for TDS up-to Annual Rent Cost of ₹2.4 Lakhs.
• Proposed Exemption is ₹ 50,000/- on Monthly basis.
• TCS (u/s. 206C(1H)) which was earlier applicable on amount of sale on goods that exceeds ₹ 50 Lakhs is now removed.
• Higher TDS/TCS rates would no longer be applicable to non-filers of Income-tax returns.

• Following is the summarised table for all the revised TDS limits:

  Sr. No.	Section	Current Limit	Proposed Limit
  1	Interest on securities (Sec 193)	No threshold	₹10,000
  2	Interest other than securities (Sec 194A)	₹50,000 (senior citizens) ₹40,000 (others) ₹5,000 (when payer is other than banks, co-op societies, post office)	₹1,00,000 (senior citizens) ₹50,000 (others) ₹10,000 (when payer is other than banks, co-op societies, post office)
  3	Dividend for individual shareholders (Sec 194)	₹5,000	₹10,000
  4	Income from mutual funds or specified companies (Sec 194K)	₹5,000	₹10,000
  5	Lottery, crossword, puzzles (Sec 194B)	₹10,000 (aggregated annually)	₹10,000 (single transaction)
  6	Horse race winnings (Sec 194BB)	₹10,000 (annual)	₹10,000 (per transaction)
  7	Insurance commission (Sec 194D)	₹15,000	₹20,000
  8	Commission, prizes, lottery tickets (Sec 194G)	₹15,000	₹20,000
  9	Commission or brokerage (Sec 194H)	₹15,000	₹20,000
  10	Rent (Sec 194I)	₹2,40,000 per year	₹50,000 per month
  11	Professional or technical services fees (Sec 194J)	₹30,000	₹50,000
  12	Income from enhanced compensation (Sec 194LA)	₹2,50,000	₹5,00,000
  13	Income paid by securitization trust (Sec 194 LBC)	Earlier 25/30 %	10%

• No TCS will be applicable on foreign remittances of loan taken for educational purpose, from specified Financial Institutions.
• Basic limit for TCS applicability for all the other cases, is also increased to ₹10 Lakhs from the earlier limit of ₹ 7 Lakhs.

Non-resident Taxation:

• Effective FY 2025-26, any non-residents providing services or technology for specified electronics manufacturing in India will be taxed on a presumptive tax rate below 10% on income. The income will be presumed to be 25% of gross receipts.

Transfer Pricing:

• The Transfer pricing assessments and audits relating to determination of Arm’s length price (ALP) are now simplified.
• The ALP which was earlier determined for each year, now once determined may use the same ALP for next 2 years.
• The taxpayer will have the option to exercise the new provision, but it must be approved by the Transfer Pricing Officer.
• The main objective of the change is for the ease of compliance and reduced burden for the taxpayers.
• The finance minister also proposed to expands the Safe Harbour Rules to reduce litigation and provide clarity.

Empowering Corporates, Startups and MSMEs:

• Startups incorporated before April 1, 2030, can claim a 100% tax deduction for 3 out of 10 years, from date of its incorporation.
• Special tax incentives for fund managers and businesses in International Financial Services Centre (IFSC) extended till March 31, 2030.
• Enhancing investment and turnover limits for MSME’s by 2.5 times, improving credit guarantee cover.

New MSME Category Limits are as under:

Relief for Small Charitable Trusts:

• The validity of registration for existing small charitable trust was increased to 10 years from existing 5 years w.e.f. 1 April 2025.
• Small charitable trust means a trust whose gross income (before claiming any exemptions) is below ₹ 5 crore per year for 2 years before application is made.
• The benefit will not be available for:

• New trusts (still getting a 3-year provisional registration)
• Trusts with income is over ₹5 crore (remain at 5-year renewals) 
• 80G donor benefits (a separate registration for 5-years) 

• The application process is also simplified as any minor errors in applications won't lead to deregistration anymore. 
• Changes in specified persons for reporting. The proposed changes are as follows:
  • A donor will now be classified as a "specified person" only if they contribute more than ₹1 lakh in a financial year (earlier the limit was ₹50,000).
  • A donor will also be considered a "specified person" if their total donations (including previous years) exceed ₹10 lakh.
  • The trust no longer needs to Report details of relatives of big donors and linked businesses.

Changes in specific LTCG tax rates:

• Long-term capital gains (LTCG) tax for business trusts (Real Estate Investment Trust, Infrastructure Investment Trust) rationalized to 12.5% (plus applicable surcharge and cess), not subject to tax at maximum marginal rate.
• LTCG tax on transfer of certain securities by Foreign Institutional Investors (FIIs) rationalized to 12.5% from 10%.

The option for opting the “Tonnage tax scheme” is now proposed to be available to Inland vessels as well.

Carry forward of losses for Amalgamation:

• Losses for Amalgamating (Pre-existing) entities were earlier allowed to be carried forward by the Amalgamated (Newly formed) entity for 8 years from the end of next financial year of amalgamation.
• Now however, the loss will be carried forward for 8 years from the end of next financial year of actual loss.

Perquisites:

Increase in the limits on the income of the employees for the purpose of calculating perquisites.

Other Compliance and Administration changes

Goods and Services Tax (GST):

• In order to file an appeal, Appellant must first pay 10% of the total amount under dispute even in case dispute is related to Penalty Amount only. Simplified Comparison table is as under:

• The definition for availing ITC under GST has now been changed from “plant or machinery” to “plant and machinery”.
• Sale of Vouchers will no longer be taxed under GST.
• Businesses cannot reduce GST liability using credit notes if the ITC was utilised by the buyer or if the ITC was passed on to someone else.
• Goods stored in Free Trade Warehousing Zones (FTWZ) will not attract GST.

Customs:

• A new board will be formed to handle customs-related cases.
• Clear deadlines will be set to complete customs duty calculations faster.
• Businesses can now correct customs declarations even after clearing goods.
• Customs duties on gold, silver, chemicals, etc. is reduced to help local businesses and exports.
• Customs duties on some medicines and drugs relating to terminal diseases such as cancer was also removed.

Financial Services:

• Foreign companies can now own 100% of Indian insurance firms, but they must invest their full premium collections in India.
• The Central KYC system will be updated to make customer verification easier.
• India Post will expand services to help businesses in villages.
• The government is investing ₹10,000 crore in Alternative Investment Funds (AIFs) to support new businesses.
• A new Financial Stability and Development Council (FSDC) will monitor financial regulations.
• A Partial Credit Enhancement Facility will help companies raise funds for infrastructure projects.
• A new Investment Friendliness Index will rank states based on ease of doing business.

Conclusion

The Union Budget 2025-26 focuses more on simplifying the direct tax system, offering significant relief to individuals and businesses, and enhancing compliance. Key changes include increased exemption limits, revised income tax slabs, and expanded deductions for NPS investments. There are also reforms introduced in TDS and TCS, along with support for MSMEs, startups, and trusts. Additionally, the budget includes measures to streamline customs, financial services, and GST, all aimed at fostering economic growth and improving the ease of doing business. These reforms are designed to provide financial relief, reduce complexities, and drive overall economic progress.

Follow Taxarithm for more such Tax related updates.