Urgent Income Tax Reforms Effective April 2025

As the new fiscal year begins on April 1, 2025, significant changes to income tax regulations are now in effect. These reforms include a revamped income tax regime, increased basic exemption limits, and adjustments to TDS and TCS rules. Understanding these changes is essential for taxpayers, as they will directly impact tax liabilities for the financial year 2025-26.

New Income Tax Slabs and Rates

The revised income tax regime introduces new slabs and rates that will affect taxpayers significantly. Under the new structure, individuals earning above ₹24 lakh will face a 30% tax rate, an increase from the previous threshold of ₹15 lakh. Additionally, the basic exemption limit has been raised from ₹3 lakh to ₹4 lakh, providing some relief to lower-income earners.

For taxpayers earning up to ₹12 lakh, there is a notable benefit: they will now pay zero tax if they opt for the new tax regime. This provision is available through a tax rebate under Section 87A of the Income Tax Act, 1961. However, it is important to note that individuals must still file their income tax returns (ITR) to claim this rebate.

Changes in ULIP Taxation Structure

The Budget 2025 has also revised the taxation structure for certain Unit Linked Insurance Plans (ULIPs). Proceeds from ULIPs that do not qualify for exemption under Section 10(10D) will now be treated as capital assets and fall under the equity-oriented funds category. This means that such proceeds will be subject to capital gains taxation, with short-term gains taxed at 20% and long-term gains at 12.5%, without indexation benefits.

Tax exemption under Section 10(10D) will still apply to ULIPs where the annual premium is below ₹2.5 lakh. This change aims to clarify the taxation of ULIPs, which have previously lacked definitive guidelines, especially for those with higher premiums.

Adjustments to TDS Rates and Thresholds

The new budget has introduced several modifications to Tax Deducted at Source (TDS) provisions. Notably, the TDS rate for income distributed by securitisation trusts to resident investors will be uniformly set at 10%, down from 25% and 30% for different categories of taxpayers.

Moreover, the thresholds for various TDS sections have been raised, allowing taxpayers to retain more disposable income. For example, the threshold for interest on securities has increased from nil to ₹10,000, and for bank interest, it has risen to ₹1 lakh for senior citizens and ₹50,000 for other taxpayers. These adjustments are designed to ease the financial burden on taxpayers and enhance compliance.

Relief for ITR Non-filers and Other Key Changes

In a significant move, the government has eliminated the provisions that imposed higher TDS and TCS rates on individuals who have not filed their income tax returns. This change aims to reduce compliance burdens and facilitate smoother tax processes. Additionally, the budget has introduced several other reforms, including enhanced medical treatment perquisite limits, extended deadlines for submitting updated returns, and simplified property valuation for tax purposes. Tax authorities will also begin reviewing current and previous ITRs for discrepancies, ensuring greater accuracy in tax assessments.

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