In the Union Budget 2025–26, the government has rolled out major direct and indirect tax reforms with a focus on reducing the tax burden on individuals, simplifying compliance, and supporting domestic industries. A significant push has been made toward promoting investment, encouraging consumption, and ensuring ease of doing business.
Direct Taxes – Relief for the Middle Class and Greater Clarity
A landmark decision in this year’s budget is the enhanced tax exemption limit under the new personal income tax regime. Individuals earning up to ₹12 lakh annually will not pay any income tax. For salaried employees, this threshold extends to ₹12.75 lakh due to a standard deduction of ₹75,000. These measures aim to put more disposable income in the hands of the middle class, potentially stimulating consumption and savings.
To further simplify tax administration and enhance transparency, the government plans to introduce a new Income Tax Bill. This legislation will feature clear and concise language to reduce ambiguity and litigation.
Although these changes are expected to cost the exchequer around ₹1 lakh crore in revenue, the long-term benefits of higher compliance and increased economic activity are anticipated to offset the short-term loss.
Revised Tax Slabs under New Regime
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Rationalising TDS and Compliance Relief
Several TDS/TCS adjustments have been made to reduce complexity. The TDS exemption on interest income for senior citizens has been increased from ₹50,000 to ₹1 lakh, while the rent threshold has been hiked from ₹2.4 lakh to ₹6 lakh annually. Similarly, the TCS threshold under the RBI’s Liberalised Remittance Scheme (LRS) has been raised to ₹10 lakh. Non-PAN holders will still be subject to higher deduction rates. Notably, delays in TCS payment until the return filing deadline will not attract criminal liability.
Smaller charitable institutions will benefit from a reduced compliance load, with the period of mandatory re-registration now doubled from 5 to 10 years. Additionally, individuals can now claim the annual value of up to two self-occupied homes as nil, without any conditions.
Promoting Business and Employment
To support international transactions and reduce tax disputes, a new scheme for determining arm’s length pricing for three-year blocks will be introduced. The safe harbour provisions are also being expanded.
Withdrawals from the National Savings Scheme post-August 29, 2024, will now be tax-exempt. NPS Vatsalya accounts will receive similar tax treatment as regular NPS accounts.
Electronics manufacturing continues to receive policy support. Non-residents providing services to Indian electronics units will benefit from presumptive taxation and storage-related safe harbour provisions. The tonnage tax scheme has also been extended to inland vessels, promoting waterway transport.
Start-ups incorporated up to April 1, 2030, can now avail tax benefits, providing a five-year extension. Category I and II Alternate Investment Funds (AIFs) investing in infrastructure will receive tax certainty on securities gains. The deadline for sovereign wealth and pension fund investments has been extended till March 31, 2030.
Indirect Taxes – Rationalisation and Industry Support
To streamline the customs tariff structure for industrial goods, seven more tariff rates have been eliminated, leaving only eight overall, including the zero rate. Where cess is applicable, it will be limited to one per tariff line, and the Social Welfare Surcharge has been scrapped for 82 such items. These changes are expected to cost the exchequer ₹2,600 crore.
Relief on Medical Imports
Basic customs duty (BCD) has been completely waived on 36 life-saving drugs. Six other critical medicines now attract a concessional 5% duty. An additional 37 medicines and 13 patient assistance programmes have been included in the exemption list.
Boosting Domestic Manufacturing
- Critical Minerals – Imports of cobalt powder, lithium-ion battery waste, lead, zinc, and 12 other key minerals have been exempted from BCD.
- Textiles – More shuttle-less looms have been added to the duty-free list. BCD on knitted fabrics is now “20% or ₹115/kg, whichever is higher”.
- Electronics – BCD on interactive flat panel displays has been doubled to 20%, while it is reduced to 5% for Open Cells and exempted for their parts.
- Battery Manufacturing – 63 capital goods used in EV and mobile phone battery manufacturing are now exempt.
- Shipping – BCD exemptions for shipbuilding components and shipbreaking continue for another decade.
- Telecom – BCD on Carrier Grade ethernet switches has been halved to 10%.
Export Promotion
- Handicrafts – Export period extended to 12 months, with an optional three-month grace. Nine more inputs added to the duty-free list.
- Leather – Wet Blue leather and Crust leather are now exempt from BCD and export duty respectively.
- Marine Products – BCD on frozen fish paste and fish hydrolysate has been cut to 5%.
- Railway MROs – Railway maintenance services will now enjoy the same import reliefs as aviation and shipping MROs, with extended export timelines.
Trade Facilitation
A two-year cap (extendable by one year) has been set to finalise provisional assessments. Importers/exporters can now voluntarily disclose errors and pay dues with interest but no penalties. Quarterly filings (instead of monthly) are now allowed for users of duty-exempt imported inputs, and the usage period has been extended to one year.
Conclusion
The Budget 2025–26 has struck a balance between providing tax relief, simplifying procedures, and incentivising strategic sectors. With a clear emphasis on transparency, domestic growth, and global competitiveness, the budget’s tax reforms aim to reshape India’s economic landscape while keeping the taxpayer at the centre.
(Source – PIB)
