Context:
In the Union Budget 2025-26, Finance and Corporate Affairs Minister of India, Smt. Nirmala Sitharaman, presented a series of direct tax proposals toward better governance, minimizing compliance burden, and furthering economic growth. The reforms deal with personal income tax, voluntary compliance, and creating a business-friendly atmosphere.
Personal Income Tax Reforms
Income Tax Exemption for the Middle Class:
- No income tax for total income up to Rs. 12 lakh (average income of Rs.1 lakh per month) under the new regime.
- The limit will be Rs. 12.75 lakh for salaried taxpayers due to a standard deduction of Rs. 75,000.
Rationalization of TDS/TCS
- Senior Citizens: The TDS on interest limit for senior citizens will be doubled from Rs. 50,000 to Rs. 1 lakh.
- TDS on Rent: Limit of TDS on rent to be hiked to Rs. 6 lakh from Rs. 2.4 lakh that will reduce transactions falling under TDS liability for small taxpayers.
- TCS on Remittances: The Tax Collected at Source (TCS) threshold under the Liberalized Remittance Scheme (LRS) is to be raised from **Rs. 7 lakh to Rs. 10 lakh.
- Decriminalization of TCS Delays: Delays in TCS payment up to the due date of filing will be decriminalized.
Encouraging Voluntary Compliance
- Time for Filing Updated Income-tax Returns: Time-limit for filing the updated income tax returns for any assessment year will be enhanced from 2 years to 4 years.
- Reporting of Crypto Asset Transactions: Taxpayers will have to furnish details related to crypto-asset transactions in the statements.
- Virtual Digital Asset: Definition of the term Virtual Digital Assets shall be revised and aligned with new provisions.
Ease Compliance Burden
Charitable Trusts – The period of registration for small charitable trusts will be extended to 10 years from 5 years.
Self-Occupied Property: The taxpayers shall be allowed to claim Nil for the annual value of two self-occupied properties without any conditions.
- No Tax on Specified Goods: No tax will be collected at source on specified goods worth more than Rs. 50 lakh.
NO ISSUE PART OF THE GENERAL DISCUSSION - Arm’s Length Price Scheme: A new scheme will determine the arm’s length price for international transactions over a block period of 3 years, reducing annual transfer pricing examinations.
- Safe Harbour Rules: Safe harbour rules on international taxation would be broadened in scope to reduce litigation and bring in tax certainty.
- Long-term Capital Gains Tax for Non-Residents: The parity of tax rates will be introduced between non-residents on long-term capital gains from the transfer of securities.
- NPS Vatsalya Accounts: Withdrawals from National Savings Scheme accounts after 29th August 2024 will not be taxed. Similar treatment to be provided to NPS Vatsalya accounts.
Employment and Investment
- Electronics Manufacturing Tax Regime: A presumptive taxation regime to be provided for non-residents availing services by Indian companies in the electronic manufacturing sector.
- Tonnage Tax Scheme for Inland Vessels: The tonnage tax scheme would be introduced under the Indian Vessels Act, 2021, with regard to the inland vessels, so that inland water transport may be developed.
- Start-Up Support: The incorporation period for getting benefits would be enhanced by 5 years from the current 1st April 2030 onwards for start-ups incorporated before the same date.
- IFSC: The ship-leasing units, insurance offices, and global company treasury centers located in the IFSC will be accorded specific benefits, with the cut-off date extended to 31st March 2030.
- Alternative Investment Funds (AIFs): Tax certainty for Category I and II AIFs investing in infrastructure will be enhanced especially on gains from securities.
- Sovereign and Pension Fund Investments: The date of investment for sovereign wealth funds and pension funds will now be stretched as far as 31st March 2030 to encourage funding of infrastructure.
Conclusion
The Union Budget 2025-26 proposes a series of direct tax reforms to spur economic growth, enhance governance, and reduce compliance for individuals and businesses. The reforms will alleviate the middle class, lighten tax burdens, and provide a business-friendly environment for start-ups, electronics manufacturing, and infrastructure investment.
