Budget 2025 should cut tax rates, raise income tax exemption to ₹5 lakh: EY

India Budget: The Union Budget 2025-26 should prioritise giving tax relief to common taxpayers by raising the basic exemption limit in the new tax regime from ₹3 lakh to ₹5 lakh and lowering tax rates, according to Ernst & Young India (EY India), a global consulting firm.

EY India also recommended delaying the tax deduction at source (TDS) on provident fund (PF) interest above ₹2.5 lakh until the withdrawal stage to reduce the compliance burden on taxpayers.

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In the last budget, some TDS rate rationalisation was introduced. EY India suggested further simplifying the TDS structure by grouping rates into 3–4 broad categories with lower rates and excluding specific items from TDS entirely.

"While a full comprehensive review of the direct tax code may take time, we might see some initial steps toward its implementation in this Budget. I also hope for a reduction in personal income tax, particularly for the lower-income groups, to provide relief and stimulate demand," said Sameer Gupta, National Tax Leader, EY India.

EY India also proposed extending the tax deferment benefit for employee stock ownership plans (ESOPs) to all employers, allowing tax payments to be made only at the sale stage.

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The firm expects significant reforms to simplify the tax system, improve taxpayer services, reduce disputes, and enhance compliance. It called for measures to quickly address pending tax disputes and prevent future disputes.

To prevent tax conflicts, options like safe harbors should be made more appealing.

As of 2023-24, over ₹31 trillion was locked in income tax litigation, accounting for 9.6% of India’s GDP.

EY India suggested removing the cap on setting off house property losses against other income sources. It also advocates giving Tier-2 cities like Hyderabad, Pune, Bengaluru, and Ahmedabad a 50% house rent allowance (HRA) exemption, aligning them with the current benefits given to the four metro cities.

The budget should also include clear guidelines on taxing cryptocurrencies and non-fungible tokens (NFTs), including how losses from virtual digital assets (VDAs) are treated.

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In the last budget, the government rationalised the capital gains tax structure by adjusting holding periods and tax rates. EY India suggested further clarifying anomalies to improve this system.

For example, the holding period for capital assets like business undertakings in slump sales could be reduced from 36 months to 24 months. Similarly, the holding period for unlisted shares in IPO Offers for Sale (OFS) could be shortened from 2 years to 1 year, aligning it with listed securities.

Exemptions for sovereign wealth and pension funds investing in infrastructure should also be clarified to ensure they remain eligible for long-term capital gains benefits.
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(with ANI inputs)