The Union Budget 2025-26, set to be presented on February 1, is expected to bring changes on the income tax front. Experts anticipate proposals ranging from rate cuts to a overhaul of the tax regime, aiming to boost consumption, simplify taxation, and support economic growth.

Additionally, EY India highlights the need to resolve income tax disputes.

“Over ₹31 lakh crore is stuck in income tax disputes as of 2023-24,” EY India noted in its Budget expectation report.

The firm suggests clearing Commissioner of Income Tax (Appeals) backlogs and strengthening alternate dispute resolution mechanisms like advance pricing agreements and safe harbors.

Focus on simplification and relief

Sameer Gupta, National Tax Leader, EY India, emphasised steps toward implementing the Direct Tax Code.

“While a full comprehensive review of the direct tax code may take time, we might see some initial steps towards 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,” Gupta said.

Subhash Chand Aggarwal, CMD of SMC Global Securities, expects further tax relief for the middle class.

“Continuing the trend from the 2024 Budget, we might see reduced tax rates for individuals earning up to ₹15 lakh. This will help increase disposable income, boost demand, and support economic growth,” Aggarwal stated.

Addressing inflation’s impact

Aggarwal noted that inflation has reduced consumers’ purchasing power. Sectors like FMCG have seen slowed growth, with value growth dropping to 5.7% in July-September 2024, compared to 9% in 2023.

He believes tax cuts can counter this trend by encouraging spending.

However, he acknowledged concerns that tax cuts might lead to increased savings rather than spending.

“India’s current cash crunch due to inflation mitigates this risk. Household savings fell to ₹14.16 lakh crore in 2022-23 from ₹23.29 lakh crore in 2020-21, while loans to households quadrupled to ₹3.33 lakh crore. Tax cuts will boost disposable income, encouraging rural and urban consumption and aiding GDP growth,” Aggarwal added.

Simplifying income tax regimes

India currently offers two tax regimes: the old regime with higher tax rates and more exemptions, and the new regime with lower rates but fewer deductions.

While merging the two could simplify the tax structure, Aggarwal believes the dual system benefits taxpayers.

“Separate tax regimes allow flexibility for taxpayers based on income and deduction claims. Simplifying the process to switch between them can improve accessibility,” he said.

Expectations beyond taxation

Experts also expect the Budget to focus on infrastructure, employment, and agriculture. Boosting private capital expenditure and addressing consumer demand remain key priorities.

With rising inflation and slower GDP growth, the 2025 Union Budget is anticipated to balance tax relief and economic recovery measures effectively.