Tax Exemptions and Benefits: New Income Tax Regime, Exemptions, and Rebates Explained

Tax Exemptions and Benefits: New Income Tax Regime, Exemptions, and Rebates Explained. The Indian government provides tax exemptions and benefits to both corporations and individuals, with a focus on promoting economic growth and supporting the middle class. Over the past five years, individual/HUF taxpayers received tax benefits worth ₹8.69 lakh crore, compared to ₹4.53 lakh crore for corporations. To aid the middle class, the government introduced a new tax regime in 2020-21, increasing exemption limits, rebates, and standard deductions. Tax rates were reduced, and exemptions for leave encashment, NPS contributions, and allowances were expanded. The government periodically monitors tax exemption distribution, with details available in the Receipt Budget. The 2025-26 budget proposes further reforms, including higher rebates and reduced TDS/TCS thresholds, benefiting middle-class taxpayers.

TAX EXEMPTIONS AND BENEFITS

(a) (i) The direct tax policy through Income-tax Act,1961 (‘the Act’), inter alia, provides for tax incentives to promote exports; balanced regional development; creation of infrastructure facilities; employment; rural development; scientific research and development; cooperative sector, encourage savings by individuals and donations for charity. The revenue impact of major tax incentives due to tax exemptions and benefits under the Act in respect of corporates and Individuals/HUFs from FY 2019-20 to FY 2023-24 are tabulated as under:

Table 1: Revenue impact of major tax incentives

Source: Receipt Budget of respective years
*Total Revenue Impact for FY 2023-24 is projected revenue impact.

(ii) The total revenue impact of major tax incentives for Individual/HUF taxpayers for last five years is Rs 8,69,907.40 Crores. In comparison, the total revenue impact of major tax incentives for corporate taxpayers for last five years is Rs 4,53,329.08 Crores. Therefore, it can be seen that the government has foregone huge revenue benefiting Individuals/HUFs taxpayers.

(b) The New tax regime was introduced in the Budget 2020-21 to simplify, reduce and make it easy for complying with income tax provisions and also to provide significant relief to the middle-class taxpayers. About 75% of taxpayers have opted for the New tax regime. It is highlighted that one of the objectives of proposals regarding Direct taxes presented in the Budget 2025 is personal income tax reforms with special focus on middle class taxpayers. Some of the measures that would benefit middle class taxpayers are discussed as under.

• Increase in basic exemption limit: Under the New tax regime introduced in the Budget 2020- 21, the threshold total income limit exempt from income-tax i.e. ‘Nil’ income tax slab was upto Rs. 2.5 lakh, which was increased to Rs.3 lakh in the Budget 2023-24 and also now proposed to be increased to Rs.4 lakh in the Budget 2025-26.
• Rebate u/s 87A: In the Budget 2023-24, the income tax rebate limit was made applicable in the new tax regime. Accordingly, resident individual with total income up to Rs.7 lakh do not pay any income tax due to rebate under the new tax regime. In the Budget 2025-26 presented on 01st Febrauary,2025, it has been proposed to further increase the rebate for the resident individual under the new tax regime so that they do not pay tax if their total income is up to Rs. 12 lakh (other than the special rate income). By increasing this limit to Rs.12 lakh, around one crore taxpayers who were earlier required to pay tax varying from Rs.20,000 to Rs.80,000 will be now paying ‘Nil’ tax. This limit will be Rs. 12.75 lakh for salaried tax payers, due to standard deduction of Rs. 75,000. Marginal relief as provided earlier under the new tax regime is also applicable for income marginally higher than Rs. 12 lakh.
• Reduction in Income tax rates: There is a continuous decrease in the personal income tax rates in various income slabs since the introduction of new tax regime in the Budget 2020-21. It has been proposed in the current Budget 2025-26 that the higher tax rate @30% will be made applicable to total income above Rs.24 lakh. Details of income tax rates slab-wise announced in the Budget 2020-21, Budget 2023-24, Budget 2024-25 (July,2024) and Budget 2025-26 are provided in the Annexure A.
• Increase in Standard deduction Limit: In the Budget 2023-24, the standard deduction of Rs 50,000/- was made available to the salaried persons opting for new tax regime. This limit was increased to Rs.75,000/- in the Budget 2024-25 (July,2024). Similarly, deduction on family pension for pensioners was enhanced from Rs.15,000/- to Rs.25,000/-in the Budget 2024- 25(July,2024). This has provided relief to about four crore salaried individuals and pensioners.
• Exemptions under New Tax regime: Taxpayers opting for New Tax regime can also avail benefit of certain exemptions which inter-alia include leave encashment upto Rs.25 lakh, increased deduction of employers contribution under NPS, some allowances received by salaried persons like daily allowance, conveyance allowance etc. and gratuity amount. (refer Annexure B).
• Rationalisation of TDS/TCS provisions: In the current Budget 2025-26, it has been proposed to increase the limit for tax deduction at source in respect of certain income such as interest income for senior citizens and rental income etc (refer Annexure C). Further, it was also announced in the current Budget 2025-26 to remove tax collected at Source (TCS) on remittances for education purposes where such remittance is out of a loan taken from a specified financial institution.
• Tax exemption for Income from Long-Term Capital Gains (LTCG): For investments in equities and mutual funds, long-term capital gains (gains made on assets held for more than a year) up to Rs 1.25 lakh per financial year are exempted from income tax.
• Option of tax regimes: Though the New income tax regime was made the default tax regime in the Budget 2023-24, taxpayers have the option to avail the benefit of the old tax regime. Under the old regime, Individual/ HUF taxpayers are eligible to claim these exemptions/deductions and have a wide range of tax preferences available to them.

Periodically, the Government has reduced tax burden of middle-class taxpayers through changes in income slab and tax rates. The tax rates under the new tax regime are comparatively lower than the tax rates in old regime for the respective income slabs. The new structure proposed in the current Budget will substantially reduce the taxes of the middle class and leave more money in their hands, boosting household consumption, savings and investment. As a result of proposals introduced in the Budget 2025-26, revenue of about ₹ 1 lakh crore in direct taxes will be forgone.

(c) & (d) The distribution of tax exemption and their impact including the revenue foregone has been analysed in Annexure-7 of Receipt Budget Statement which is available in the public domain (indiabudget.gov.in)(Copy enclosed).

Annexure A

A comparison of the tax rates and slabs under the old regime and the new regime

(i) A comparison of the tax rates and slabs under the old regime and the new regime introduced in the Budget 2020-21 is as under:-

(ii) The tax slabs and rates in the new regime were further revised in the Budget 2023-24 for Assessment Year 2024-25 as under:-

(iii) The tax rates under the new tax regime were further revised in the Budget 2024-25 (July,2024) w.e.f. Assessment Year 2025-26 as under:

(iv) The tax rates under the new tax regime proposed in the current Budget 2025-26 w.e.f. from Assessment Year 2026-27 is proposed to be as under:

• A few examples for calculation of tax benefit to the middle-class tax payers are given in the table below:

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Annexure B

Exemptions/tax benefits available under New tax regime:

(i) Increase in exemption of Leave encashment limit u/s 10(10AA): In the Budget 2023- 24, the limit of encashment of leave up to 10 months of average salary, at the time of retirement in case of an employee (other than an employee of the Central Government or State Government), was enhanced to Rs.25 lakh from Rs.3 lakh.

(ii) Deduction under section 80CCD(2) for employer’s (other than the Central Government and State Government) contribution to employee NPS accounts, has been increased from 10% to 14% in the Budget 2024-25 (July,2024).

(iii) Tax exemptions are available for the following allowances received by the salaried persons:

• any travel allowance granted to meet the cost of travel on tour or on transfer;
• any daily allowance to meet the ordinary daily charges incurred by an employee on account of absence from his normal place of duty, whether granted on tour or for the period of journey in connection with transfer,
• any conveyance allowance granted to meet the expenditure incurred on conveyance in performance of duties of an office or employment;
• any such special allowance or benefit, specifically granted to meet expenses wholly incurred in the performance of the duties of an office or employment
• any such allowance granted to the assessee either to meet his personal expenses at the place where the duties of his office or employment of profit are ordinarily performed by him or at the place where he ordinarily resides, or to compensate him for the increased cost of living, as may be prescribed and to the extent as may be prescribed:

(iv) Tax exemption in respect of the amount received on voluntary retirement u/s 10(10C) and gratuity u/s 10(10) subject to the limit prescribed.

(v) Reduction in surcharge and maximum tax rate: Highest surcharge under the new regime has been reduced to 25 percent from 37 percent in the Budget 2023-24. This has reduced the maximum rate from 42.74 per cent to 39 per cent.

(vi) Annual value of the self-occupied property simplified u/s 23: Presently tax-payers can claim the annual value of self-occupied properties as ‘Nil’ only on the fulfillment of certain conditions. Considering the difficulties faced by taxpayers, in the Budget 2025, it has been proposed to allow the benefit of two such self-occupied properties, if the owner occupies it for his own residence or cannot actually occupy it due to any reason.

(vii) Increase in limits of certain perquisites: In the Budget 2025, it has been proposed to increase the limits on the income of the employees for the purpose of calculating perquisites u/s 17 of the Act which will benefit salaried class taxpayers.

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Annexure C

Rationalisation of TDS/TCS provision:

The increased threshold for TDS rates under various provisions which will have a positive impact are enumerated as follows:-

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The above statement has been submitted in reply of undermentioned Rajyasabha Question and Answer:-

GOVERNMENT OF INDIA
MINISTRY OF FINANCE
DEPARTMENT OF REVENUE

RAJYA SABHA UNSTARRED QUESTION NO. 224
ANSWERED ON 04/02/2025

TAX EXEMPTIONS AND BENEFITS

224. Smt. Darshana Singh Dr. Anil Sukhdeorao Bonde Shri Brij Lal
Shri Madan Rathore
Shri Mayankbhai Jaydevbhai Nayak Smt. Sangeeta Yadav
Smt. Kiran Choudhry
Shri Narayana Koragappa Shri Jaggesh
Shri Neeraj Dangi
Shri Lahar Singh Siroya Smt. Maya Naroliya

Will the Minister of FINANCE be pleased to state:-

Questions

(a) the distribution of tax exemptions and benefits between corporations and individual taxpayers over the past few years;

(b) the details of the specific measures or policies that have been implemented to ensure that the middle-class benefit more from tax exemptions;

(c) whether Government has setup any mechanism to monitor the distribution of tax exemption periodically; and

(d) if so, the details thereof?

ANSWER

MINISTER OF STATE FOR FINANCE (SHRI PANKAJ CHAUDHARY)

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