Union Budget 2025-26: Direct Tax Proposals Aim to Ease Compliance, Provide Relief to Middle Class, and Stimulate Investments

New Delhi: In her presentation of the Union Budget 2025-26 today, Union Minister for Finance and Corporate Affairs, Nirmala Sitharaman, announced a series of direct tax reforms designed to provide relief to taxpayers, encourage voluntary compliance, and stimulate economic growth through strategic investments.

Middle Class Tax Relief

A major highlight of the budget was the personal income tax reforms, which provide significant relief to the middle class. Under the new tax regime, no income tax will be levied on individuals earning up to Rs. 12 lakh annually (Rs. 1 lakh per month), excluding special rate income such as capital gains. For salaried taxpayers, this limit increases to Rs. 12.75 lakh, thanks to the standard deduction of Rs. 75,000. This proposal aims to put more money in the hands of the middle class, boosting consumption and savings.

Rationalization of TDS/TCS

To ease the tax burden, especially for small taxpayers, TDS (Tax Deducted at Source) and TCS (Tax Collected at Source) limits have been rationalized. The threshold for TDS on interest for senior citizens has been doubled from Rs. 50,000 to Rs. 1 lakh, offering them greater relief. Additionally, the TDS limit on rent has been increased from Rs. 2.4 lakh to Rs. 6 lakh, benefiting small landlords. The Finance Minister also proposed increasing the TCS limit for foreign remittances under the RBI’s Liberalized Remittance Scheme (LRS) from Rs. 7 lakh to Rs. 10 lakh, further easing financial transactions.

Encouraging Voluntary Compliance

Sitharaman introduced a proposal to extend the time limit for filing updated income tax returns from two years to four years. This extension aims to encourage taxpayers to come forward and file corrections without penalty. Additionally, the government has proposed amendments to include crypto-assets in tax filings, ensuring transparency in digital transactions.

Reducing Compliance Burden

The Budget proposed reducing the compliance burden for small charitable trusts by extending their registration period from 5 years to 10 years. Other provisions include allowing Nil tax on the annual value of two self-occupied properties and exempting tax collection at source on sales of specified goods valued above fifty lakhs. These reforms aim to simplify tax processes, especially for smaller entities.

Boost to Business and Employment

To encourage investment and business growth, Sitharaman proposed several tax incentives. A presumptive taxation regime will be introduced for non-resident service providers supporting electronics manufacturing units, and a safe harbour will be introduced for non-residents who store components for such units.

Additionally, the Tonnage Tax Scheme benefits will now be extended to inland vessels under the Indian Vessels Act, 2021, aiming to promote inland water transport in India.

Support for Startups and International Financial Services Centres (IFSC)

The Budget also supports the startup ecosystem, proposing to extend the period for incorporation by five years until April 1, 2030, ensuring continued benefits for emerging businesses. Furthermore, Smt. Sitharaman announced that Sovereign Wealth Funds and Pension Funds will be able to make investments in infrastructure projects until March 31, 2030, further stimulating growth in key sectors.

The Budget also included provisions to enhance activities in International Financial Services Centres (IFSC), extending benefits to ship-leasing units, insurance offices, and global treasury centers operating in IFSCs, with a cut-off date for commencement extended by five years to March 31, 2030.

Revenue Impact

The Finance Minister informed that these direct tax proposals are expected to result in a revenue forgone of approximately Rs. 1 lakh crore. Despite the revenue impact, the aim is to foster a business-friendly environment, boost investments, and increase disposable income for the middle class.