Tax Announcements and its Impact on Taxpayers

2024-12-13

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On 1 February 2025, the Union Finance Minister of India, Nirmala Sitharaman, introduced significant reforms to the income tax regulations as part of the Union Budget 2025-26.
This year, the focus of the Direct Tax Strategy was on simplifying tax compliance, enhancing transparency, and promoting digital transactions. The tax changes announced aim to impact both high-income and low-income groups, reflecting a balanced approach to fiscal policy. Let us now explore how taxpayers and the broader Indian economy will be influenced by the tax policies outlined in Budget 2025-26.

Relief to senior citizens from filing income tax return

In the Union Budget 2025-26, the government introduced provisions to ease the tax filing process for senior citizens. Individuals aged 75 years and above, receiving only pension and interest income from the same specified bank, are exempt from filing income tax returns. The specified bank is responsible for deducting the applicable tax at source, ensuring compliance without the need for the senior citizen to file a return. This measure aims to reduce the compliance burden on elderly pensioners.

Reduction of time constraints for reopening the assessment

To minimise compliance costs and improve efficiency, the Union Budget 2025-26 has retained the period for reopening income tax assessments at 3 years from the end of the relevant assessment year for most cases. Reopening beyond 3 years, up to a maximum of 5 years, is allowed only if there is evidence of undisclosed income exceeding ₹50 lakh in a year. This is a reduction from earlier provisions that permitted reopening up to 10 years under specific circumstances.

Additionally, reopening assessments solely based on data analytics, objections from the Comptroller and Auditor General (C&AG), or search and survey operations is not permitted, providing greater certainty and reducing unwarranted scrutiny for taxpayers.

The time limit for completion of assessments and related processes continues to be streamlined for better clarity and quicker resolution, although specific reductions in appraisal time limits, such as shortening by three months, have not been reintroduced in this budget cycle.

Dividend relief

To provide relief to taxpayers, the Union Budget 2025-26 continues the provision that advance tax on dividend income is payable only after the dividend is declared or paid. This prevents taxpayers from having to pay tax upfront on dividends not yet received.

Dividends paid to Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) remain exempt from Tax Deducted at Source (TDS), supporting investments in these infrastructure-related instruments.

Additionally, income tax exemption on dividend income for foreign portfolio investors is applied at the applicable treaty rate. Dividend distributions to international companies from Minimum Alternate Tax (MAT) levies are excluded if their effective tax rate is lower than the MAT rate, ensuring tax neutrality and promoting foreign investment.

Setting up a conflict resolution board

To reduce litigation and promote faster resolution of tax disputes for small taxpayers, the Union Budget 2025-26 has continued the framework for the Dispute Resolution Committee (DRC). Taxpayers with taxable income up to ₹50 lakh and disputed income up to ₹10 lakh are eligible to approach this committee for amicable dispute settlement. The earlier Settlement Commission has been discontinued, but pending cases continue to be handled by a transitional authority if requested by the taxpayer.

Faceless Income Tax Review Tribunal

To streamline the appeal process and increase transparency, the Income Tax Appeal Tribunal (ITAT) has been fully digitised, functioning as a faceless tribunal with jurisdiction spread across national centres. All communications between appellants and the ITAT are now conducted electronically, ensuring a faster and paperless appeal system.

Promotion of the transfer of the UCB to the SFB

To encourage consolidation and strengthen the banking sector, tax neutrality provisions continue to apply for Urban Cooperative Banks (UCBs) converting to Small Finance Banks (SFBs). UCBs transferring assets to SFBs are exempt from capital gains tax on such transfers, facilitating smooth transitions without immediate tax burdens.

Tax credits for social construction

To promote affordable housing, the Union Budget 2025-26 has extended the additional interest deduction of up to ₹1.5 lakh on loans taken for affordable house purchases to 31 March 2025. This incentive helps make home ownership more accessible to low- and middle-income groups.

Further, the qualifying period for tax holidays on affordable housing projects has been extended by another three years, now valid up to 31 March 2026. Tax exemptions are also available for notified Affordable Rental Housing Projects (ARHPs), encouraging the development of rental housing infrastructure for economically weaker sections.

Tax benefits for Start-ups

To support entrepreneurship, the start-up tax holiday and associated capital gains exemptions have been extended up to 31 March 2026. This extension aims to foster innovation and encourage investment in start-ups by providing tax relief for a longer period, supporting their growth and sustainability.

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To promote digital transactions and reduce the compliance burden for individuals conducting a significant portion of their transactions digitally, the Union Budget 2025-26 has proposed raising the tax audit threshold for such individuals. Specifically, individuals who conduct 95% or more of their transactions digitally will have the tax audit threshold increased from ₹5 crore to ₹10 crore. This measure aims to incentivise digital payments and ease the compliance requirements for taxpayers who predominantly engage in digital transactions.

Exemption from auditing

To continue promoting digital transactions and ease compliance for businesses and professionals, the Union Budget 2025-26 retains the increased tax audit threshold. For taxpayers who conduct at least 95% of their business transactions digitally, the tax audit limit remains at ₹10 crore, up from the earlier threshold of ₹5 crore. This provision encourages transparency and the adoption of digital payment systems while reducing the compliance burden for digitally compliant taxpayers.

Tax rationalisation of Unit Linked Insurance Plans (ULIP)

To further streamline and bring parity in the taxation of investment-linked insurance products, the Union Budget 2025-26 continues with the rationalised tax treatment of ULIPs. As per current provisions, ULIP policies with an annual premium exceeding ₹2.5 lakh (per individual per year) are not eligible for tax exemption on maturity proceeds under Section 10(10D) of the Income Tax Act.

However, in the event of the policyholder's death, the entire amount received by the nominee continues to remain tax-exempt, regardless of the premium amount.

Rationalisation of the tax-free revenue of the provident funds

As part of ongoing tax reforms, the Union Budget 2025-26 continues the existing rule where interest earned on employee contributions to provident funds exceeding ₹2.5 lakh per annum is taxable. This measure, aimed at preventing misuse of tax exemptions by high-income earners, ensures a fairer distribution of tax benefits.

This taxation rule applies only to contributions made on or after 1 April 2021, and contributions up to ₹2.5 lakh per annum remain eligible for tax-free interest. The provision aligns with the government's goal of targeting tax incentives towards the salaried middle class while enhancing tax equity.

Savings for limited trusts

In order to reduce the burden of compliance on small charitable trusts operating educational institutions and hospitals, it is proposed to raise the cap on annual receipts for these trusts from the existing '1 crore to '5 crores for non-applicability of different compliances, such as permissions, etc.

Relaxation of the exemption conditions to SWF/PF

In order to encourage more SWF/PF to invest in Indian infrastructure, it is proposed to relax some of the conditions for the 100% tax exemption introduced in the previous budget. The conditions are expected to ease the ban on borrowing or leasing, limits on economic practices, direct investment in infrastructure holders, etc.

Reforms for non-filing of tax

In order to prevent the habit of not filing returns by individuals, the Union Budget has announced new reforms that will charge the taxpayer in the absence of ITR filing. If a return of profits has not been filed, the rate of TDS/TCS shall be at twice the rate stated or 5%, whichever is greater. This rule shall not extend to purchases where the entire amount of tax is expected to be withheld, e.g., wage revenue, non-resident payment, lottery, etc.

Impact of new laws on the taxpayers

The new modifications in the tax announcement have created a buzz across the nation. Prime Minister Narendra Modi has described the new rules as a well-rounded development for the country. Nirmala Sitharaman has announced a new beginning for the textile industry, an increase in the customs duty levied upon cotton and raw silk cultivation. Quite different from the standard practice, this year's tax announcement was made available in the digital format only and not printed.

The tax rates were not increased in accordance with the previous years, but the ministry failed to address the requests of taxpayers for higher investment limits and medical costs.
Moreover, the recent tax announcement made it problematic for taxpayers in financing investment areas like the limitations of deductions for ULIP and the contractor's fund.
Finally, the government has remarked on working for the citizens by relaxing stamp duty, streamlining travel leave concessions, and exemptions from the return filing.
The Budget 2025-26 tax framework continues to address critical areas such as unit-linked insurance plans (ULIPs), pre-filled income tax return (ITR) forms, higher TDS rates for non-filers, and TDS exemptions on dividends paid to REITs and InvITs. These measures are intended to simplify tax compliance, improve transparency, and support the financial well-being of the working and middle-income segments of the population.

Since the last decade, the country has seen a significant change in the economy and the tax rules. The common man has always been affected by the laws and, many times fails to preserve their finances. Canara HSBC Life Insurance brings you saving plans for long-term financial goals. Not only can you save money today, but you can also support your family with finances in the coming years of fluctuating tax rules.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

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