Budget 2025: FM set to introduce new tax bracket for people who adopt renewable energy and reduce carbon emissions

The focus will therefore be on creating jobs, developing skills and providing relief to a large mass of people in the grip of inflation, with the overall objective of increasing the GDP growth rate. Let’s look into the crystal ball and share ideas on where the 2025 Budget proposals could go from an individual tax perspective.

Taxpayers, as always, expect the Minister of Finance to propose lower tax rates and tax relief to increase disposable personal income. More money in people’s hands is a good idea from a macroeconomic perspective and would also mean increased savings, investment and spending, which would help fuel economic growth.

Providing tax breaks to increase disposable personal income seems like a simple solution to meeting popular demand and spurring economic growth. The Minister of Finance and her team working on the budget could consider the following suggestions:

1. Towards a unified tax system

Over the past five years, we have had two tax regimes in parallel. The old tax regime with regular income brackets and qualifying deductions/exemptions and the new tax regime with relatively wider income brackets and lower tax rates, without most of the deductions/exemptions available in the old tax regime. The taxpayer can choose one or another tax regime.

The aim of introducing a new tax regime in Budget 2020 was to simplify the tax system and over the years the government has made changes to the new tax regime to make it more attractive.

It was widely reported in the media earlier this year that almost 72% of taxpayers had opted for the new tax regime while filing their tax returns for FY24. Considering this and the fact that a new income tax law is in the works, the time is ideal for the government to put in place a single, unified tax regime.

A unified tax regime with expanded income brackets and lower tax rates will help achieve the envisaged rationalization and simplification of the tax system and will also make minority taxpayers of the old tax regime happy.

2. Rationalization of capital gains

The government has been studying this issue for many years and in the latest budget changes were made to aspects such as the capital gains tax rate, holding periods and indexation to make the taxation of capital gains simpler and easier to administer.

It is well known that there is increased activity among retail investors in the stock market, and that more and more people are turning to it to supplement their income. The government should raise the tax exemption threshold for long-term capital gains on stocks and equity-oriented mutual funds from ₹1.25 lakh to ₹5 million. This would provide a strong incentive for taxpayers to invest more, save more and spend more, thereby boosting overall economic activity.

Another aspect of capital gains taxation that could benefit from the intervention of the Minister of Finance in this budget is the exemption threshold provided for in Article 54, Article 54F and Article 54EC of the Income Tax Act, which relate to the reinvestment of capital gains from the sale of assets in real estate. specific property or titles.

Currently, there is a limit of ₹10 crore for claiming exemption under section 54 and section 54F. Likewise, there is a limit of ₹50 lakh to claim exemption under section 54EC.

As the indexation benefit is no longer available, it is logical to increase the exemption thresholds of ₹10 million to ₹12 crore under section 54/54F and ₹50 million to ₹1 crore under section 54EC.

3. Tax incentives to encourage sustainable development

The government has actively integrated the Sustainable Development Goals into its economic and fiscal policies to control climate change and promote sustainable development. Tax breaks may be introduced for people who adopt renewable energy, reduce carbon emissions and dependence on fossil fuels, or invest in sustainability projects.

A separate tax bracket or reduction, taking into account the general principles of the new tax regime, could be introduced for individual taxpayers who promote sustainable development by investing in renewable energy sources, such as solar panels or vehicles electric, in order to reduce the carbon footprint. It will also help the government balance economic growth with environmental protection and social equity.

This idea is very much in line with developed countries such as the United States, United Kingdom, Germany and Canada, where these tax breaks, vouchers and credits are used effectively to promote the adoption of renewable energy and promote sustainable development.

As always, individual taxpayers can expect lower taxes and there is no shortage of ideas from armchair intellectuals. Although some ideas may have to wait their time, it is clear that the role of the Minister of Finance is never easy. Nevertheless, we are convinced that fiscal prudence will ultimately prevail.

Sonu Iyer is a Tax Partner and National HR Advisory Services Leader at EY India. Siddharth Deb, Tax Director, EY India, also contributed to the article.