The Indian Budget 2025
Simplifying India’s budget for our readers
Before writing in depth about the budget, I had published an article highlighting the challenges faced by the Indian economy based on which the budget of 2025 was designed. If you have no idea about what’s going on, I recommend you to first read it by clicking here.
FM Nirmala Sitharaman presented the budget on 1st February, 2025 that brought cheer on the faces of most people and was pegged to be the ‘budget of the middle class’ by news channels and some economists alike.
Let’s dive in…
Starting with the highlight of the budget – the changes in the income tax slab rates.
The government stuck to its objective of phasing in the New Tax Regime and the mega announcement was that NO income tax will be charged up to your income of INR 12 lakhs.
Whether you follow news channels, newspapers or read news online, I’m sure you have come across this table at least once.
What this table does is it is explaining the benefit a taxpayer will accrue due to new limits set by the government.
For example, if your current year income is 12 lakhs, based on the current tax slabs, you will pay a tax of INR 80,000 (see the figure in the PRESENT column corresponding to 12 lakhs). However, if your income is to stay the same in the next year, you will not pay any tax (see the figure in the last column TAX AFTER REBATE BENEFIT corresponding to 12 lakhs).
The above table was run for so long everywhere that some may have missed the actual table of slab rates. See below
As per this table, you are supposed to pay tax if you earn an income over 4 lakhs. That’s where the government has played its magic. Along with the slab benefits, the government has given a tax rebate (a payback, discount) in such a manner that no tax is payable up to the income of INR 12 lakhs.
Other changes in direct taxes
- Rationalization of TDS by reducing the number of rates and thresholds above which TDS is deducted
- On rent
- Deemed rental income will not be charged if you own two houses.
Earlier, if you had more than ONE house properties, irrespective of whether you have rented it or not, you were supposed to consider rental income on the second property and pay tax on it. This income was called deemed rent.
With current provisions, deemed rent will be calculated only if you have more than TWO house properties.
A relief from tax for the income that was never earned by the house owners.
- No TDS to be deducted on rent paid on any property up to INR 6 lakhs. Earlier, the limit was only 2.40 lakhs.
- Withdrawals of NSS have now become exempt. Earlier, NSS were taxed at slab rates.
IMPORTANT POINTS
We all have rejoiced at the commendable announcement. Let us just go one step further in understanding the details so that we don’t make rookie mistakes and end up paying more than we should. Consider the following points along with the announcement –
The benefit of NO TAX up to 12 lakhs is only available on normal sources of income. Meaning, if you have earned income out of capital gains, the benefit of no tax up to 12 lakhs does not apply.
For salaried persons, a standard deduction of INR 75,000 is available over and above all other benefits. This means anybody earning salary income will pay NO TAX until their income is more than 12.75 lakhs.
The new slabs will take effect from 1st April 2025. All your incomes of current year will be taxed as per the prevailing tax rates in which you do not have to pay income up to INR 7 lakhs.
Now, on to the other important points. If you are an investor, a businessperson, a founder aspiring to build a startup, a student or someone who loves to know things, you will find it interesting.
As highlighted in my previous article regarding the challenges faced by the Indian economy (read here), India is in a bright spot globally with their diplomatic policy that makes it an ally of the USA, China and Russia all at the same time. At the same time, India needs to make sure that the economy STAYS booming with a good pace with equitable distribution of income among all classes and geographies of people – which will lead to higher income levels, better aspirations and high consumption.
But you cannot achieve higher income levels or better consumption patterns directly. The means to achieve them are different and many and hence, the government has identified 4 engines that have the potential to steer the economy at its true potential.
One common aspect across these 4 engines is addressing the problem of unemployment. In terms of population, India still remains as a young and growing country and if enough and timely opportunities are not created, our demographic dividend will turn into a liability. We are already a daily recipient of spam calls disturbing us multiple times daily. When we are set out to do something productive, the last thing we want is to spend our time and energy getting disturbed by the forces trying to disrupt our pace and pulling us down. If unemployment rises, there will be more such forces trying to bend their ways into getting our data and looting our hard earned money.
Having more mouths to feed doesn’t make a market, having ample of efficient brains, hands and legs that facilitate feeding those mouths do.
Growth engine 1 – Agriculture
Agriculture remains an important sector of the Indian economy with almost 50% of population still engaged in agriculture and allied activities and contributing to the extent of 18% of our GDP. In spite of India being well known as an agrarian country, most of our farmers lack basic infrastructure to efficiently produce and sell crops. The unfortunate news of farmers committing suicide is a common trend and bold measures are required to get them to the place they deserve.
- The government is starting programmes like ‘Dhan Dhanya Krishi Yojana’ and ‘Rural Prosperity and Resilience’, which will cover 100 districts across India having the lowest productivity and creating employment opportunities by upskilling, introducing technology and investment.
- They have also launched a 6 year mission with special focus on Tur, Urad and Masoor to attain self sufficiency in pulses.
- To rejuvenate the traditional textile sector, the government is also starting a mission to improve cotton productivity and quality.
This mission also keeps in mind the Bangladesh crisis and the Indian government intends to take advantage to shift some share of global cotton demand to India.
Think of the sectors that will benefit from this initiative – fashion, textile machinery, handicrafts, etc.
- The government also plans to transform INDIA POST by leveraging their post office network, employees and data as a large public logistic organization. (This initiative is my favorite if executed well).
Growth engine 2 – MSMEs
- The government had launched the CGTMSE scheme in the year 2000. Yet hardly anyone knew about it as proper promotion of the scheme was never done. The government enhanced the limit of CGTMSE from 5 crores to 10 crores.
CGTMSE is (Credit Guarantee Trust for Micro and Small Enterprises – aimed at providing collateral free loans to micro and small enterprises.
The government guarantees anywhere between 50% to 80% of the loan availed by micro and small enterprises under this scheme. This enables banks to share risk of unsecured loans with the government and induces the banks to give loans to small businesses.
Loans given to MSMEs also fall under priority sector lending and hence, is a win-win for banks and government alike.
Micro and Small combined make up for over 99% of MSMEs.
Based on your financial performance, banks can now provide collateral free loans up to 10 crores (20 crores if you are a startup).
- The government has also revised the limits for defining MSMEs. Following is the table showing current and enhanced limits-
- A fund of funds with investment of 10,000 crores will be set up to support startups.
- Special focus is mentioned for MSMEs in on clean tech manufacturing, footwear, toys and food processing.
Growth engine 3 – Investment
- For skill development, the government has announced programmes for Anganwadi that will help in upskilling and taking care of nutritional needs of up to 8 crore children.
- Like I mentioned in my previous article, unemployability is as big a concern and steps need to be taken from the very roots of the system to make the younger generation capable of meeting real world demands and challenges.
- The government is also taking initiatives for providing broadband connectivity to government schools.
- The government is also spending on additional infrastructure for IITs to accommodate 6,500 more students per year and for medical education to accommodate 10,000 additional seats per year.
- For infrastructural development, the government has kept aside INR 1.5 lakh crores to provide 50 year interest free loans to states.
- The government has modified the UDAN scheme to make air travel affordable for the middle class and enhance regional connectivity to 120 new destinations and carry 4 crore passengers in the next 10 years.
- A SWAMIH Fund 2 – aimed at affordable and mid-income housing – will be established with an outlay of INR 15,000 crore for completion of 1 lakh such houses.
- Top 50 tourist destinations will be developed to build key infrastructure like hotels, etc.
Growth engine 4 – Export
- Set up of Export Promotion Mission with sectoral targets and Ministries.
- Set up of BharatTradeNet – a unified digital infrastructure for trade documentation and fincancing.
- Upgradation of air cargo warehousing infrastructure for high vaule perishable items.
Other reforms
- New income tax bill will be tabled soon. This is expected to be less complicated and will have half the provisions compared to the current act.
- FDI in insurance sector enhanced from 74% to 100%.
- Decriminalisation of more than 100 laws
Indirect taxes
- Removal of seven tariffs from custom duty and exemption of Social Welfare Surcharge
- 36 life saving medicines relating to cancer treatment, rare diseases and chronic illnesses fully exempted from basic custom duty
- Increase in scope of exemption of custom duty for textile machinery
- In electronic goods, increase in custom duty for IFPD and reduction and exemption for Open Cells
- Push to the EV manufacturing segment with exemption from custom duty of 35 additional capital goods for EV production
The government has done their job with changes in direct taxes, fine tuning of indirect taxes and several other initiatives in select industries. This still does not mean everything is well in the country. There are some critical points that are not easy to spot. The opposition has, like always, been critical of how the budget is only favoring Bihar or that the NDA government has only focused in places where elections are due and they’re not completely wrong.
Keeping politics aside, I’ve tried to capture some excellent data points compiled by a MINT article (click here) that show the side of the budget that is not visible unless you dig deep.
Firstly, the government has set a long term target to get the fiscal deficit below 4.5% (and this budget expects to get it down to 4.4% from 4.8%). But how can the government reduce fiscal deficit when they are giving so many tax incentives that is reducing their income?
The simplest explanation is that the government has reduced their expenditure in several sectors. It is striking to see that the government is consistently talking about upskilling and educating the next generation. However, their total expenditure in education as a percentage of GDP has dropped from 4% in 2009-10 to 2% in 2023-24. Similar trend is seen in rural development where the expenditure has dropped from 6% to 4%.
Covid has taught us many things – especially when it comes to healthcare. However, this government seems to have missed those lessons completely. Our expenditure in healthcare has stayed flat at 2% of GDP since 2009-10 till date.
After the pandemic, thanks to this government that it kept giving fuel to the economy to keep going through their CAPEX. The idea was that once the government starts spending in infrastructure, private investment will follow and will give a compounded push to the growth of the economy along with creating massive job opportunities. However, due to high interest rates and global slowdown, private capex did not slow down and what this government was left with was five years of high inflation and low wage growth.
If the government wants to achieve their USD 5 trillion economy dream by 2030, consumption needs to rise and fast. The government has smartly now put the money in the hands of the public and DIS-INCENTIVIZED savings. The government now hopes that more money in the hands of the public will mean higher spending power and eventually what the government is losing in direct income tax will be recovered with better GST collections and tax from higher corporate profits.
Conclusion
Overall, the budget has received a thumbs up from all the stakeholders.
Will the people respond to the consumption cry of the government or look to save more?
The RBI has responded positively with a 25 bps cut in the repo rate. Will this be enough to steer the private sector into increasing their capacities through CAPEX?
Will India be able to successfully navigate through the global slowdown, trade wars and other geopolitical challenges?
This is an infinite game. Every new solution will open doors to new challenges and problems. Life goes on…