02/02/2025
Budget 2025: Zero Tax Up to âš12 Lakh â A Boon or a Concern?
The Union Budget 2025 has introduced a landmark proposalâzero tax on income up to âš12 lakh under the New Tax Regime. For salaried individuals, this limit is slightly higher at âš12.75 lakh, thanks to the standard deduction. While this move is being celebrated for increasing disposable income, it also raises concerns about the long-term impact on savings and economic stability.
No Tax Incentives for Savings â A Double-Edged Sword
One of the biggest differences between the New Tax Regime (NTR) and the Old Tax Regime (OTR) is the absence of tax benefits on savings and investments. Unlike the OTR, where individuals could claim deductions under Section 80C, 80D, 80E, and others, the NTR offers no such incentivesâexcept for Section 80CCD(2), which allows employer contributions to the National Pension Scheme (NPS).
While this simplifies tax calculations and leaves more money in the hands of taxpayers, it also discourages savings. Without tax benefits, fewer people may opt for long-term investment options like PPF, EPF, or life insurance, potentially leading to lower financial security in emergencies.
The Risk of Low Savings â Learning from the COVID-19 Crisis
Indiaâs household savings rate has historically played a crucial role in economic resilience during crises. The COVID-19 pandemic was a prime exampleâwhen salaries were cut, and jobs were lost, people relied on their personal savings to survive. However, with no mandatory savings culture due to tax incentives being removed, the ability of individuals to withstand future financial shocks could be severely impacted.
If people donât prioritize savings voluntarily, it could lead to higher dependency on loans and credit, increasing financial vulnerability. This shift might impact the insurance industry, mutual funds, and retirement planning, as individuals may prefer immediate spending over long-term security.
Higher Disposable Income â Impact on Inflation
While the tax relief under the NTR is expected to boost consumer spending, it may also have inflationary consequences. With more money in hand and fewer incentives to save, demand for goods and services could rise sharply, potentially driving inflation upward.
The RBIâs monetary policies will play a crucial role in balancing this increased spending with inflation control. If inflation rises significantly, the government may need to step in with corrective measures, such as interest rate hikes, which could further impact investments and loans.
Final Thoughts â Balancing Growth and Stability
The zero tax proposal up to âš12 lakh under the New Tax Regime is undoubtedly a bold move that will increase disposable income and fuel economic growth. However, the lack of tax incentives for savings raises concerns about financial security and inflation risks.
While short-term economic benefits like increased spending and demand stimulation are clear, long-term financial discipline and crisis preparedness should not be overlooked. Policymakers must carefully assess whether additional incentives for savings or investment-linked tax benefits should be reintroduced to maintain a healthy balance between growth and financial stability.
What do you thinkâwill this move empower taxpayers or create a future financial risk for India? Let us know your thoughts!
5.0 â
¡ Chartered accountant
