Budget 2025: A Game-Changer for India’s Middle Class?

In a move that signals a significant shift in India’s personal taxation landscape, Budget 2025 has proposed one of the most substantial tax reforms in recent years. The government’s decision to exempt incomes up to ₹12.75 lakh from taxation marks a dramatic expansion of the tax-free bracket, potentially transforming how millions of Indians save, invest, and spend their money.

This sweeping reform, which moves far beyond the previous tax exemption limits, appears designed to achieve three key objectives: boosting disposable income for the middle class, stimulating domestic consumption, and in turn boosting demand for corporates. For individual taxpayers, this change could mean rethinking their entire financial planning strategy – from investment choices to retirement savings.

In this report, we cover the impact of Budget 2025 on two main grounds:

1. Personal taxes and finance, relating to changes that affect your own finances
2. Market impact, relating to which sectors have been the most impacted by Budget proposals and bond markets. 

Budget and you

#1 Change in tax slab under the new regime

Changes on the personal tax front were eagerly awaited and did not disappoint. While nothing changed as far as the ‘Old Tax Regime’ goes, the ‘New Tax Regime’ got more attractive. Here are the changes.

• Zero Tax Threshold Raised to Rs. 12 lakhs: Budget 2025 increases the rebate under section 87A for resident individuals from Rs. 7 lakhs to Rs. 12 lakhs. What this means is that for those with income up to Rs. 12 lakhs per annum (Rs. 12,75,000 if you take into account standard deduction which has remained unchanged at Rs. 75,000), there will be no tax payable under the new tax regime. This will come into effect from assessment year 2026-2027 onwards. 
• Changes in tax slabs: Budget 2025 revises the tax slabs and the rates under the ‘New Tax Regime’. There are two big changes here that can significantly reduce your total tax outgo. One, the slab amounts have changed. Two, there is a new slab rate of 25% introduced. 

For example, if you had an income of Rs 12,00,000, you will now have to pay zero tax under the new tax regime from the Rs 71,500 earlier. If you earned Rs 25 lakh, you would be paying Rs 319,500 under the new slab rates as against Rs 434,200 earlier – a saving of Rs 114,400.

But what if you are over the Rs 12,00,000 limit by just by a small margin? The marginal relief provision (that has been left unchanged) comes to your rescue. This provision ensures that the tax you have to pay just because you’re marginally over the limit is not inflated, by looking at the excess of your income over this Rs 12,00,000 limit. For example, if you had an income of Rs 12.1 lakh, the tax payable will be Rs.10,400 (including 4% cess and assuming no standard deduction for simplicity’s sake)

We have designed a calculator for you to check the tax impact in the new slab rates. You can change the inputs to see the tax you have to pay.

Compare Tax Regimes in Excel

Apart from these, there are some interesting points to note here. The Rs 12 lakh proposed limit does not include capital gains. However, if you had other income (income from other sources) then those would come under the Rs 12 lakh limit. 

That means someone whose primary income is from interest from, say, deposits or pensions would all enjoy this. A retired person (or anyone seeking income) can therefore comfortably invest in safe options like FDs without fear of losing tax under the next regime.  They would still be taxed on their mutual funds and stocks as capital gains is outside this limit.

#2 Changes in TDS

Tax deducted at source (TDS) applies on any income that you may receive – salary, interest, dividends, and so on. This TDS is calculated once that income crosses a particular threshold or minimum amount. The Budget 2025 has increased this threshold, from April 1 2025, as explained below:

As you can see, senior citizens earning interest income especially stand to benefit from the higher TDS limits. Another change on the TDS front is for those who have not filed tax returns – these individuals had suffered a higher TDS rate, in most cases at twice the applicable rate. From April 1, 2025 onwards, this provision of higher TDS will not apply. 

#3 Changes in TCS

Tax Collected at Source applies when a tax component is deducted from you on certain transactions. The most common of these, where individuals are concerned, is foreign remittances. Currently, foreign remittances above Rs 700,000 sent for education purposes carry a TCS rate of 0.5%. The Budget has proposed to do away with this TCS altogether – provided this comes from a loan from a financial institution taken for this education purpose. Apart from this, for other foreign remittances including overseas tour packages, the Budget has increased the threshold beyond which the TCS applies to Rs 10,00,000 from Rs 700,000.

#4 Self-occupied property value relief

Taxpayers can now claim two self-occupied properties as having nil annual value, removing previous restrictions. Earlier, you needed to prove that you were away from a city where you owned the other house to claim nil value. Now, you no longer need to prove that work/business is the reason you can't live in your house. You can claim nil value for up to 2 self-occupied houses (under Section 23 of the Income Tax Act). This is effective from AY- 2025-26, which means it is already effective for FY 2024-25.

#5 NPS Vatsalya to receive 80CCD benefit

It is proposed to extend the tax benefits available to the National Pension Scheme (NPS) under Section 80CCD of the Act to the contributions made to the NPS Vatsalya accounts. Accordingly: 

• Parents/guardians can claim tax deduction under Section 80CCD for contributions made to their minor child's NPS Vatsalya account.
• Maximum deduction allowed: Rs 50,000 per year
• When money is withdrawn from the account, regular withdrawals will be taxed. If the minor passes away, withdrawals won't be taxed for the parent/guardian. Partial withdrawals (up to 25% of contributions) won't be taxed if used for education, specified illnesses or disability (more than 75%) of the minor.

The above benefits will be applicable from AY- 2026-27, which means it is effective for financial year beginning April 1, 2025. 

However, it is important to note that this is available only under the old tax regime. This is in line with the rules for your own NPS, which is available only for old tax regime when it comes to self-contribution. Under the new tax regime, only employer contribution (NPS mooted by your company) is available.

#6 Exemption from tax for NSS withdrawals

This provision requires some explanation. The background is as follows:

• Before April 1992, people got tax deductions for deposits in NSS
• When withdrawing this money (including interest), it was taxable
• If the account holder died, withdrawals by legal heirs weren't taxed

What changed? On August 29, 2024, the government announced no interest would be paid on NSS balances after October 1, 2024

The proposed rule now:

• Any withdrawals made on or after August 29, 2024, will be tax-free
• This applies only to deposits (and their interest) made before April 1, 1992
• This change is retrospective, meaning it applies from August 29, 2024

Simply put: If you had old NSS deposits from before 1992, you can now withdraw them without paying tax, since the government stopped paying interest on these accounts.

The main reason for this change was to help people who are forced to withdraw their money because interest payments were stopping.

#7 Clarification on ULIP taxation

Pre-2021, all payouts from ULIPs came under the purview of Section 10(10D) of the IT Act, under which they were not included in computation of total income and therefore tax exempt. 

This changed in 2021. For ULIPs issued after this date, the exemption would only be available if the premium for such policy is under Rs.2,50,000 per annum. If there was more than one ULIP, the aggregate premium would need to be under Rs.2,50,000. Gains on redemption of high premium ULIPS were taxed similar to equity mutual funds in accordance with this circular.

On the other hand, payouts from other life insurance policies – which were subject to similar limits when it came to tax exemptions – were brought under ‘other income’. Due to this difference, there always was confusion over how ULIPs were taxed.

The Budget 2025, therefore, has clearly specified ULIP tax treatment. It does so by explicitly classifying non-exempt ULIPS as a ‘capital asset’. The gains from redemption of ULIPs will therefore be treated as capital gains. Further, it brings them under the definition of equity oriented mutual funds. To put it simply - there’s no change on ULIP taxes, just more clarity.

#8 Updated returns window extended

Taxpayers can now file updated income tax returns up to four years, instead of the previous two-year limit. That’s some relief for those of you who wake up late to filing mistakes 😊

#9 Increase in income limit for calculating perquisites

This proposal requires some explanation. The current rules are as follows:

1. If an employee's salary is less than ₹50,000, certain benefits from employers (like free or discounted services) are not considered "perquisites" for tax purposes. This limit was set in 2001.
2. If an employee's total income is less than ₹2 lakh, any money spent by the employer on their (or their family's) overseas medical treatment is not counted as a perquisite. This limit was set in 1993.

The problem: These income limits were set 20-30 years ago and are outdated considering today's living standards and economic conditions.

Proposed change: The government wants the power to make rules to increase these income limits to ensure more employees can receive benefits from their employers without these being counted as taxable perquisites.

It is not clear what the new limits will be. That will determine whether this will be beneficial to you or not. 

There is one important announcement– there is a new Income Tax Bill coming! Nirmala Sitharaman announced a new Income Tax Bill to be introduced next week, aiming at simplifying tax compliance and reducing litigation. We will know more only when it comes.

Budget and the markets

Stock market

The 2025 Budget's cornerstone is a significant reduction in personal income tax rates, which promises to boost domestic consumption by increasing disposable income. These tax cuts are substantial enough to potentially redirect savings into capital markets through Systematic Investment Plans (SIPs), enable higher EMI payments, and stimulate discretionary spending in sectors like travel and tourism.

The consumption story is further strengthened by the possibility of RBI interest rate cuts and a favorable bond market environment. With lower government borrowings, the risk of government crowding out banks' funding needs reduces. Therefore, financial institutions can better support consumer lending across automobiles, real estate, durables, and home improvement sectors. 

There are also other Budget proposals that support the consumption story. We list some of them: 

• The fact that the government intends to identify 50 top tourism destinations in the country and develop them along with States augurs for the travel and tourism sector.
• The agriculture sector announcements - mainly comprising pricing and policy support for farmers in pulses, oil seeds, fruits and vegetables and the New Employment Generation Scheme announced in previous budget - effectively translate into more money in the hands of farmers, job seekers and taxpayers. This is a boost to broad-based consumption from staples to discretionary and luxury. The allocation to New Employment generation scheme has also been doubled to Rs.20,000 crore from Rs.10,000 crore last year.

The market’s reaction was rightly in favour of the consumption sector as soon as the tax announcements were made and the Budget speech was over. The Nifty Consumption index gained close to 5% in a market that was otherwise flat. 

The negative reaction to the budget came on the capex side as the Govt. didn’t increase its allocation meaningfully for FY26. Central Govt. capex as a % of GDP has been maintained at 3.1% of GDP, same as for FY25. The absolute amount has been maintained at Rs.11.2 lakh crore Vs Rs.11.11 lakh crore for previous year.  

However, the bright spot here is that in this Budget, the government has increased the allocation to States for capex to Rs 1.5 lakh crore from 1.25 lakh crore last year at concessional interest rate for 50 years. The scope of capex opportunities has also been widened to include Global Captive Centres (GCC) in Tier 2 cities with additional incentives for that to States. 

So, while disappointment for market may largely be coming from higher expectations, the government is clearly going by the communicated path of slowly winding down its capex and allowing private capex to take off. Private capex cycle in turn has to be triggered by capacity utilisation which in turn depends on demand. Hence, the thrust of Budget 2025 to stimulate demand appears to be in the right direction.

The market’s present disappointment though, can provide an opportunity for those looking to pick quality sectors in the space if the expensive capital goods sector cools down a bit. 

The Budget did not forget the manufacturing, energy and infrastructure sectors although they were overshadowed by the personal tax rate cuts and consumption story. Here are some of the proposals in these sectors:

• There was renewed thrust on Public Private Partnership (PPP) in this Budget to channelise private capital for infrastructure development. Thrust on nuclear energy has been brought back to ensure energy security as we move forward. The Budget has put forward a mission on 100GW of Nuclear Energy by 2047 as an essential part of energy participation.
• The electronics manufacturing sector has been supported with requisite duty adjustments, as planned, to correct the inverted duty structure with the progress in domestic manufacturing. For the EV manufacturing sector, the government has not only reduced the customs duty on key minerals such as cobalt power and lithium-ion scrap to zero but also brought down the duty on capital goods used in manufacturing of EV batteries. 
• Non-leather footwear is another that has been given major thrust with additional thrust to technical textile manufacturing as it forms the mainstay of non-leather footwear like sports goods.

As always, PrimeInvestor will be on the lookout for opportunities in these spaces. As you may be aware, we already have existing recent calls in consumption – both through Prime Stocks, Prime Funds as well as Prime Trends – Consumption smallcase. You would do well to check them out now. 

Bond market

If the budget had only limited sops to offer to the stock markets, it is a good one for bond markets. 

For one, after over-achieving on the fiscal deficit target for FY25 (4.8% versus 4.9% originally expected) despite slower growth, the Centre has plans to tighten it further for FY26. It now expects the fiscal deficit to come in at 4.4% in FY26. This is based on a nominal GDP growth assumption of 10.1% which also appears attainable. It has also laid down fresh FRBM targets that propose to shift the goalpost on fiscal consolidation from the fiscal deficit number to debt to GDP ratio. The focus on debt instead of deficit may also help India persuade global rating agencies to reconsider their sovereign ratings.  

Two, in a rare occurrence, the fiscal deficit in absolute terms will also decline for the third consecutive year. The fiscal deficit which dipped from Rs 16.5 lakh crore in FY24 Rs 15.7 lakh crore in FY25RE is expected to moderate a bit to Rs 15.68 lakh crore in FY26.  

This will mean the Centre's market borrowings in FY26 at Rs 11.53 lakh crore will be lower than Rs 11.6 lakh crore in FY25 (RE). This should free up room for both corporate and financial firms and banks to raise their bond market borrowings without being crowded out by the government. 

These factors add to India's attractiveness for foreign investors and are bullish for long term bonds. 

With RBI already stepping up liquidity measures short term rates in the market should head down tracking long term rates, even if the upcoming MPC meeting doesn't bring rate cuts.