income tax
Published on 5 April 2025
Tax Exemptions: Impact on Individuals and Corporates
Tax Incentives Under the Income-tax Act, 1961: An Overview
The Government of India offers numerous tax incentives under the Income-tax Act, 1961, which are advantageous for both corporations and individual taxpayers. Between FY 2019-20 and FY 2023-24, individuals and Hindu Undivided Families (HUFs) benefited from tax incentives totaling ₹8.69 lakh crore, while corporations availed benefits amounting to ₹4.53 lakh crore.
Recent Budget Highlights
Recent budgets have seen an uptick in tax exemptions aimed at benefiting the middle class. Notably, the Budget for FY 2025-26 increased the basic exemption limit under the new tax regime to ₹4 lakh. Additionally, the rebate provided under Section 87A exempts individuals earning up to ₹12 lakh from income tax, positively impacting nearly one crore taxpayers. Alongside these changes, there has been an increase in standard deductions for salaried individuals and pensioners, as well as expanded allowances for leave encashment, NPS contributions, and long-term capital gains.
The government continually evaluates the impact of these tax incentives and has systematically reduced the overall tax burden through adjustments in income slabs and rates. The new tax regime, launched in Budget 2020-21, offers lower tax rates while allowing taxpayers the flexibility to choose between the old and the new structures. Proposals in the Budget for FY 2025-26 are anticipated to cause a revenue loss of around ₹1 lakh crore, ultimately aiming to enhance disposable income and drive economic growth.
Parliamentary Inquiry on Tax Incentives
On February 4, 2025, during the Rajya Sabha session, a series of questions pertaining to tax exemptions and benefits were raised regarding their distribution between corporations and individual taxpayers in recent years. The query, initiated by members including Smt. Darshana Singh and others, delved into the specifics of measures aimed at benefiting the middle class, the monitoring mechanisms of tax exemptions, and related details.
Minister of State for Finance's Response
In response, Shri Pankaj Chaudhary, Minister of State for Finance, elaborated on the following points:
(a) Distribution of Tax Exemptions
The Income-tax Act facilitates tax incentives across various sectors, promoting exports, regional development, infrastructure, employment, scientific research, and more. The revenue impact from major tax incentives for individuals/HUFs and corporations over the past five years is detailed below:
| Financial Year | For Corporates (in ₹ Crore) | For Individuals/HUFs (in ₹ Crore) |
|---|---|---|
| 2019-20 | 94,109.83 | 1,55,429.45 |
| 2020-21 | 75,218.02 | 1,28,244.23 |
| 2021-22 | 96,892.39 | 1,68,566.30 |
| 2022-23 | 88,109.27 | 1,96,678.95 |
| 2023-24* | 98,999.57 | 2,20,988.47 |
| Total | 4,53,329.08 | 8,69,907.40 |
*2023-24 figures are projected estimates.
The data indicates a significant revenue concession granted to Individual/HUF taxpayers compared to corporations.
(b) Enhancements for Middle-Class Taxpayers
The new tax regime launched in Budget 2020-21 simplified compliance with tax provisions while providing crucial relief to middle-class taxpayers. Approximately 75% of taxpayers have transitioned to this new regime. Significant proposals for the middle-class include:
- Increase in Basic Exemption Limit: Adjusted from ₹2.5 lakh to ₹3 lakh in FY 2023-24, and further to ₹4 lakh in FY 2025-26.
- Section 87A Rebate: Proposals will exempt resident individuals with a total income up to ₹12 lakh from paying tax. This adjustment will ease tax burdens for around one crore taxpayers.
- Reduction in Income Tax Rates: Ongoing reductions across income slabs, with the highest rate applicable only to incomes above ₹24 lakh in the current budget.
- Heightened Standard Deductions: Enhanced from ₹50,000 to ₹75,000 in FY 2024-25.
- Tax exemptions under New Tax Regime: Inclusion of benefits covering leave encashment, NPS contributions, and certain allowances.
The government also proposed rationalizing TDS/TCS provisions in the Budget 2025-26, leading to increased exemption thresholds for senior citizens and other specified incomes.
(c) Monitoring Tax Exemptions
A systematic approach to the distribution of tax exemption impacts and foregone revenue is reflected in Annexure-7 of the Receipt Budget Statement, publicly accessible at indiabudget.gov.in.
Conclusion
The Government of India continues to implement tax policies under the Income-tax Act, 1961, aiming to provide substantial benefits to both corporations and individual taxpayers. Recent adjustments in tax legislation are designed to enhance disposable income, support economic growth, and ensure that the middle class benefits significantly from taxation reforms.