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We covered in the last two parts on the Union Budget 2025 how the focus is on growth and also on shifting the focus to private from the public sector. The budget presented by Finance Minister Nirmala Sitharaman also introduces a range of tax reforms (the ₹12 lakh per annum tax free being the most famous one) and compliance adjustments that impact both individuals and businesses. While the budget aims to provide relief to middle-class taxpayers, it also tightens regulations in key areas, particularly around real estate tax credits and foreign asset disclosures.
ITC Restrictions on Real Estate
One of the most contentious aspects of the budget is the retrospective restriction on Input Tax Credit (ITC) for real estate. The government has clarified that ITC will not be available for the construction of immovable property, even if the property is intended for leasing. This amendment is effective retrospectively from July 2017, aligning with the Supreme Court’s Safari Retreat case. However, it is expected to trigger further litigation, as it significantly impacts businesses in commercial real estate leasing and infrastructure development. Legal challenges may arise as companies question the fairness of retrospective amendments that change fundamental tax planning strategies.
Direct Tax Provisions, A Big Relief for the Middle Class
The direct tax changes in Budget 2025 predominantly favor individuals under the new tax regime, making it more attractive than the old regime.
- Revised Tax Slabs:
- ₹0 – ₹4 lakh: Nil
- ₹4 – ₹8 lakh: 5%
- ₹8 – ₹12 lakh: 10%
- ₹12 – ₹16 lakh: 15%
- ₹16 – ₹20 lakh: 20%
- ₹20 – ₹24 lakh: 25%
- Above ₹24 lakh: 30%
- Increased Rebate under Section 87A: The rebate limit has been increased to ₹60,000, effectively making incomes up to ₹12 lakh tax-free.
- Marginal Relief: For individuals earning between ₹12 lakh and ₹12.6 lakh, a marginal relief provision will smooth the transition and prevent sudden jumps in tax liabilities.
- Capital Gains Exclusion from 87A Rebate: If an individual’s income includes capital gains, the total income will not be eligible for the 87A rebate, and tax must be paid accordingly, regardless of whether the total falls below ₹12 lakh.
Indirect Tax (GST & Customs) Changes
While direct tax reforms focus on simplifying individual taxation, the changes in GST and Customs laws introduce compliance-heavy provisions that businesses must navigate carefully.
- Input Tax Credit (ITC) Restrictions on Real Estate:
- ITC is disallowed for the construction of immovable property, even if leased.
- While aligning with the Safari Retreat case decision, this provision remains open to interpretation and could lead to disputes.
- TDS and TCS Adjustments:
- The TDS threshold on professional fees (Section 194J) has been raised from ₹30,000 to ₹50,000, reducing compliance burdens for professionals.
- TDS on rental income now applies only to payments exceeding ₹6 lakh annually, up from the previous ₹2.4 lakh threshold.
- TCS on foreign education expenses is now exempt if payments are made through an education loan. For other remittances, TCS will be applicable only beyond ₹10 lakh.
- GST Credit Note Adjustment: Businesses will only be allowed to adjust credit notes against GST liability if the recipient has also reversed their input tax credit. This measure is aimed at preventing undue tax advantages and ensuring parity in GST transactions.
- Customs Duty Adjustments:
- Basic Customs Duty (BCD) has been reduced on several imported goods, including marble, granite, automobiles, and metals.
- The Social Welfare Surcharge (SWS) has been removed, but the Agricultural Infrastructure & Development Cess (AIDC) has been increased on selected imports, balancing tax relief with revenue requirements.
- A new requirement mandates that provisional assessments for Customs must be finalized within two years, expediting trade and reducing compliance delays.
Updated Tax Compliance & Procedural Changes
To ensure smoother tax compliance, the budget introduces procedural adjustments that provide more leeway for taxpayers.
- Updated Income Tax Returns (ITR) Window Extended:
- Taxpayers can now file updated returns for the past two years, up from the previous one-year limit.
- This provides an opportunity for individuals who have missed disclosures, such as foreign assets, ESOPs, or dividends, to regularize their tax filings without facing severe penalties.
- Foreign Asset Disclosure Under Black Money Act:
- Taxpayers holding foreign RSUs, shares, and dividend income must now explicitly declare them in tax filings to avoid penalties under the Black Money Act.
- This move is aimed at curbing tax evasion and ensuring full transparency in cross-border financial holdings.
Conclusion
The Union Budget 2025 presents a well-calibrated mix of tax relief for individuals while strengthening compliance for businesses. The new tax regime has been made substantially more attractive, with lower tax burdens and higher exemption limits, encouraging more taxpayers to shift away from the old regime. At the same time, businesses in real estate, professional services, and international trade must carefully adapt to the tightened restrictions on ITC, TDS, and foreign asset disclosures. The retrospective amendments, particularly those affecting real estate, may face legal challenges, but the government appears firm in its stance of aligning tax provisions with prior judicial pronouncements.
Overall, while the budget boosts consumption by leaving more money in taxpayers’ hands, it also ensures robust compliance mechanisms to prevent revenue leakage. Businesses and individuals alike must take a detailed look at these changes to optimise their tax strategies and maintain compliance with evolving tax regulations.
