Budget 2025: Key Tax Reforms Proposed by Former CBDT Chair JB Mohapatra

By: Admin
Date: January 22, 2025
Categories: CBDT, News
Reading Time: 4 Min

Introduction: Proposals for a More Efficient Tax System
As the Union Budget 2025 approaches, former CBDT Chair JB Mohapatra has outlined key reforms aimed at creating a more efficient and equitable tax structure. Presented in collaboration with the Global Trade Research Initiative, these recommendations focus on reducing the tax burden, addressing inflation, and promoting balanced investments.

1. Adjusting Income Tax Exemptions and Deductions for Inflation
The income tax exemption threshold, unchanged since 2014, has significantly lost its value due to inflation. Many taxpayers face an increased burden as exemptions fail to keep pace with rising costs.

Proposed Adjustments

  • Increase the Exemption Threshold: Raise the ₹2.5 lakh limit to ₹5.7 lakh to restore its 2014 value.
  • Enhance Deductions:
    • Savings Deposit Interest Deduction: Increase from ₹10,000 to ₹19,450 by 2025.
    • Section 80C Deduction: Adjust from ₹1.5 lakh to ₹2.6 lakh for life insurance premiums and provident funds.
    • Medical Insurance Deduction: Raise from ₹25,000 to ₹41,000.

Mohapatra emphasized that adopting automatic inflation indexing, a practice already in place in several countries, can help ensure exemptions remain relevant over time.

2. Simplifying the TDS Framework
The Tax Deducted at Source (TDS) system, introduced in 1961, has grown overly complex with its expansion from four categories to 40 TDS and 13 TCS categories.

Key Issues

  • Most TDS revenue is derived from just a few categories, including salaries, dividends, and contracts.
  • Varying rates and thresholds create unnecessary compliance burdens.

Proposed Reform

  • Eliminate less significant TDS categories to streamline the system and reduce confusion for taxpayers.

This simplification would make compliance easier for individuals and businesses while maintaining revenue efficiency.

3. Reclassifying Futures and Options (F&O) as Speculative Activity
Despite high risks and significant retail losses in F&O trading, it is currently classified as non-speculative in the Income Tax Act. This allows losses to be offset against other income categories.

Proposed Change

  • Redefine F&O trading as speculative activity to restrict loss set-offs.

This recommendation aligns with SEBI’s findings that 90% of retail investors face losses in F&O trading. Reclassifying it would discourage excessive retail risk-taking and reflect its high-risk nature more accurately.

4. Reducing Tax on Fixed Deposit Gains
At present, interest earned on fixed deposits (FDs) is taxed at individual slab rates of up to 30%, while long-term equity capital gains are taxed at a much lower rate of 12.5%.

Proposed Reform

  • Cap the tax rate on FD interest earned from deposits held for over a year at 12.5% for individual taxpayers.

Benefits of the Reform

  • Address the tax disparity between equity and FD investments.
  • Encourage household savings by reversing the declining deposit trends noted by the RBI in 2024.

This measure would create a level playing field for different investment options, boosting confidence in traditional savings instruments.

Conclusion: A Roadmap for Fairer Taxation
The proposed reforms aim to ease the tax burden on middle-class taxpayers, simplify compliance, and foster balanced investment choices. By addressing inflation, disparities, and inefficiencies, the government has an opportunity to create a more equitable and growth-oriented tax system.

As Budget 2025 draws near, adopting these recommendations could strengthen public confidence in India’s tax framework while ensuring sustainable economic development.

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