Key Tax Law Changes Effective This Year - 2025 Onwards

Tax laws are ever-evolving, reflecting the dynamic nature of economies and governments' fiscal policies. As we enter 2025, significant changes in tax laws aim to improve compliance, enhance transparency, and address modern economic challenges. This article provides an overview of the critical tax law changes effective this year, their implications, and the steps taxpayers should take to adapt.

1. Changes in Income Tax Rates and Slabs

Individual Taxpayers: The government has restructured income tax slabs to provide relief to middle-income groups while increasing tax rates for ultra-high earners. These changes were announced in the Union Budget 2024 and are effective for the Financial Year (FY) 2024-25, corresponding to Assessment Year (AY) 2025-26.

• Income up to INR 5,00,000 remains exempt.
• Revised slabs include reduced rates for incomes between INR 5,00,001 and INR 15,00,000.
• A new surcharge rate of 42% applies to individuals with annual income exceeding INR 5 crore.

Corporate Tax:

• A reduced tax rate of 20% is introduced for new manufacturing entities commencing operations in FY 2024-25 under specified conditions.
• Companies availing certain exemptions will continue at the earlier rate of 25%.

2. Introduction of the Digital Economy Tax (DET)

To address the rise in digital transactions and the gig economy, the government has implemented a Digital Economy Tax:

• A 2% levy on digital transactions conducted by non-resident entities earning revenues exceeding INR 2 crore in India.
• Indian e-commerce operators are required to deduct TDS at 1% on payments exceeding INR 1,00,000 annually to individual sellers.

This move aligns India's tax system with global efforts to tax digital services effectively. Announced in the Union Budget 2024, this tax applies from April 1, 2024.

3. Expansion of the Goods and Services Tax (GST) Scope

New Exemptions and Rates

• Essential items like renewable energy equipment and electric vehicles are taxed at a reduced rate of 5% to promote sustainability.
• Luxury goods and services witness a higher GST rate of 28%, enhancing revenue collection.

GST on Online Gaming and Cryptocurrency

• Online gaming platforms are now subject to 18% GST on the platform fees.
• Cryptocurrency transactions attract a GST of 28%, aligning with the government's cautious approach to regulating digital assets.

These changes were part of the GST Council's recommendations in late 2024 and are effective from January 1, 2025.

4. Changes in Tax Deduction and Exemption Provisions

• Standard Deduction for Salaried Employees: The standard deduction has been increased to INR 75,000 from INR 50,000, providing additional relief to salaried individuals. Effective from FY 2024-25 (AY 2025-26), this change was announced in the Union Budget 2024.
• Standard Deduction for Salaried Employees is applicable to both old and new tax regimes unless explicitly stated otherwise in the announcement. However, the Union Budget announcement usually clarifies this.

Housing Loans

• The interest deduction on housing loans has been enhanced to INR 3,00,000 for loans sanctioned from April 1, 2024, onwards to boost the real estate sector.
• An additional deduction of INR 1,00,000 is available for first-time homebuyers.
• Housing Loan Deductions (interest and additional first-time buyer benefits) are primarily features of the old tax regime, as the new regime restricts most exemptions and deductions.

Health Insurance

Tax benefits under Section 80D for health insurance premiums have been increased:

• Individual policy: INR 35,000 (up from INR 25,000)
• Senior citizens: INR 60,000 (up from INR 50,000)

These changes are effective for FY 2024-25 (AY 2025-26).

Health Insurance Premium Benefits under Section 80D are benefits of the old tax regime.

5. Introduction of the Green Tax Incentives

To encourage environmentally friendly practices, the government has introduced several tax incentives:

• A 10% rebate on investments in renewable energy projects.
• Accelerated depreciation for companies adopting green technologies.
• Enhanced tax deductions for businesses achieving carbon neutrality.

Announced in the Union Budget 2024, these incentives apply from FY 2024-25 onwards.

6. Streamlining of Compliance Procedures

Simplified Tax Filing for MSMEs

• MSMEs with turnover up to INR 5 crore can now file quarterly tax returns instead of monthly.
• A pre-filled GST return system has been introduced to reduce compliance burdens.

E-Filing Mandates

• All taxpayers, including individuals earning over INR 10,00,000 annually, must file returns electronically.
• Introduction of a mobile app for filing simplified tax returns and tracking refunds.

These measures are effective from April 1, 2024.

7. Enhanced Focus on Anti-Avoidance Measures

General Anti-Avoidance Rule (GAAR)

• Strengthened provisions to curb aggressive tax planning by corporations.
• Heavier penalties for misreporting of income and tax evasion.

Tightening of TDS/TCS Compliance

• Non-compliance with TDS/TCS requirements will attract higher penalties, ranging from 10% to 20% of the amount.
• Enhanced reporting obligations for specified transactions exceeding INR 50 lakh.

Effective for transactions from April 1, 2024, onwards, these measures were announced in the Union Budget 2024.

8. Taxation of Foreign Income and Investments

Non-Resident Taxation

• Revised rules for determining residential status based on the number of days spent in India (reduced to 120 days for significant income earners).
• Clarity on double taxation relief agreements (DTAs) to avoid disputes.

Foreign Portfolio Investments (FPIs)

• Gains from FPIs are taxed at a flat rate of 15%, replacing earlier slab rates.
• Enhanced compliance requirements for foreign investors in Indian securities.

These provisions apply for FY 2024-25 (AY 2025-26).

9. Specific Industry-Focused Tax Changes

Real Estate Sector

• REITs and InvITs receive tax-neutral status for certain income streams.
• Affordable housing projects launched after April 2025 enjoy a tax holiday for 3 years.

Startups

• Startups registered under the Startup India scheme can now avail tax holidays for 5 years instead of 3.
• Relaxation in carry-forward losses criteria, with the continuation of losses permitted for up to 12 years.

These changes are effective from FY 2024-25 (AY 2025-26) unless specified otherwise.

What Taxpayers Should Do

1. Stay Updated: Regularly check government notifications and updates on tax laws.
2. Plan Finances: Leverage increased deductions and exemptions for effective tax planning.
3. Comply Early: File returns on time and ensure compliance with new digital tax requirements.
4. Consult Experts: Engage tax consultants to navigate complex changes, especially for cross-border and corporate taxation.
5. Adopt Technology: Use tax-filing tools and software to simplify compliance and reduce errors.

Conclusion

The tax law changes effective in 2025 signify the government's commitment to modernizing the tax system, promoting economic growth, and ensuring fairness. While these changes offer opportunities for savings and incentives, they also place greater emphasis on compliance. By understanding and adapting to these changes, taxpayers can ensure a smooth transition and maximize the benefits of the new provisions.