Clipped from: https://www.financialexpress.com/money/seven-things-that-can-go-wrong-in-budget-2025-3732495/?ref=hometop_hp
In this write-up, we highlight seven key areas where the government cannot afford to go wrong. While there are many important issues to address, these seven require Finance Minister Sitharaman’s urgent attention and any wrong step could make this budget a disappointment for the people who have high expectations from the Modi government.
Seven things that can go wrong in Budget 2025
The Budget is almost here, with Finance Minister Nirmala Sitharaman set to present it on February 1. As always, various industries and social groups have put forth their expectations, hoping the government will deliver on their demands. However, past budgets have often failed to meet public expectations fully and, at times, have even complicated things instead of simplifying them.
A recent example is the capital gains tax changes effected in the July 2024 Budget. While the government claimed it was done to simplify taxation, it removed provisions related to indexation on some asset classes that caused widespread concern among investors. Following the backlash, indexation benefits were partially restored for the real estate sector. However, that adjustment led to demands for similar treatment across many other sectors.
In this write-up, we highlight seven key areas where the government cannot afford to go wrong. While there are many important issues to address, these seven require Finance Minister Sitharaman’s urgent attention and any wrong step could make this budget a disappointment for the people who have high expectations from the Modi government.
Here are 7 things that can go wrong in Budget 2025:
1. Failing to reduce the tax burden on the middle class
One of the biggest mistakes in Budget 2025 would be not providing tax relief to the middle class, which is burdened by both high-income taxes and high indirect taxes like GST.
The last significant tax relief for small and middle-class taxpayers came in 2014 when then Finance Minister Arun Jaitley increased the Section 80C deduction limit from Rs 1.1 lakh to Rs 1.5 lakh. That budget also raised the basic exemption limit from Rs 2 lakh to Rs 2.5 lakh for individuals and to Rs 3 lakh for senior citizens aged 60 to 80 years. Also, a key middle-class demand was met by increasing the deduction on home loan interest under Section 24 from Rs 1.5 lakh to Rs 2 lakh.
However, more than 10 years have passed since these basic exemptions were last revised for individuals below 60 and senior citizens. There have also been no major changes in deduction benefits for taxpayers. A meaningful revision is now necessary, not just from the taxpayers’ perspective but also for the economy. Leaving more money in the hands of individuals earning less than Rs 15 lakh per annum — who make up 88% of total taxpayers — could significantly boost consumption, ultimately benefiting the economy as a whole.
Also read: Personal Taxation in Budget 2025: Our top 10 predictions
2. Superficial tweaks to the New Tax Regime won’t work
Since launching the New Tax Regime in 2020, the Modi government has made several small adjustments, hoping to attract more taxpayers. However, these changes have not delivered the expected results as far as making more individuals switch to the new regime.
Over the past five years, around 6 crore taxpayers have migrated to the new regime. But this number doesn’t show the entire picture as over 80% of these tax filers reported nil taxable income, meaning their shift had no financial benefit for the government.
The real concern lies with the 28% of taxpayers who continue under the Old Tax Regime. These individuals contribute significantly to tax revenues and have resisted moving to the new regime because of the deductions and exemptions they currently enjoy. If the government genuinely wants to accelerate the transition, it must introduce substantial incentives under the New Tax Regime and mere incremental changes won’t be enough.
Budget 2025 needs bold announcements to make the New Tax Regime more attractive; otherwise, most high-value taxpayers will continue sticking to the old system.
3. Not aligning EPFO 3.0 with much-required tax support for members
The government’s push for EPFO 3.0, aimed at improving retirement benefits for private-sector employees, needs tax support in Budget 2025. Ignoring the demand to separate EPFO contributions from Section 80C deductions would be a mistake.
Currently, EPFO contributions fall under the Section 80C deduction, which is part of the Old Tax Regime. However, with the proposed removal of the 12% employee contribution cap, employees will be contributing more each month and increasing their retirement corpus. While this move enhances social security, it could also lead to a lower take-home salary unless the government provides tax relief to these employees.
If Budget 2025 fails to introduce a dedicated tax benefit for EPFO contributions under the New Tax Regime, employees may face an additional financial burden. Providing a separate deduction or incentive would ensure that higher EPF contributions don’t negatively impact disposable income, making the transition smoother and more acceptable for private-sector workers.
4. Further changes to capital gains tax in the name of simplification would be a mistake
If the government once again tinkers with capital gains tax under the pretext of simplification, it could backfire, just as it did last year. Any further increase in capital gains tax or further curtailment of indexation benefits would be a major misstep.
In the July 2024 Budget, the FM removed the indexation benefit on real estate deals from the capital gains tax framework while also reducing the long-term capital gains (LTCG) tax rate from 20% to 12.5%. This decision angered property owners since indexation helps offset capital gains against inflation, effectively reducing tax liability. The government later clarified that real estate assets purchased before July 23, 2024, would still enjoy indexation benefits.
An amendment to the Finance Bill, 2024, was moved to allow people choose either a 12.5% long-term capital gains tax rate without indexation or a 20% rate with indexation for property acquired before July 23, 2024.
What confused investors and experts was the government’s justification that these changes were part of a “simplification” effort — something few found convincing. As we approach Budget 2025, the least the government can do is avoid making things more complicated. Any further tax hikes or additional conditions on indexation benefits, already restricted to certain asset classes, will only add to taxpayers’ frustration.
Currently, long-term capital gains (LTCG) from equity shares, equity-oriented mutual funds, and business trust units held for over 12 months are taxed at 12.5% on gains exceeding Rs 1.25 lakh per year, up from the previous Rs 1 lakh exemption in Budget 2024. Meanwhile, short-term capital gains (STCG) on listed equity shares, equity mutual fund units, and business trust units have seen a tax hike from 15% to 20%.
With these recent changes still settling in, introducing more tweaks to capital gains tax in Budget 2025 would only add to investor uncertainty. The government should focus on stability rather than constant modifications that create confusion and deter investment.
Also read: Budget 2025: Key expectations of the common man from FM Nirmala Sitharaman
5. Ignoring a big capex push could be a blunder
If the government fails to maintain a strong focus on capital expenditure (capex) in Budget 2025, it could be a serious mistake and could deepen the ongoing slowdown.
The Economic Survey 2024-25 has already highlighted a temporary slowdown in investment activity, making it crucial for the government to sustain its capex push. However, if the Budget shifts focus away from capex, whether due to fiscal constraints, tax revenue considerations, or other factors, it could have long-term negative consequences.
To sustain growth, the FY26 Budget must ensure continued momentum in government-led capital expenditure. Other than that, the government needs to target measures such as tax rationalization and income tax deductions that could help boost personal disposable incomes and support economic activity.
For FY25, the Modi government had allocated Rs 11.11 lakh crore for capex, yet concerns about weak private investment and unemployment remain. Since the COVID-19 pandemic, total capital expenditure has reached Rs 38 lakh crore, with capex accounting for 23% of total government spending in FY25.
The persistent slowdown in private sector capex and rising unemployment have led to disguised unemployment and stagnation in real wages. Without a robust capex push, these issues could worsen, making it essential for the government to prioritise infrastructure spending and investment incentives in Budget 2025.
6. Failing to attract long-term foreign capital could be a setback
If Budget 2025 does not introduce measures to attract significant foreign capital, both long-term Foreign Institutional Investors (FIIs) and Foreign Direct Investment (FDI), it would be a missed opportunity to boost investment and technological growth in India.
While India has seen strong foreign investment inflows over the past decade, the trend has become concerning in recent years. Net FDI inflows have moderated, and FIIs have largely been in a selling mode of late due to factors such as geopolitical uncertainties, the resurgence of China’s markets, and expectations of US interest rate cuts.
To restore investor confidence, the government must introduce policy reforms that make India a more attractive destination for both FIIs and FDIs. This could include tax incentives, regulatory simplifications, and sector-specific investment policies.
The government has a crucial opportunity in Budget 2025 to signal its commitment to fostering a stable and investor-friendly environment. Failing to act decisively could further dampen foreign investment sentiment, impacting India’s growth and capital markets.
7. Lack of incentives for startups and emerging tech could slow India’s progress
Budget 2025 must introduce strong incentives for startups and entrepreneurs, particularly in critical domains like AI, deep tech, and drug discovery, to prepare India for the future. The global economic landscape is rapidly evolving, with AI emerging as a transformative force. What began as a corporate-driven technological advantage has now become a key focus for governments worldwide. Countries like the US and China have already taken a lead in the AI race and India must act swiftly to catch up. The Union Budget presents an opportunity to accelerate AI-driven growth and innovation in the country.
To achieve this, the FM must announce targeted tax incentives for AI and deep-tech startups, alongside tax reforms that attract more foreign investment into Indian startups. A higher budget allocation for research and development, particularly in emerging technologies such as AI, semiconductors, and biotechnology, is needed. Raising the GST registration threshold and simplifying e-invoicing compliance will reduce the regulatory burden on startups. Increasing access to input tax credit will also improve cash flow, making it easier for startups to scale.
Conclusion:
As Sitharaman prepares to present Budget 2025, the government must focus on key areas to avoid setbacks. First, meaningful tax relief for the middle class is crucial, as the last major changes occurred over a decade ago. Reforms in the New Tax Regime are needed to encourage more taxpayers to shift from the old regime.
Tax support under the EPFO 3.0 initiative, a continued capex push, and efforts to restore confidence in FIIs and FDIs will be other expectations in this budget. Finally, targeted incentives for startups and emerging tech sectors, especially AI, can ensure India remains competitive globally. Budget 2025 must address these priorities for sustained economic growth.
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