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Budget 2025: Universal income transfer scheme to new tax deductions among SBI Research proposals

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5 min read | Updated on January 27, 2025, 11:30 IST

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SUMMARY

Budget 2025 expectations from FM Nirmala Sitharaman: SBI Research has proposed the government may consider introducing a universal income transfer scheme as political parties in several states have gone into a competitive mode to woo women voters by introducing direct cash transfer schemes.

Universal income transfer

Reduce tax rate to 15% for income between ₹10-15 lakh, says SBI Research | Image source: Shutterstock

Budget 2025 expectations: As Finance Minister Nirmala Sitharaman prepares for the budget presentation on February 1, 2025, SBI Research has shared several recommendations to the government in a report titled Prelude to Union Budget 2025-26.
This article summarises all the top recommendations made by SBI Research for the upcoming budget:

Universal income transfer scheme

SBI Research has proposed the government may consider introducing a universal income transfer scheme as political parties in several states have gone into a competitive mode to woo women voters by introducing direct cash transfer schemes.

"Of late, there is a Tsunami of women-centric schemes unleashed by multiple states offering direct benefit transfers (some badly guised as pure electoral realpolitik, we believe) that can bleed select states’ finances going forward as the wedge between revenue receipts and such expenditures may vault to 3-11% of the states revenue receipts," SBI Research said.

"With income transfer to women likely to be promised competitively by states in future, even the Union may be tempted to follow suit.. It would be worth taking course to adopt a universal income transfer scheme (matching grant from center to states) towards substantially reducing several market disturbing subsidies," it added.

No GST on insurance, separate deductions in new regime for social security

The report has proposed to provide separate deductions in the new tax regime for social security, which will help revive the insurance sector.

As per the Insurance Regulatory and Development Authority of India (IRDAI), insurance penetration in India dropped to 3.7% in FY24 from 4% in FY23 and 4.2% in FY22. This decline is mainly due to a decline in life insurance penetration, raising concerns over the IRDAI's mission of "Insurance for all by 2047"

SBI Research expects that the government will focus on the following points to revive the insurance sector:

  • Remove GST/Tax on Term/Pure Life Insurance and health insurance premiums
  • Like NPS, provide separate deduction of ₹25,000 or ₹50,000 for life/Health insurance in the new and old tax regime
  • Bring all the Government sponsored pension schemes, APY, PM-SYM, PM-KMY and NPS-Traders under one umbrella
  • New insurance program for MSME employees

Health sector revamp

The report proposes various measures to revamp the health sector. It has suggested a uniform GST rate of 5% to 12% on medical devices, from the current GST rates range from 5% to 18%.

"This uniform tax structure could simplify compliance, improve operational efficiency, and lower costs in the sector," it said.

Further, the report said the government should target increasing healthcare spending to 5% of the GDP from 1.95% in FY24.

"A more aggressive target of 5% could be required to address the growing needs of India’s ageing and expanding population, it said while proposing to allocate proceeds from healthcare cess and the proposed 35% GST slab on tobacco and sugar products to strengthen public health programmes.

GST 2.0 roadmap

SBI Research has also proposed a roadmap for GST 2.0, with the rationalisation of tax rates. It has suggested to start with the inclusion of electricity tariff, then aviation turbine fuel, and finally petrol/diesel in GST. Further, the government may also consider exempting /lowering health insurance products from GST at least for all retail and health-focused products.

SBI Research has also suggested bringing clarity to the definition of input service distributor and removing GST TDS on banking services.

"Interchange fees paid through settlement agencies like NPCI, Master and VISA. Transaction charges are settled on real-time basis and the invoice wise details are received subsequently. Banks are required to pay the GST TDS and subsequently claim refund of the same from the member Banks. Considering practical difficulties faced in complying with TDS provisions, GST TDS should not apply on banking services," the report said.

Sector-specific suggestions

Infra Financing: SBI Research suggests alternate sources of funding such as tax-free bonds, and tax-paid bonds.
Agriculture: Comprehensive omnibus Credit Guarantee Fund Trust - Agri & Allied Sectors (CGFTAAS) and implementation of the 2021 report on the agri value chain.
Housing: The definition of priority-sector lending may be aligned with the definition of affordable housing.
MSME: Separate Production Linked Incentives (PLIs) for sectors such as textile, garments, handicrafts, food processing, leather, electronics, auto components, bulk drugs etc. Increased budgetary allocation to expand the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE).
Green taxonomy: Suitable green taxonomy
Disaster pool: Public-private disaster pool for natural disaster risk involving the insurance sector.
Education: Skill development and professional education in collaboration with global institutes

Income-tax proposals

  • Remove all tax exemptions from the old tax regime, except NPS and section 80D exemptions. And, bring all under the new tax regime. -Further, the limits for NPS exemption and medical insurance deduction under section 80D may be increased to ₹1 lakh and ₹50,000 respectively.
  • Reduce tax rate to 15% for income between ₹10-15 lakh
  • Tax income from fixed deposits like other asset classes and increasing the savings account tax exemption limit to ₹20,000.

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