Union Budget 2025 key updates

SECTION A: UNION BUDGET 2025: KEY UPDATES 

The Finance Minister of India presented the Union Budget for the financial year 2025-26 on February 01, 2025, with a specific focus on power, urban development, mining, financial sector, along with taxation and regulatory reforms, driven by four pivotal engines of agricultural resilience, MSME empowerment, reviving investment momentum, and global export competitiveness.

DIRECT TAXES 

Rates for Individuals and Other Non-Corporate Entities

Currently, all non-corporate taxpayers (such as individuals and Hindu undivided families (HUFs)) are taxed as per the progressive slab rates ranging between 0% and 30%. With that said, there are two tax regimes, being ‘old regime’ and ‘new regime’, having a specific manner of computing income and tax thereon. The Finance Bill, 2025 (“Bill”) has proposed the following changes to the slab rates under the new tax regime:

The above tax slabs are applicable with effect from the Financial Year 2025-26. Resident individuals with an income of up to INR 12,00,000 will have no tax liability due to the increased rebate under Section 87A. For salaried individuals, no tax will be applicable on income up to INR 12,75,000, considering the standard deduction of INR 75,000.

Taxation of unit linked insurance policies (ULIPs)

The Income Tax Act, 1961 (“IT Act”) provides that income tax exemption on sum received under a ULIP is not available in cases where:

1. The annual premium exceeds INR 2,50,000 during any year of the policy term; or
2. The annual premium exceeds 10% of the sum assured in any year of the policy term.

There was ambiguity regarding the characterization of gains from such non-exempt ULIPs, specifically whether they should be taxed as capital gains or as income from other sources. To provide clarity, the Bill proposes that:

1. Such non-exempt ULIPs will be treated as “capital assets”, making any gains from their redemption taxable as capital gains; and
2. These non-exempt ULIPs will be classified as equity-oriented funds and taxed according to the provisions applicable to such funds.

Harmonisation of significant economic presence (SEP) provisions

The IT Act contains provisions for taxing non-resident income through business connection and SEP. While the business connection provisions specifically excluded income from operations confined to the purchase of goods in India for export purposes, a similar exemption was not explicitly provided under the SEP framework, leading to ambiguity. To ensure consistency, the Bill proposes to amend the definition of SEP to explicitly exclude transactions or activities of non-residents that are confined to the purchase of goods in India for export purposes from constituting SEP in India.

Presumptive Tax regime for non-residents in Electronics sector

The Bill proposes a presumptive tax regime for non-residents providing services or technology to Indian companies engaged in setting up or operating electronics manufacturing facilities under a scheme notified by the Ministry of Electronics and Information Technology. Under this framework, 25% of the non-resident's receipts from such services or technology will be deemed as business income. Given that foreign companies are subject to a 35% tax rate on business income, this measure effectively reduces their tax liability to 8.75% of their gross receipts.

Standardization of Long-Term Capital Gains (LTCG) Tax

The Finance Act, 2024, standardized the LTCG tax rate at 12.5% for all taxpayers. Currently, Foreign Institutional Investors (FIIs) and specified funds remain subject to a 10% LTCG tax on the transfer of unlisted securities and listed debt securities. The Bill proposes to align the LTCG tax rate for FIIs and specified funds with that applicable to other investors, ensuring uniformity in taxation.

Expanded Tax-Neutral Relocation for Offshore Funds

The IT Act allows tax-neutral relocation of offshore funds to the IFSC if registered as a Category I/II/III alternative investment fund (AIF). The Bill extends this benefit to offshore funds transferring assets to retail schemes or exchange traded funds (ETFs) under the IFSC Authority (Fund Management) Regulations, 2022. This aligns with the Finance Act, 2024, which granted tax exemptions on certain income streams, including interest, dividends, and capital gains (excluding shares in Indian companies) for IFSC-based retail schemes and ETFs.

Extension of sunset dates in GIFT IFSC

In order to avail tax exemptions/ deductions in GIFT City/ IFSC, sunset date have been extended as follows:

Expanded Tax Exemption for Derivative Transactions in IFSC

The Income Tax Act provides tax exemptions for non-residents on income derived from (i) the transfer of non-deliverable forward contracts, offshore derivative instruments (ODIs), or over-the-counter derivatives, and (ii) income distributions on ODIs executed with an offshore banking unit in the International Financial Services Centre (IFSC). The Bill proposes to broaden the scope of this tax exemption to include transactions executed with an IFSC unit registered as a foreign portfolio investor.

Additional Tax Exemptions for Ship Leasing Activities in IFSC

The IT Act currently offers tax exemptions on (i) capital gains for non-residents and IFSC units on the transfer of equity shares of an aircraft leasing company based in IFSC, and (ii) dividend income earned by an IFSC unit from a company in IFSC, where both entities are engaged in aircraft leasing. The Bill extends similar tax exemptions to ship leasing activities conducted within the IFSC.

Rationalisation of Taxation for REITs and INVITs

The IT Act establishes a distinct taxation regime for Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (INVITs). Under this regime, income such as interest, dividend, and rental income (for INVITs) is tax-exempt at the trust level but taxable in the hands of the investor. Conversely, capital gains are taxable at the business trust level but exempt for investors.

Income of REITs and INVITs is subject to taxation at the maximum marginal rate (MMR). The Bill proposes to clarify that LTCG arising from the transfer of listed shares, units of equity-oriented funds, and unit of a business trust will be taxable at a reduced rate of 12.5%, rather than the MMR. Under the current provisions, such a carve-out from MMR is only applicable to short-term capital gains.

Extension of tax exemption for infrastructure sector investments

The IT Act provides tax exemptions to sovereign wealth funds, pension funds, and others on income such as dividends, interest, and LTCG from investments in the infrastructure sector. This exemption is available for investments made between April 1, 2020, and March 31, 2025. To further encourage investment in the infrastructure sector, the Bill proposes to extend the sunset date to March 31, 2030. Additionally, the tax exemption is proposed to be extended to LTCG arising from the transfer, maturity, or redemption of unlisted bonds or debentures (held for more than 24 months), which were previously deemed as short-term capital gains.

Curtailment of carry forward period for Losses for M&A transactions

Under the IT Act, unutilized business losses can be carried forward for a period of 8 years. In the case of amalgamation, or the succession of a proprietorship or partnership by a company, or a private limited company by a limited liability partnership, the accumulated losses of the predecessor entity are deemed to be the losses of the successor entity for the financial year in which the reorganization occurs, thereby allowing a fresh 8-year carry forward period. To ensure consistency across different forms of reorganization, the Bill proposes that the accumulated losses of the predecessor entity will be subject to the overall 8-year carry forward limit, regardless of when they are transferred to the successor entity.

Introduction of Block Transfer Pricing Assessment

Under the IT Act, when a taxpayer engages in specified related party transactions, the tax officer may refer the matter to the Transfer Pricing Officer (TPO) to determine the arm's length price (ALP). To reduce compliance burdens, the Bill proposes a 'block' transfer pricing assessment option. If confirmed by the TPO, the ALP determined for a given financial year will apply to similar related party transactions for the next two financial years.

Registration validity and exit tax exemption for not-for-profit (NFP) entities

The IT Act requires NFP entities to be registered with tax authorities to claim tax exemptions. The registration is valid for 5 years and must be renewed thereafter. The Bill proposes to extend the validity of registration to 10 years for NFP entities, provided their total income does not exceed INR 5,00,00,000 during each of the two financial years preceding the financial year in which the registration application is made.

Additionally, under the current provisions, an exit tax is levied on NFP entities’ accreted income when their registration is cancelled due to specified violations, including incomplete registration applications. The Bill proposes that the exit tax will not apply in cases where the cancellation of registration occurs.

Revised thresholds for related party transactions in NFP entities

The IT Act mandates that transactions between NFP entities and specified related parties must be conducted on an arm’s length basis. The definition of specified related parties includes (i) any person whose contribution exceeds INR 5,00,000 by the end of the financial year, (ii) specified relatives of individuals in (i), and (iii) any concern in which any person in (i) or (ii) has a substantial interest (categories (ii) and (iii) are referred to as ‘other persons’).

The Bill proposes to amend the monetary thresholds to INR 1,00,000 in the relevant financial year or INR 10,00,000 in aggregate by the end of the relevant financial year. It further proposes that ‘other persons’ will no longer be considered specified related parties under these provisions.

INDIRECT TAX 

The Union Budget 2025-26 introduces several amendments to customs and GST laws, aimed at boosting domestic manufacturing, reducing tax slabs, enhancing value addition, and simplifying compliance. Additionally, targeted programs for controlled delivery of specified goods have been introduced. Broadly, the amendments carry a positive sentiment for the trade and industry.

Voluntary revision framework for import/export entries

The Bill proposes to allow importers and exporters to voluntarily revise their custom entries (bills of entry or shipping bills) after clearance, enabling them to self-assess duties, which may result in additional payment or refunds.   However, this mechanism excludes cases under audit/investigation, refund cases with prior reassessment or provisional assessment, or any other cases notified by the Central Board of Indirect Taxes and Customs.

Key customs duty exemptions and concessions across sectors

The Bill introduces significant basic custom duty (BCD) exemptions and concessions for the sectors below:

In addition to the modifications in customs duty outlined in the table above, the following exemptions have been introduced:

1. Pharmaceuticals: Custom duty exemption to 36 life-saving drugs, including 6 additional medicines under 5% concessional duty, with corresponding exemptions for bulk drugs. Patient assistance programmes have been expanded to cover 37 more medicines and 13 new programs, ensuring free distribution of specified drugs to patients through BCD exemption.
2. Shipping: Extension of BCD exemption for 10 years on raw materials, components, consumables, and parts used in ship manufacturing. The existing duty exemptions for ship breaking activities remains unchanged.
3. Electric Mobility: Addition of 35 capital goods to the custom duty exemption list, specifically used for manufacturing of lithium-ion cell used in the batteries of electronic vehicles, supporting domestic electric vehicle production.

Reinsurance services tax exemption

The Bill introduces a significant retrospective exemption from service tax on reinsurance services provided by insurance companies in the agricultural sector. The exemption specifically targets reinsurance services provided by insurance companies under two major agricultural insurance schemes: the Weather-Based Crop Insurance Scheme and the Modified National Agricultural Insurance Scheme. This retrospective relief covers the period from April 1, 2011, to June 30, 2017.

KEY SECTORAL REFORMS IN BUDGET 2025-26 

The Union Budget 2025-26 introduces a range of policy measures to attract investments, strengthen manufacturing, enhance infrastructure, and promote clean energy. These initiatives are aimed at fostering economic growth, increasing ease of doing business, and positioning India as a global investment hub.

Investment & Economic Reforms

• The foreign direct investment (FDI) limit in the insurance sector will be increased from 74% to 100%, allowing foreign insurers to operate independently in India.
• A national monetization pipeline (Phase II: 2025-2030) will be introduced to expand asset monetization beyond roads, railways, and power to include urban and social infrastructure.
• National Framework for Global Capability Centers will be developed to attract multinational companies to set up IT service and R&D hubs in Tier-2 cities, enhancing talent availability, infrastructure, and creating a more investment-friendly regulatory environment.
• The government will streamline merger approval processes, and as per publicly available information, NCLT approval may no longer be required for mergers of listed entities. 

Manufacturing & MSME Growth

• National Manufacturing Mission will be launched under the Make in India initiative to support small, medium, and large industries through policy support, execution roadmaps, and governance frameworks.
• MSME classification expansion will increase investment and turnover thresholds by 2.5 times and 2 times, respectively, enabling more businesses to qualify for government incentives and financial support.
• Enhanced credit access for MSMEs will raise credit guarantees for micro and small enterprises from INR 5 crore to INR 10 crore, unlocking INR 1.5 lakh crore in additional credit over the next five years.
• Increased credit guarantee for startups will double the credit guarantee limit from INR 10 crore to INR 20 crore, with a moderated 1% guarantee fee for loans in 27 key sectors under Atmanirbhar Bharat.
• Fund of funds for startups worth INR 10,000 crore will be introduced to enhance access to capital, fostering innovation and entrepreneurship.

Clean & Renewable Energy

• Nuclear Energy Mission has set a target of 100 GW of nuclear energy by 2047, with INR 20,000 crore allocated for the development of small modular reactors and plans to operationalize at least five indigenous SMRs by 2033.
• Amendments to Nuclear Energy Laws will be introduced in the Atomic Energy Act, 1962, and the Civil Liability for Nuclear Damage Act, 2010, to facilitate private sector participation in nuclear energy.
• Renewable Energy Budget Increase has allocated INR 26,549.38 crore to the Ministry of New & Renewable Energy, marking a 53.48% increase from the previous year to accelerate clean energy adoption.
• Customs duty exemptions for critical minerals have been introduced for cobalt, cadmium, beryllium, tin, zirconium, and copper to boost clean energy projects and domestic manufacturing.
• Electric mobility incentives include the removal of customs duties on lithium-ion battery components, reducing EV costs and promoting indigenous battery manufacturing.
• Clean Tech Manufacturing Initiative will support the domestic production of solar PV cells, EV batteries, motors, controllers, electrolysers, wind turbines, and high-voltage transmission equipment, strengthening India's clean energy ecosystem.

Infrastructure & Shipbuilding

• Shipbuilding Financial Assistance Policy will be overhauled with the introduction of credit notes for shipbreaking, promoting a circular economy in the sector.
• Inclusion of large ships above a specified size to the infrastructure harmonized master list, attracting private investment in shipbuilding.
• Development of shipbuilding clusters will focus on improved infrastructure, skilling initiatives, and advanced technology support, strengthening the domestic shipbuilding ecosystem.

SECTION B: EXECUTIVE POLICY OF TRUMP ADMINISTRATION 

Trade policy reforms

On January 20, 2025, President Donald Trump issued the "America First Trade Policy" memorandum, directing federal agencies to evaluate and revise U.S. trade policies. The key areas of focus include addressing unfair trade practices, reviewing trade relations with China, and ensuring economic security.

Key Measures:

• Assessment of trade imbalances and consideration of a global supplemental tariff.
• Review of trade agreements, including potential changes to the United States-Mexico-Canada Agreement (USMCA).
• Evaluation of currency manipulation by trading partners.
• Investigation into discriminatory taxation of U.S. entities by foreign nations.

Additionally, President Trump imposed 10% tariffs on imports from China, effective February 4, 2025.

China trade relations

The Trump administration has, amongst others, ordered:

• a compliance review of the U.S.-China Economic and Trade Agreement, with potential tariff implications;
• examination of China's trade practices, particularly in intellectual property and technology transfer; and
• review of U.S. legislation concerning China’s trade status and intellectual property rights enforcement.

Energy and environmental policy reverals

President Trump has taken significant steps to roll back the previous administration's climate and energy policies.

Key Directives:

• Withdrawal from the Paris Agreement: The U.S. Ambassador to the United Nations has been instructed to formally notify withdrawal.
• Suspension of the Inflation Reduction Act (IRA) and Infrastructure Investment and Jobs Act Funding: Federal Agencies have been directed to pause disbursements for clean energy and infrastructure projects.
• Moratorium on Offshore Wind Projects: Federal approvals for new wind energy lease sales have been halted.
• Energy Emergency Declaration: The administration has declared a national energy emergency, removed restrictions on drilling in Alaska, and advanced a pro-fossil fuels policy aimed at expanding domestic oil and gas production.

Automotive and transportation policy

President Trump has taken action to revoke several Biden-era policies related to electric vehicles (EVs).

Key Actions:

• Revocation of the 2030 EV sales mandate, eliminating the goal of making 50% of all new vehicles electric.
• Halt on EV charging infrastructure funding, including $5 billion from federal funds.
• Removal of state-level emission waivers, allowing unrestricted gasoline vehicle sales.