Finance Minister Nirmala Sitharaman presented the Union Budget 2025-26 in Parliament on 1 February 2025, announcing a comprehensive package of tax reforms, foreign direct investment liberalisation, and fiscal consolidation measures. The Budget, themed around "Sabka Vikas," proposes to raise the FDI limit in the insurance sector from 74% to 100% and exempt individual income up to Rs 12 lakh from income tax.
Background
The Union Budget is presented annually under Article 112 of the Constitution, laying down the government's revenue and expenditure estimates for the forthcoming financial year. The 2025-26 Budget arrives against a backdrop of moderating inflation, steady GDP growth above 6%, and the government's stated objective of achieving a fiscal deficit below 4.5% of GDP. Several sectors, particularly insurance and direct taxation, had been awaiting policy clarity on investment thresholds and compliance simplification.
Key Provisions
The Budget introduces the following notable measures:
FDI in insurance raised to 100%: The foreign direct investment cap in the insurance sector has been increased from 74% to 100%, subject to the condition that the entire premium collected is invested within India. This amendment requires corresponding changes to the Insurance Act, 1938 and FEMA regulations.
Income tax exemption up to Rs 12 lakh: Individuals earning up to Rs 12 lakh annually (Rs 12.75 lakh for salaried taxpayers, factoring in the Rs 75,000 standard deduction) will pay no income tax. This represents a significant expansion of the zero-tax threshold under the new tax regime.
New Income-Tax Bill announced: The Finance Minister confirmed the introduction of a new Income-Tax Bill to replace the Income-tax Act, 1961, aimed at simplifying the legislative framework by reducing chapters and provisions by nearly half.
Fiscal deficit target at 4.4%: The fiscal deficit for 2025-26 has been pegged at 4.4% of GDP, down from the revised estimate of 4.8% for 2024-25, signalling continued fiscal consolidation.
Jan Vishwas 2.0 announced: The government confirmed plans to introduce a second iteration of the Jan Vishwas Bill to decriminalise over 100 additional provisions across business-related statutes.
TDS rationalisation: Several thresholds for tax deducted at source have been revised upward, reducing the compliance burden on taxpayers and businesses.
Implications for Practitioners
The 100% FDI opening in insurance is the most consequential reform for corporate and transactional lawyers. Foreign insurers currently holding minority stakes will need to assess restructuring options, while new entrants will evaluate fresh entry strategies under FEMA and Insurance Regulatory and Development Authority of India guidelines. The condition that entire premiums must be invested in India introduces a regulatory safeguard that practitioners must factor into deal structuring.
The expanded zero-tax threshold fundamentally changes personal tax planning for the middle-income segment. Tax advisors should note that the benefit is available exclusively under the new tax regime, making the old-versus-new regime analysis even more critical for clients with significant deductions under Chapter VI-A.
The announcement of a new Income-Tax Bill signals a wholesale legislative overhaul. Practitioners should prepare for the transition period by monitoring the Bill's progression through Parliament and advising clients on potential changes to compliance frameworks, assessment procedures, and dispute resolution mechanisms once the new law takes effect.