Budget 2025 Expectations: Sustainability and Climate 

Viral Thakker, Partner & Leader, Sustainability & Climate | Deloitte South Asia | Mahesh Jaising, Partner & Leader, Indirect Tax | Anuj Agarwal, Partner, Corporate & International Tax

Current Environment

Since the announcement of Budget 2024, India has witnessed developments in its pursuit of sustainability and climate resilience. These advancements reflect the country’s steadfast commitment to achieving net-zero carbon emissions by 2070 while fostering sustainable development. From new policies and programmes promoting renewable energy and energy transition pathways to innovations in climate-resilient agriculture and carbon credit trading mechanisms, these efforts underscore India’s focus on balancing growth with environmental sustainability. Below are a few instances highlighting the nation’s progress in this space.

Increased investment in Renewable Energy

Focused programmes, such as the PM Surya Ghar Muft Bijli Yojana, have been launched to empower 1 crore households with free electricity up to 300 units monthly through rooftop solar installations. The scheme has garnered significant interest with over 1.28 crore registrations and 14 lakh applications. It offers 60 percent subsidies for systems up to 2kW and 40 percent for systems between 2 to 3kW, capped at 3kW, which translates to subsidies of up to INR78,000. Complementing this, the government has expanded the list of exempted capital goods for manufacturing solar panels and cells, extending customs duty exemptions on essential inputs, such as silicon wafers, flat copper wires and EVA, until March 2026. However, exemptions for solar glass, tinned copper and components for wind and renewable energy systems expired in September 2024, signalling a need to revisit and amplify such incentives.

Energy transition pathways
NITI Aayog is framing guidelines for India’s energy transition, balancing employment, growth and environmental sustainability. A policy document is expected as part of the FY25 budget. Key initiatives include NTPC Green Energy Limited’s planned investment of INR80,000 crore in Maharashtra for green hydrogen, ammonia and methanol projects, alongside 2 GW of pumped storage and up to 5 GW of renewable energy projects, aligning with its target of 60 GW renewable capacity by 2032. Complementing these efforts, Research & Development (R&D) on Small Modular Reactors is advancing at the Bhabha Atomic Research Centre in Mumbai, with the Bharat Small Reactor initiative aiming to enhance safety and efficiency. India plans to deploy 40–50 Small Modular Reactors (SMRs) to replace captive thermal power plants, supported by government-private sector collaborations for R&D in emerging nuclear technologies. The government had also announced that it would develop a “climate finance taxonomy” to enhance the availability of capital for climate adaptation and mitigation.

India is also laying the groundwork for its Carbon Credit Trading Scheme (CCTS), with a detailed blueprint unveiled in August 2024 to guide industries in managing CO2 and industrial gases. The scheme is set to launch in FY2026–27, marking a critical step in regulating emissions for hard-to-abate industries and enabling carbon credit trading.

In 2023, the government of India launched the National Green Hydrogen Mission (NGHM) to establish India as a global hub for producing, using and exporting Green Hydrogen (GH) and its derivatives and developing indigenous manufacturing capabilities. The Union Cabinet had approved a capital outlay of INR197.44 billion (~US$2.3 billion) for the mission. The government introduced incentive schemes under the Strategic Interventions for Green Hydrogen Transition (SIGHT) programme to further incentivise the supply chain and provide direct financial incentives for electrolyser manufacturing and GH production in India.

Emphasis on sustainable agricultural practices

The government has released 109 weather-resilient, high-yielding and bio-fortified seed varieties through ICAR-affiliated institutes, distributing these breeder seeds to state seed corporations, Krishi Vigyan Kendras and other state institutions for farming purposes. About one crore farmers are being introduced to natural farming practices, which are supported by certification, branding and 10,000 bio-input resource centres. A comprehensive review of agricultural research is underway to boost productivity and develop climate-resilient crop varieties. Additionally, the government is working with states to integrate six crore farmers and their land into a digital registry, using kharif crop survey data to improve crop management and yields. The Namo Drone Didi Scheme, with an INR500 crore allocation, offers an 80 percent subsidy for women-led Self-Help Groups (SHGs) to purchase drones, supported by loans from the Agricultural Infrastructure Fund and skill training via 1,000 new industrial training institutes. Further modernisation is encouraged through the Jan Vishwas Bill 2.0, designed to attract Foreign Direct Investment (FDI) in agriculture and enhance technology adoption and R&D initiatives.

Focused efforts on mitigating water scarcity
As of October 2024, the Jal Jeevan Mission has successfully provided tap water connections to over 15.19 crore rural households, accounting for 78.58 percent of all rural households in India. This progress underscores the nation’s commitment to balancing economic growth with environmental stewardship.

As India continues its journey towards sustainability and climate resilience, the developments outlined in the budget highlight the nation's commitment to balancing growth with environmental stewardship. Moving forward, expectations for the 2025 Union Budget may focus on deepening support for renewable energy, advancing energy transition initiatives and strengthening climate-resilient agricultural practices. By building on the foundation laid this year, the next budget has the potential to accelerate progress towards India’s net-zero goals and reinforce its position as a leader in sustainable development.

Expectations

Ask #1
Renewable energy

• Specific measures
  1. Enhanced focus on consumer awareness and strengthening vendor network across different states to ensure quality installation of rooftop solar panels under the PM Surya Ghar Yojana (Source Rajnish).
  
  2. Clarifying the financial structure for rooftop solar installations may help increase adoption. Financial assistance or low-interest loans for rooftop solar installation costs may ease the financial burden. 
  
  3. Upgrading the National Solar Portal will help reduce technical glitches and improve project implementation.
  
  4. More support could be directed towards enhancing the green transportation network, focusing on accelerating the Faster Adoption and Manufacturing (FAME) of (Hybrid and Electric Vehicles) III programme. This could promote electric mobility and sustainable urban transit systems.
  
  5. Need for targeted training programmes and capability development initiatives to address the talent gap in renewable energy sectors, such as solar, wind and green hydrogen.
  
  6. Extend customs duty concessions on the import of Battery Energy Storage Systems (BESS) under the Project Import Scheme.
  
  
• Measurable outcome
  These measures will result in higher renewable energy capacity, reduced carbon emissions and greater adoption of electric mobility, helping India meet its sustainable energy and environmental goals.

• Rationale
  1. Financial assistance or low-interest loans could address the high upfront costs of rooftop solar installations, making them more accessible to households and accelerating adoption across India. 
  
  2. Enhanced funding for the Ministry of New and Renewable Energy (MNRE) could accelerate renewable energy infrastructure deployment, supporting India’s low-carbon transition and energy security. Strengthening the FAME III programme could increase electric vehicle adoption, leading to lower carbon emissions and cleaner air in cities.
  
  3. Allocating resources to upgrade the solar infrastructure platform could resolve technical glitches, speed up rooftop installation and reduce financial losses caused by system inefficiencies.
  
  4. With rising demand for solar PV, wind turbine technicians and operators in production and storage, an estimated 1.7 million jobs could be added in the renewable energy sector. However, there is a significant shortage of skilled workers, creating a barrier to the efficient implementation and growth of renewable energy projects.
  
  5. With the rising demand for renewable energy storage, BESS is becoming increasingly relevant to ensure the optimum usage of renewable energy sources. BESS consists of various items that attract different customs duty rates. In case the same can be specifically brought under the Project Import Scheme with a 5 percent customs duty, it will not only address the issues surrounding the classification of BESS but will also provide impetus to renewable energy conservation.

Ask #2:
Enhancing air quality

• Specific measure: It may be beneficial to review and strengthen the National Clean Air Programme (NCAP) by introducing stricter enforcement measures, real-time monitoring systems and enhanced industry emission standards. Further, expanding its scope to include peri-urban and rural areas could address the gap in pollution control. 

• Measurable outcome
  Significant reduction in PM2.5 and PM10 levels, meeting both NAAQS and World Health Organisation’s (WHO) guidelines, leading to improved air quality and health benefits.

• Rationale: Due to accelerated development, especially in major cities, India struggles to meet the benchmark for air quality that was supposed to be met in 2024; air pollution levels exceed the National Ambient Air Quality Standards (NAAQS) for PM2.5 and PM10 levels, and these pollutants also surpass the WHO’s air quality guidelines. This indicates a significant gap in air quality management and the need for enhanced measures to reduce particulate pollution and meet both national and international standards.

Ask #3:
Green financing

• Specific measure
  1. The creation of a unified system for climate finance may help streamline regulations and reduce compliance challenges. This could be complemented by a system to track and allocate climate-related spending.
  
  2. Incentives, such as interest support for green projects and deposits, could be introduced. Additionally, supporting green debt securities through tax incentives could attract investment.
  
  3. Interest income and capital gains arising from the transfer/redemption of green debt securities may be tax-exempt or taxed at a concessional rate.
  
  4. To ensure certainty, the definition of “green debt securities” for income tax benefits may be aligned with the regulatory definition issued by the Securities and Exchange Board of India (SEBI).
  
  5. Tax exemption may be non-discriminatory and allowed to all investors in such bonds, irrespective of whether (i) the bonds are issued under the FDI window, Foreign Portfolio Investment (FPI) route or the External Commercial Borrowing (ECB) option, etc., or (ii) the bonds are issued by an Indian issuer or a financier, such as a Bank/Non-Banking Financial Company (NBFC)/Housing Finance Companies (HFC) etc., or (iii) the bonds are listed or unlisted
  
  6. Non-resident investors whose income consists solely of tax-exempt income may be granted dispensation from tax reporting compliance.
  
  7. Issuers may be exempt from the applicability of thin-capitalisation rules, allowing the interest costs on green debt securities to be tax-deductible.
  
  
• Measurable outcome
  1. A robust and transparent climate finance ecosystem accelerates the country’s transition to renewable energy, strengthens green infrastructure and contributes to long-term environmental goals.

2. The sustainable finance market in India is expected to reach US$125 billion by 2026, driven by private equity and venture capital firms, at a 5-year CAGR of 46 percent, per research agencies.

• Rationale

1. According to SEBI’s data on green debt securities, between June 2017 and March 2024, 20 Indian corporates issued green bonds worth INR6,128 crore (~US$0.73 billion). Mobilising resources for green infrastructure will reduce the economy's carbon intensity.

2. Cumulative investments of US$10.1 trillion will be required to meet India’s net-zero goals by 2070. Green finance being allocated to such climate mitigation measures accounts for only about 25 percent of total investments.

3. Streamlined regulations, credible data and incentives for green investments will attract more funding and interest in sustainable projects, ensure better resource allocation and improve transparency.

4. Tax incentives for such instruments will enhance the attractiveness in terms of added Basis Points (BPS) of yield to investors while at the same time rationalising the cost of finance for borrowers in India. It can be a cost-efficient tool to boost investment in the sector with a relatively low impact on public finances, helping reduce the interest cost of financing for borrowers.

5. Several jurisdictions, such as Brazil, the USA and Malaysia, already offer tax incentives to expand their local green bond markets.

Ask #4:
Sustainable Aviation Fuel (SAF)

• Specific measures

1. Facilitate the adoption of SAF by establishing enforceable targets that can revised annually. SAF production could also be supported by formalising feedstock supply chains and easing/streamlining regulatory processes to obtain necessary permits and approvals.

2. Establish biomass storage banks to collect and store agricultural residues.

3. Increased transparency across policies and timelines for expanding biofuel initiatives, including the phased blending of Compressed Biogas (CBG) in vehicles and households.

• Measurable outcome

Encouraging SAF production will help achieve a 1–2 percent SAF blend in aviation fuel by 2027 and establish a reliable supply chain to meet these targets. This will also reduce aviation emissions by about 5–10 percent by 2030.

• Rationale

1. Biomass storage banks will facilitate energy production and incentivise biofuel development.

2. Biofuels will be crucial for India to reduce its dependence on imported oil, cut emissions and support rural economies using agricultural residues. This will help diversify the energy mix and contribute to achieving net-zero emissions. In the case of CBG, clear policies will be crucial to meeting the government’s mandatory CBG Blending Obligation (CBO) from FY26 onwards. With targets of 1 percent in FY26, 3 percent in FY27 and 4 percent in FY28, defined timelines will address infrastructure challenges, scale up production and ensure a steady supply.

3. Clear targets and other supportive measures/policies will help provide the aviation industry with a clear pathway to meet sustainability goals and achieve decarbonisation targets. Formalising feedstock supply chains and easing regulatory processes will ensure a consistent and scalable supply of raw materials for SAF production and reduce delays to facilitate quicker adoption.

Ask #5:
Carbon market

• Specific measures
  1. Development of an overarching institutional framework to govern and regulate the market or provide a unified framework for credit generation, trading and export.
  
  2. The development of verification standards that are aligned with internationally recognised frameworks, such as Verra and Gold Standard, could be explored. Emphasis could also be placed on developing real-time data-sharing platforms.
  
  3. Financial incentives, such as tax reliefs and subsidies, could be considered for small projects to reduce entry barriers for MSMEs and enable broader participation.
  
  4. Concessional tax, such as section 115BBG, may be broad-based to include income earned from the transfer of Voluntary Emission Reductions (VERs) or Renewable Energy Certificates (RECs).
  
  5. For taxpayers engaged in trading carbon credits, an alternate net basis of taxation (instead of the 10 percent taxation on a gross basis under section 115BBG) may be considered.
  
  6. Clarify the zero-rating status on the sale of carbon credits to overseas companies where money is received in convertible foreign exchange.

• Measurable outcome
  1. A robust carbon credit mechanism will bring greater transparency, participation and help India meet its global targets on carbon emissions reduction and achieving net zero emissions by 2070.
  2. This will also align with the government’s plans to develop an indigenous carbon market in India under the recently notified Carbon Trading Scheme 2023, aimed at decarbonising the Indian economy by pricing the Greenhouse Gas emissions through the trading of carbon credit certificates.

• Rationale
  1. The absence of a unified governance structure in India’s carbon credit market may lead to confusion and inefficiencies. A regulatory body/committee will help smoothen operations and help win investor confidence.
  
  2. Non-standardised verification processes or the absence of accessible data-sharing platforms may result in varying credit quality, hinder trust and create opportunities for fraud or corruption. 
  
  3. The high costs involved prevent small holders/-scale projects from engaging in the carbon credit market, reducing inclusivity and market diversity.
  
  4. Currently, the domestic income tax law provides a beneficial provision (under section 115BBG) for the taxation of income arising from the transfer of carbon credits, which is validated by the United Nations Framework on Climate Change (UNFCC). However, there are no similar provisions for Renewable Energy Certificates (RECs) or Voluntary Emission Reduction (VER) certificates, which are not expressly validated by the UNFCC.
  
  5. Prior to the introduction of section 115BBG, extensive litigation was before Courts/Tax Tribunals in India regarding the taxation of carbon certificates—essentially on the characterisation between business and capital receipts. This has led to uncertainty in the taxation of carbon credits and protracted litigation.
  
  6. While the introduction of section 115BBG has helped settle the tax position around the taxability of the UNFCC-validated certificates, the taxability of other voluntary certificates, such as RECs or VERs, which are not specifically validated by the UNFCC, remains uncertain.
  
  7. Zero rating status on the sale of carbon credits to overseas buyers will (i) bring certainty to export status from a GST and Customs standpoint and (ii) enable exporters to claim a refund of input taxes incurred in earning such credits.

Ask #6:
Green Hydrogen (GH)

• Specific measures
  1. Prioritise the deployment of additional funds in research and infrastructure and scale up production capacities to strengthen the National Green Hydrogen Mission (NGHM) further.
  
  2. Explore demand-side mandates encouraging industries, such as vehicle manufacturing, to use green steel produced with green hydrogen.
  
  3. Offer targeted subsidies aimed towards GH production and capacity-building for wind energy, particularly offshore projects.
  
  4. Indirect taxes
  a. Provide an upfront exemption from the basic customs duty of 40 percent on the import of solar modules, with
  o Specified end-use condition: An exemption to be available only for solar power plants being set up to supply electricity exclusively to GH projects.
  o End date of exemption: This exemption shall not apply to imports made after 31 March 2026.
  
  b. Provide the benefit of Project Import with a concessional basic customs duty of 7.5 percent on “solar power plants or solar power projects, being set up for the supply of electricity exclusively to a GH project.”
  
  c. Clarify whether a standalone renewable energy plant (solar and wind) can be set up in an SEZ or as an EOU and supply power to a GH plant located in the same or a different SEZ or EOU.
  
  d. Clarify whether a renewable energy power plant set up as a standalone SEZ unit for power supply to another SEZ unit is entitled to all the taxes/duty benefits available under Section 26 of the SEZ Act.
  
  e. Provide a duty benefit on import/local procurement of equipment for solar and wind captive power plants to be set up as an EOU as part of an integrated GH project under Notification no 52-2003-Customs/FTP.
  
  5. Income tax
  a. Clarify that the “business of manufacture or production of any article or thing” for eligibility to the corporate tax rate of 15 percent (plus surcharge and cess) under section 115BAB of the Income-tax Act, 1961, includes the production of GH and hydrogen derivatives, such as urea and ammonia.
  
  b. Considering the government’s plan to achieve an installed renewable energy capacity of 500 GW and a GH production capacity of 5 MMT per annum by 2030, the current sunset date of 31 March 2024 to commence manufacturing or production may be extended to 31 March 2027, specifically for GH and hydrogen derivatives projects.

• Measurable outcome
  India could achieve its sustainability ambitions with support from the National Green Hydrogen Mission, which targets the production of 5 million metric tonnes of GH annually by 2030, with an associated renewable energy capacity addition of about 125 GW by the same year. Given the country’s potential, experts suggest that India could produce up to 10 million metric tonnes per year by 2030.

• Rationale

1. GH will be crucial for India’s energy transition and industrial transformation, helping the country reach its net-zero emissions goal by 2070. Made through water electrolysis powered by renewable energy, green hydrogen and its by-products can significantly reduce emissions.

2. Offers a promising solution to decarbonise challenging sectors, such as industry and transport, which face significant technical and socio-economic barriers. While limited solutions exist for these “hard-to-abate’ sectors, GH and its derivatives can play a key role by serving as a clean energy source.

3. The NGHM intends to ensure the availability of renewable energy for GH projects at the “least possible costs.” In producing GH, the costs of electrolysers and input renewable energy are the two major components, in addition to capital costs and enabling infrastructure. Currently, GH hovers around INR300 per kilogram; reducing these costs will be vital for widescale adoption.

4. On the indirect tax front, the government has levied a customs duty of 44 percent (including basic customs duty and cess) on the import of solar modules, effective from 1 April 2022, which has led to an increase in the overall project cost of solar power generation.

5. Given the existing tax framework, it is difficult for GH developers to source/generate solar power at viable costs, which will be critical for achieving cost efficiencies in the production of GH.

Ask #7

Climate adaptation efforts

• Specific measures
  1. Additional funding for agricultural R&D to develop climate-resilient crop varieties and promote climate-smart farming practices could be explored. The focus could be on creating drought-tolerant, flood-resistant and high-yielding crop varieties tailored to specific regional climates.
  
  2. Prioritising investment in digital tools and technologies to help farmers adopt climate-smart practices, such as precision farming and soil health management.
  
  3. More investments towards nature-based solutions, including afforestation projects, wetland restoration and coastal protection efforts to mitigate climate risks.
  
  4. Building disaster risk resilience by allocating funds for better infrastructure in cities that can withstand extreme weather events, including flood control systems, rainwater harvesting and green building technologies/updating building codes.

• Measurable outcome
  Increased funding for resilient agriculture and technology will enhance sector productivity, improve income levels and ensure food security. Similarly, strengthened urban resilience will minimise the impact of extreme weather to improve nature and community resilience. Nature-based solutions (NbS) can provide up to 30 percent of the mitigation needed to limit global warming to 1.5ºC above pre-industrial levels by 2030.

• Rationale
  1. Focusing on disaster risk resilience will enhance agricultural productivity and increase climate resilience. It will also help ensure that urban areas are more resilient to climate-induced disasters, such as floods, heat waves, and water shortages.
  
  2. Nature-based solutions have proven to be cost-effective and provide long-term protection against climate impacts while enhancing biodiversity. 
  
  3. Precision farming and investing in digital technologies will help increase farmers’ adaptive capacity, risk management and long-term planning. 
  
  4. Increased investment in R&D will help increase crop productivity, develop varieties that can withstand climate change and ensure food security. 

Policy recommendations

Recommendation #1

• Details: Increase funding for MGNREGS/other similar schemes or policies to focus on soil health, water conservation and reforestation to build climate resilience. The focus could also be given to expanding crop insurance coverage, particularly in vulnerable regions prone to floods and droughts, to help farmers adapt to climate impacts and reduce their financial vulnerability.

• Expected impact: Conducive policies help reduce farmers’ financial risks, improve their capacity to adapt to climate impacts and bring economic stability.

Recommendation #2

• Details: Reintroduction of the 15 percent concessional corporate tax rate for new manufacturing companies.

• Expected impact: The continuation of this scheme could help India become a global manufacturing hub by reducing reliance on imports and promoting self-sufficiency. It will also be particularly beneficial for companies involved in generating GH and other renewable power sources, encouraging further investments.

Recommendation #3

• Details: Policy push towards the commercialisation of sustainable and advanced biofuels in India. This could focus on regulations, incentives such as Viability Gap Funding, subsidies and blending mandates. While India has begun using SAF, the commercial viability of SAF production remains a challenge to its successful commercialisation in the country. Drawing from the successful commercialisation of SAF in other countries, India could adopt similar policies to accelerate SAF adoption.

• Expected impact: Accelerating the commercialisation of sustainable and advanced biofuels in India can transform the aviation sector by reducing carbon emissions and reliance on fossil fuels, driving the country towards energy security and climate leadership. India’s National Biofuels Coordination Committee aims to achieve a 1 percent blend of SAF with jet fuel by 2027 and 2 percent by 2028.