What was decided, when, and by whom

The FY2025 Outline of Tax Reform is the government outline approved by Cabinet on December 27, 2024. It is published across nine pages on the Ministry of Finance website. Its opening sentence expresses the year's aims.

To adjust tax burdens during rising prices and address reductions in working hours, the income tax basic deduction and minimum employment income deduction will be increased, and a new deduction introduced for children and similar relatives of university age.

The introduction then lists higher defined contribution pension limits, expansion of SME management enhancement incentives, tax measures to fund stronger defense capabilities, legislation for global minimum taxation, and revision of tourist tax-free shopping. These are intended to achieve a shift to a growth-oriented economy driven by wage increases and investment. For how to read the outline, see Key points of the FY2026 tax system revision outline Please also take a look.

Main pillars of the outline

The text has eight chapters. Their names and decisions are as follows.

The accompanying estimate of revenue changes from FY2025 domestic tax reform totals a JPY 661 billion reduction in a full year and JPY 680 billion in the initial year. For the previous year, see FY2024 Outline of Tax Reform Please see

Addressing the JPY 1.03 Million Barrier Through Two Deductions

The largest item is the first personal income tax section, adjustment of tax burdens during rising prices and measures addressing reductions in working hours. First, the basic deduction increases by JPY 100,000 for individuals with total income of JPY 23.5 million or less. The resulting deductions are as follows.

The minimum employment income deduction rises from JPY 550,000 to JPY 650,000. Both apply to income tax from 2025 onward, while withholding on salaries and public pensions applies to amounts payable from January 1, 2026. This section is estimated to reduce revenue by JPY 583 billion in a full year and JPY 675 billion in the initial year.

A New Deduction for University-Age Children and Similar Relatives

The third measure creates a provisional Special Deduction for Specified Relatives. A resident with a relative or similar person aged at least 19 but under 23 who shares their livelihood, has total income of no more than JPY 1.23 million, and is not an eligible dependent may deduct an amount from total income and similar income. Spouses and dedicated blue-return family employees and similar persons are excluded. The deduction is JPY 630,000 where the relative's total income exceeds JPY 580,000 but is no more than JPY 850,000, then decreases in stages to JPY 30,000 for income over JPY 1.2 million and up to JPY 1.23 million. The income limit for spouses sharing a livelihood and dependent relatives also rises from JPY 480,000 to JPY 580,000, and that for working students from JPY 750,000 to JPY 850,000.

Three Deductions Support Child-Rearing Policy

For life insurance premium deductions, separate 2026 calculations apply to general life insurance deductions for new policies where a resident has a dependent under 23. When combined with premiums on old policies, the general life insurance deduction limit is JPY 60,000, up from JPY 40,000. The combined limit for general life, nursing and medical care, and individual annuity insurance remains JPY 120,000.

For housing loan deductions, borrowing limits are set for qualifying individuals who construct or acquire certified housing and similar homes and occupy them during 2025. Qualifying individuals are those under 40 with a spouse, those aged 40 or older with a spouse under 40, or those with a dependent under 19.

• The borrowing limit for certified housing is JPY 50 million.
• The borrowing limit for ZEH-standard energy-efficient housing is JPY 45 million.
• The borrowing limit for housing meeting energy conservation standards is JPY 40 million.

The third measure covers renovations. Qualifying child-rearing renovations to a home owned by a qualifying individual and occupied during 2025 are added to the deduction. Ten percent of the standardized construction cost, capped at JPY 2.5 million, may be credited against income tax.

Higher Defined Contribution Pension Limits

For corporate defined contribution pensions, the matching contribution rule preventing employee contributions from exceeding employer contributions is abolished. The contribution limit for those without a defined benefit corporate pension becomes JPY 62,000 per month, up from JPY 55,000. Individual defined contribution limits become JPY 75,000 per month for Category 1 insured persons, up from JPY 68,000, and JPY 62,000 for those without corporate pensions other than Category 1 and Category 3 insured persons, up from JPY 23,000. The National Pension Fund contribution ceiling also rises to JPY 75,000 per month.

Eligible ages also expand. Among those aged at least 60 but under 70 who cannot currently join an individual defined contribution pension, former participants, investment instruction account holders, and similar persons who are not receiving the basic old-age pension or old-age benefits become eligible, with a monthly contribution limit of JPY 62,000.

SME Corporation Tax Changes Move in Both Directions

The special reduced corporation tax rate for SMEs is revised and extended for two years. The original states:

For fiscal years with annual income exceeding JPY 1 billion, the rate on the first JPY 8 million of annual income rises to 17% from the current 15%.

The other revision excludes group relief companies from eligible corporations. Meanwhile, SME management enhancement tax incentives expand to equipment essential to an investment plan expected to yield an average annual return of at least 7% and confirmed as meeting the Minister of Economy, Trade and Industry's business expansion requirements. Conditions include base-year sales over JPY 1 billion but below JPY 9 billion and a plan targeting sales above JPY 10 billion.

Some equipment is excluded: digitalization equipment for remote operation, visualization, or automated control, and equipment used for crypto asset mining. The development of crypto asset taxation is covered in The crypto asset tax system was created this way. for further details.

Introducing Special Defense Corporation Tax and Phased Tobacco Tax Increases

Tax measures to fund stronger defense capabilities form a separate chapter, centered on a provisional Special Defense Corporation Tax.

For the time being, Special Defense Corporation Tax will be imposed on a corporation's reference corporation tax amount for each taxable fiscal year.

Tax equals 4% of the corporation tax amount used as the tax base for each taxable fiscal year. That base is the reference corporation tax amount less an annual JPY 5 million basic deduction. Filing and payment deadlines match corporation tax, and application begins with fiscal years starting on or after April 1, 2026.

National tobacco tax is temporarily set at JPY 8,302 per 1,000 cigarettes, compared with the statutory rate of JPY 6,802. Implementation begins April 1, 2027, through three stages: JPY 7,302 on April 1, 2027, JPY 7,802 on April 1, 2028, and JPY 8,302 on April 1, 2029. Heated tobacco also moves to a new conversion method in two stages, April 1 and October 1, 2026. This chapter's estimated revenue increase is JPY 572 billion in FY2026 and JPY 986 billion in a full year.

Tourist Tax-Free Shopping Moves to Departure Confirmation

When an operator of a tax-free shop sells eligible goods, exemption will require customs confirmation at the departure port within 90 days of purchase and retention by the operator of the confirmation information. A note explains that in practice this is a refund method: goods are sold at a tax-inclusive price, and the operator refunds the tax once export is confirmed at departure.

Eligible goods also change. The JPY 500,000 daily purchase ceiling per shop and special packaging requirement for consumables are abolished, as is the distinction between general goods and consumables. The requirement excluding goods not for ordinary living use is also abolished, replaced by individual designation of items at high risk of improper purchases, such as gold bullion. These changes generally apply to eligible goods sold and similar transactions from November 1, 2026.

To determine if it relates to you

• Salary and pension recipients should review the basic deduction and employment income deduction sections.
• Those supporting children aged at least 19 but under 23 should review the provisional Special Deduction for Specified Relatives. Deduction amounts depend on the child's total income band.
• Those considering building or buying a home or child-rearing renovations during 2025 should review the child-rearing support tax measures.
• For defined contribution pension users, both contribution limits and eligible ages change.
• Corporations with annual income over JPY 1 billion and SME owners considering equipment investment should review corporate taxation.
• Retailers offering tax-free shopping should review the tourist consumption tax exemption section; the method itself changes.

Source

• FY2025 Outline of Tax Reform, Cabinet Decision of December 27, 2024 Ministry of Finance (Contents)