Income tax reboot: Budget 2025 rejigged tax rules for 2026 - zero tax up to Rs12 lakh, easier compliance, new act ahead
New tax rules 2026: From higher tax-free income thresholds and relaxed TDS norms to a longer window for correcting past returns, the measures point to a clear shift towards simplification and reduced disputes.
- Jan 1, 2026,
- Updated Jan 1, 2026 2:07 PM IST
Budget 2025 has ushered in a sweeping reset of India’s income tax regime, introducing changes that reshape how individuals and businesses plan, report and comply with taxes. From higher tax-free income thresholds and relaxed TDS norms to a longer window for correcting past returns, the measures point to a clear shift towards simplification and reduced disputes. The reforms culminate in the enactment of the Income-tax Act, 2025, which will replace the decades-old law from April 1, 2026, marking a defining moment for direct taxation in India.
Higher tax-free income limit for salaried taxpayers
One of the most impactful announcements is the enhancement of the Section 87A rebate for salaried individuals. Residents with a net taxable income of up to Rs 12 lakh will now pay no income tax. With the standard deduction of Rs 75,000, the effective tax-free threshold rises to Rs 12.75 lakh under the new regime. The change is expected to provide meaningful relief to middle-income earners and influence long-term salary structuring and household financial planning.
Longer window to file updated returns
The Budget also focuses on easing compliance by extending the timeline for filing updated income tax returns under Section 139U. Taxpayers now get 48 months, up from 24 months, to correct returns for the preceding four assessment years. By allowing voluntary disclosures with an additional tax payment, the move is intended to reduce litigation and improve trust between taxpayers and the tax administration.
Senior citizens get relief on interest income
Senior citizens stand to gain from a substantial increase in the TDS exemption limit on interest income, which has been raised from Rs 50,000 to Rs 1 lakh, effective FY26. This provides significant relief to retirees who depend largely on interest from bank deposits and savings instruments for regular income.
Higher TDS threshold for dividend income
Retail investors will benefit from the increase in the TDS threshold on dividend income from Rs 5,000 to Rs 10,000 per financial year, effective April 1, 2025. The change reduces the tax impact on small shareholders and improves cash flows for investors with relatively modest portfolios.
TDS and TCS rationalised across segments
The rationalisation exercise extends to several other areas, including higher thresholds for TDS on rent, bank interest and contractor payments. These adjustments are designed to ease compliance for small landlords, senior citizens and small businesses, while reducing the frequency of tax deductions on lower-value transactions.
New TDS rule for firms and LLPs
A key procedural change is the introduction of Section 194T, which mandates TDS on payments made by firms and LLPs to partners in the form of salary, remuneration, interest, commission or bonus, effective April 1, 2025. The provision aims to improve transparency and consistency in the taxation of partnership-related payments.
New Income-tax Act
The reform push culminates in the replacement of the Income-tax Act, 1961 with the Income-tax Act, 2025, a streamlined law designed to reflect modern economic realities and close long-standing gaps in interpretation. Together, the Budget 2025 measures signal a move towards a more efficient, taxpayer-friendly tax system aligned with India’s evolving economic landscape.
Budget 2025 has ushered in a sweeping reset of India’s income tax regime, introducing changes that reshape how individuals and businesses plan, report and comply with taxes. From higher tax-free income thresholds and relaxed TDS norms to a longer window for correcting past returns, the measures point to a clear shift towards simplification and reduced disputes. The reforms culminate in the enactment of the Income-tax Act, 2025, which will replace the decades-old law from April 1, 2026, marking a defining moment for direct taxation in India.
Higher tax-free income limit for salaried taxpayers
One of the most impactful announcements is the enhancement of the Section 87A rebate for salaried individuals. Residents with a net taxable income of up to Rs 12 lakh will now pay no income tax. With the standard deduction of Rs 75,000, the effective tax-free threshold rises to Rs 12.75 lakh under the new regime. The change is expected to provide meaningful relief to middle-income earners and influence long-term salary structuring and household financial planning.
Longer window to file updated returns
The Budget also focuses on easing compliance by extending the timeline for filing updated income tax returns under Section 139U. Taxpayers now get 48 months, up from 24 months, to correct returns for the preceding four assessment years. By allowing voluntary disclosures with an additional tax payment, the move is intended to reduce litigation and improve trust between taxpayers and the tax administration.
Senior citizens get relief on interest income
Senior citizens stand to gain from a substantial increase in the TDS exemption limit on interest income, which has been raised from Rs 50,000 to Rs 1 lakh, effective FY26. This provides significant relief to retirees who depend largely on interest from bank deposits and savings instruments for regular income.
Higher TDS threshold for dividend income
Retail investors will benefit from the increase in the TDS threshold on dividend income from Rs 5,000 to Rs 10,000 per financial year, effective April 1, 2025. The change reduces the tax impact on small shareholders and improves cash flows for investors with relatively modest portfolios.
TDS and TCS rationalised across segments
The rationalisation exercise extends to several other areas, including higher thresholds for TDS on rent, bank interest and contractor payments. These adjustments are designed to ease compliance for small landlords, senior citizens and small businesses, while reducing the frequency of tax deductions on lower-value transactions.
New TDS rule for firms and LLPs
A key procedural change is the introduction of Section 194T, which mandates TDS on payments made by firms and LLPs to partners in the form of salary, remuneration, interest, commission or bonus, effective April 1, 2025. The provision aims to improve transparency and consistency in the taxation of partnership-related payments.
New Income-tax Act
The reform push culminates in the replacement of the Income-tax Act, 1961 with the Income-tax Act, 2025, a streamlined law designed to reflect modern economic realities and close long-standing gaps in interpretation. Together, the Budget 2025 measures signal a move towards a more efficient, taxpayer-friendly tax system aligned with India’s evolving economic landscape.