Income Tax Bill 2025 aligns deductions, rebates with Budget 2025 announcements

The Centre has mended the Income Tax Act, 1961, remedying a drafting error that affected the standard deduction for salaried taxpayers in the financial year 2025-26. This correction aligns with Budget 2025 announcements, returning the standard deduction to Rs 75,000 for income up to Rs 12.75 lakh under the new tax regime. The revised provisions provide substantial relief to salaried individuals who were initially disadvantaged due to the error.

The Finance Act, 2025, introduced significant changes to the tax rebate under Section 87A, increasing the tax-free income threshold from Rs 7 lakh to Rs 12 lakh. This adjustment effectively reduces the tax liability for incomes up to Rs 12 lakh to zero. However, the rebate does not apply to incomes taxed at special rates, such as short-term capital gains (STCG) and long-term capital gains (LTCG).

Finance Minister Nirmala Sitharaman remarked on the amendments, stating, "Providing clarity for the new Income Tax regime, where standard deduction of Rs. 75,000 will be clarified for salaried individuals." This statement underlines the government's commitment to ensuring taxpayers receive the intended benefits of the Budget 2025 measures.

Naveen Wadhwa, Vice President of Research and Advisory Division at Taxmann, told the Economic Times: "I had pointed out that proviso to Section 16(ia) gave a reference to clause (ii) of section 115BAC(1A), which applies to the assessment year 2025-26, but did not mention clause (iii), which governed the assessment year 2026-27. Due to this omission, the enhanced standard deduction of Rs. 75,000 under the new tax regime failed to be available for the current financial year 2025-26. However, in the latest Taxation Laws (Amendment) Bill, 2025, as passed by the Parliament, this drafting error is fixed."

Changes done

Under the newly adjusted tax regime, the standard deduction permits taxable income to stand at Rs 12 lakh after deduction, with tax payable amounting to Rs 60,000. Taxpayers can then claim the Section 87A rebate of Rs 60,000, eliminating any net tax liability. This change makes the tax regime more favourable for middle-income earners, adjusting tax obligations to better reflect their earning contexts.

The Budget 2025 explanatory memorandum further elaborates: "From assessment year 2026-27 onwards, for an assessee, being an individual resident in India whose income is chargeable to tax under the sub-section (1A) of section 115BAC, it is proposed to,–- Enhance the limit of total income for rebate in clause (a) and (b) of first proviso under section 87A, on which the income-tax is payable as per the rates of income-tax under sub-section (1A) of section 115BAC, from Rs 7,00,000 to Rs 12,00,000 and the limit of rebate in clause (a) of first proviso to section 87A from Rs 25,000 to Rs 60,000."

Amidst these changes, it's important for taxpayers to note that the rebate does not apply to special rate incomes like STCG. This specificity ensures clarity in the application of tax laws and prevents unintended tax benefits on incomes outside the standard provisions.

Overall, these amendments are positioned to provide a more equitable taxation framework for salaried individuals, addressing previous discrepancies and reinforcing the intended benefits of the new tax regime. These corrections reflect the government's responsiveness in addressing legislative oversights and providing clear guidance to taxpayers.