Income Tax in FY26: New tax slabs, raised rebate limits, removal of equalisation levy -- new tax rules effective April 2025

Effective April 1, 2025, new income tax regulations have been introduced following the enactment of the Finance Act 2025. One of the significant changes is the increased income limit for individuals opting for the new Income Tax regime to avail rebates under Section 87A.

The threshold has been raised from Rs 7 lakh to Rs 12 lakh, which implies that individuals earning up to Rs 12 lakh annually will no longer need to pay income tax. This adjustment offers substantial relief compared to the earlier regime where a Rs 12 lakh income attracted a tax of Rs 80,000. However, individuals still need to file Income Tax Returns to remain compliant.

New tax slabs

The new rules also modify the structure of tax slabs under the new Income Tax regime. Seven slabs now dictate tax obligations, ranging from Rs 0 to Rs 24 lakh and above, with the no-tax threshold rising to Rs 4 lakh from the previous Rs 3 lakh. The highest tax rate is now applicable to those earning over Rs 24 lakh, up from Rs 15 lakh previously. 

These changes aim to simplify tax calculations and provide clearer guidance on tax liabilities, particularly benefiting middle-income earners. Importantly, these revisions do not affect corporate tax rates or the old Income Tax regime, maintaining stability for businesses.

As per the revised slabs, the tax rates will be as follows:

– Rs 0-4 lakh – Nil
– Rs 4-8 lakh – 5%
– Rs 8-12 lakh – 10%
– Rs 12-16 lakh – 15%
– Rs 16-20 lakh – 20%
– Rs 20-24 lakh – 25%
– Above Rs 24 lakh – 30%

Old Tax Regime

Although the new tax regime may be attractive to many taxpayers, some individuals prefer sticking to the old tax regime because of the deductions and exemptions available that can reduce their taxable income. Here are the income tax slabs for the old tax regime:

Income up to Rs 2,50,000: Tax rate 0%
Income between Rs 2,50,001 to Rs 5,00,000: Tax rate 5%
Income between Rs 5,00,001 to Rs 10,00,000: Tax rate 20%
Income above Rs 10,00,000: Tax rate 30%

Under the old regime, taxpayers can benefit from deductions for various expenses, including:
House Rent Allowance (HRA)
Leave Travel Allowance (LTA)
Section 80C (up to Rs 1.5 lakh)
National Pension System (NPS) contributions (up to Rs 50,000)
Medical insurance premiums (up to Rs 50,000)

Standard deduction

For salaried individuals, the standard deduction has been enhanced to Rs 75,000, effectively increasing the non-taxable income limit to Rs 12.75 lakh annually under the new regime. Additionally, a provision for marginal relief ensures that individuals earning slightly above Rs 12 lakh can maintain a similar take-home pay by only paying tax on income exceeding this amount. This means that a taxpayer with earnings of Rs 12.10 lakh would only incur a tax liability of Rs 10,000. This provision seeks to prevent abrupt tax burdens on individuals close to the threshold, enhancing equity within the tax system.

Equalisation levy

The Finance Act 2025 also abolishes the equalisation levy previously imposed on digital transactions. This levy, introduced in 2020 at 2% for e-commerce operators and 6% on online advertisements, will no longer be applicable from April 2025. Its removal is expected to streamline digital transactions and reduce the tax burden on non-resident digital service providers, potentially encouraging increased foreign investment in India's digital economy. The change reflects a move towards less regulatory complexity in the ever-evolving digital marketplace.

TDS tweaks

Further, adjustments have been made to thresholds for TDS on bank interest and dividends. For senior citizens, the TDS threshold on bank interest has been increased to Rs 1 lakh from Rs 50,000, while for others, it rises to Rs 50,000. 
Additionally, the TDS threshold for dividend income has doubled to Rs 10,000. The tax collected at source (TCS) threshold for overseas remittances under the Liberalised Remittance Scheme has also increased to Rs 10 lakh from Rs 7 lakh. These measures aim to reduce the tax liability for individuals and promote greater financial ease for both domestic and international transactions.