India’s income tax system has undergone significant changes for the financial year 2025–26 (Assessment Year 2026–27), aimed at making taxation simpler, more transparent, and taxpayer-friendly. These reforms were announced in the Union Budget 2025 and are now coming into effect.
Major Changes in Tax Slabs
- Tax-free limit raised to ₹4 lakh: Individuals will now pay zero tax on annual income up to ₹4 lakh.
- New tax slabs under the revised regime:
- ₹4 lakh – ₹8 lakh: 5%
- ₹8 lakh – ₹12 lakh: 10%
- ₹12 lakh – ₹16 lakh: 15%
- ₹16 lakh – ₹20 lakh: 20%
- ₹20 lakh – ₹24 lakh: 25%
- Above ₹24 lakh: 30%
This change directly benefits middle-income taxpayers, reducing their overall tax liability.
Increased Rebate and Deductions
Section 87A rebate expansion:
- Individuals with a net taxable income of up to ₹12 lakh will now receive a full rebate of up to ₹60,000 — meaning no tax payable in such cases.
- Standard deduction has been increased to ₹75,000, further enhancing tax-free income for salaried employees. Effectively, a salaried person earning up to ₹12.75 lakh could end up paying no tax.
Structural Reform in Tax Law
- The Income Tax Act, 1961 is being replaced by the Income Tax Bill, 2025, creating a more digital-first, transparent, and taxpayer-friendly system.
- The number of provisions is being reduced from 819 to 536 to simplify compliance.
- Faceless assessment will become the norm, reducing human interface and possible corruption.
- Improvements are planned for TDS refund processes to speed up reimbursements.
Property Income and Pension Taxation Changes
- Rental income clarity: Clause 22 confirms that the 30% standard deduction and pre-construction interest deduction on home loans will apply to both self-occupied and rented properties.
- Unified Pension Scheme (UPS) withdrawals: Lump-sum and premature withdrawals from UPS will now be taxed in the same way as the National Pension System (NPS), creating uniformity in retirement savings taxation.
Why These Changes Matter
These changes aim to:
- Boost disposable income for the middle class.
- Simplify the tax compliance process.
- Modernize the tax administration to match India’s digital economy.
With higher tax-free limits, bigger rebates, and simplified laws, the government hopes to encourage spending, improve savings, and reduce disputes between taxpayers and authorities.
Conclusion
The new income tax framework for FY 2025–26 marks a significant shift towards a more citizen-centric approach. The raised tax-free limit, increased rebates, and streamlined legal framework are expected to benefit millions, especially salaried and middle-class taxpayers.
As the new law takes full effect, it could not only make filing returns easier but also inject fresh momentum into India’s economy.
