Anaya Nolan
The new tax regime in India, introduced under the Income Tax Act, offers lower tax rates but eliminates most deductions, aiming for simplicity and ease of filing. The new regime is the default for FY 2024-25, offering a standard deduction of Rs. 75,000 for salaried individuals. The tax slabs have been revised, with incomes up to Rs. 12 lakhs now having nil tax liability due to an increased rebate of Rs. 60,000. For incomes above Rs. 12 lakhs, the tax rate increases progressively, with the last slab of income above Rs. 15 lakhs taxed at 30%. The choice between the old and new regimes depends on individual circumstances, with the old regime offering various exemptions and deductions. Understanding these changes is essential for taxpayers to make sound financial decisions and adapt their tax planning strategies.
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What You'll Learn
Income tax slabs
In India, income tax is governed by the Income Tax Act, 1961, and is administered by the Income Tax Department under the Central Board of Direct Taxes (CBDT). The Income Tax Act provides taxpayers with the option of selecting from two regimes: the old tax regime and the new tax regime. The old regime allows for various exemptions and deductions, while the new regime offers lower tax rates but eliminates most of these deductions.
The new income tax slabs and rates under the new regime for the FY 2025-26 (AY 2026-27) are as follows:
- Rs. 0 to Rs. 4 lakh – Nil
- Rs. 4 lakh to Rs. 8 lakh – 5%
- Rs. 8 lakh to Rs. 12 lakh – 10%
- Rs. 12 lakh to Rs. 16 lakh – 15%
- Rs. 16 lakh to Rs. 20 lakh – 20%
- Rs. 20 lakh to Rs. 24 lakh – 25%
- Income above Rs. 24 lakh will be taxed at 30%
The income tax slabs under the new regime for FY 2024-25 (AY 2025-26) are as follows:
- Rs. 3 lakhs of income – Nil
- Rs. 3 lakhs to Rs. 7 lakhs – 5%
- Rs. 7 lakhs to Rs. 10 lakhs – 10%
- Rs. 10 lakhs to Rs. 12 lakhs – 15%
- Rs. 12 lakhs to Rs. 15 lakhs – 20%
- Above Rs. 15 lakhs – 30%
The income tax slabs under the old regime for FY 2024-25 (AY 2025-26) are as follows:
- Up to Rs. 2.5 lakhs – Nil
- Rs. 2.5 lakhs to Rs. 5 lakhs – 5%
- Rs. 5 lakhs to Rs. 10 lakhs – 20%
- Above Rs. 10 lakhs – 30%
The choice between the old and new tax regimes depends on the individual's financial situation, specifically their income level and eligibility for tax deductions and exemptions. The new regime aims to reduce the compliance burden on individuals by lowering tax rates and reducing deductions, making tax filing simpler. However, the old regime may be more beneficial for those with higher incomes or those who can take advantage of various exemptions and deductions.
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Tax deductions
In India, income tax is governed by the Income Tax Act, which offers taxpayers the option to choose between the old and new tax regimes. The old regime allows for various exemptions and deductions, while the new regime offers lower tax rates but eliminates most deductions.
- Transport allowances in the case of a specially-abled person.
- Standard deduction of Rs. 50,000, which was increased to Rs. 75,000 for the new regime effective from FY 2024-25.
- Family pension: Those receiving a family pension can claim a deduction of Rs. 15,000 or 1/3rd of the pension, whichever is lower. This amount has been increased to Rs. 25,000 for the new regime effective from FY 2024-25.
- Higher Leave Encashment Exemption: The exemption limit for non-government employees has been raised from Rs. 3 lakhs to Rs. 25 lakhs.
The old regime offers over 70 exemptions and deductions, including:
- Section 80C, which allows for a reduction of taxable income up to Rs. 1.5 lakh.
- HRA and LTA.
The choice between the two regimes depends on the individual's income level and the tax deductions they are eligible for. For example, for an income of Rs. 20 lakhs, the old regime is preferable if tax-saving investments are greater than Rs. 3,75,000. On the other hand, the new regime is more suitable if tax-saving investments are less than Rs. 3,75,000.
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Tax exemptions
In India, the Income Tax Act provides taxpayers with the choice of opting for either the old tax regime or the new tax regime. The old regime offers various exemptions and deductions, including HRA and LTA, that can reduce taxable income and lower tax payments. One of the most popular deductions is Section 80C, which allows for a reduction of taxable income up to Rs. 1.5 lakh.
The new tax regime, on the other hand, offers lower tax rates but eliminates most deductions, aiming for simplicity and ease of filing. For the financial year 2025-26, the new regime provides a significant benefit, as the tax liability is reduced to nil for incomes up to Rs. 12 lakh. The new regime also introduced a standard deduction of Rs. 50,000, which was later increased to Rs. 75,000 for salaried individuals.
While the new regime generally offers lower tax rates, there are still some exemptions and deductions available. For example, transport allowances are available for specially-abled individuals. Additionally, those receiving a family pension can claim a deduction of Rs. 15,000 or 1/3rd of the pension, whichever is lower. This amount has been increased to Rs. 25,000 for the new regime.
In terms of tax planning, 2025 is expected to be a dynamic year with both known and unknown changes. The IRS makes routine inflation-related adjustments to more than 60 tax provisions annually, and these adjustments for 2025 are expected to increase by about 2.8%. Additionally, several provisions put in place by the 2017 Tax Cuts and Jobs Act (TCJA) are set to expire at the end of 2025, which may result in further changes to the tax landscape.
In the United States, the recent Republican win in the presidential election has also brought about potential tax law changes. The alternative minimum tax (AMT) exemption for 2025 has increased to $88,100 for individuals and $137,300 for married couples filing jointly. Additionally, the SALT deduction cap has been made permanent and raised to $30,000, with certain limitations for specific income levels.
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Tax savings
In India, income tax is governed by the Income Tax Act, which offers taxpayers the option to choose between the old tax regime and the new tax regime. The new tax regime was introduced to reduce the compliance burden on individuals and HUFs by offering lower tax rates but eliminating most deductions.
For the financial year 2025-26, the new regime provides a significant benefit, as the tax liability is reduced to nil for incomes up to Rs. 12 lakhs. The income tax slab rates for this period are as follows:
- Rs. 0 to Rs. 4 lakhs – Nil
- Rs. 4 lakhs to Rs. 8 lakhs – 5%
- Rs. 8 lakhs to Rs. 12 lakhs – 10%
- Rs. 12 lakhs to Rs. 16 lakhs – 15%
- Rs. 16 lakhs to Rs. 20 lakhs – 20%
- Rs. 20 lakhs to Rs. 24 lakhs – 25%
- Above Rs. 24 lakhs – 30%
The decision to choose between the old and new tax regimes depends on the taxpayer's income and the tax-saving deductions they are eligible for. For instance, if your income is Rs. 20 lakhs, you should choose the old regime if your tax-saving investments are more than Rs. 3,75,000. However, if your tax-saving investments are less than Rs. 3,75,000, the new regime would be more beneficial.
To optimise your financial plan and make sound financial decisions, it is advisable to stay updated with the current tax laws and consult a tax professional.
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Tax filing
In India, income tax is governed by the Income Tax Act, 1961, and is administered by the Income Tax Department under the Central Board of Direct Taxes (CBDT). The Income Tax Act provides taxpayers with the choice of two regimes: the old tax regime and the new tax regime. The old regime offers various exemptions and deductions, while the new regime offers lower tax rates but eliminates most deductions.
The new tax regime introduced in 2023 aimed to reduce the compliance burden on individuals. It reduced tax rates and deductions simultaneously, eliminating the need for individuals to obtain various tax-saving investments and document them to reduce their tax liability. The new regime is the default for the FY 2024-25.
The income tax slab rates for the new regime for FY 2025-26 (AY 2026-27) are as follows:
- Rs. 0 to Rs. 4 lakhs – Nil
- Rs. 4 lakhs to Rs. 8 lakhs – 5%
- Rs. 8 lakhs to Rs. 12 lakhs – 10%
- Rs. 12 lakhs to Rs. 16 lakhs – 15%
- Rs. 16 lakhs to Rs. 20 lakhs – 20%
- Rs. 20 lakhs to Rs. 24 lakhs – 25%
- Above Rs. 24 lakhs – 30%
For the old regime, the first slab is tax-free for income up to Rs. 2.5 lakhs. The second slab covers income between Rs. 2.5 lakhs and Rs. 5 lakhs, with a 5% tax rate. The third slab is for income between Rs. 5 lakhs and Rs. 10 lakhs, with a 10% tax rate. The last slab is for income above Rs. 15 lakhs, with a 30% tax rate.
When it comes to tax filing, every taxpayer (or assessee) who meets certain conditions is required by law to file a tax return. The scope of income subject to tax is determined by the individual's residential status. Taxpayers can refer to the different ITR forms based on their income levels and sources to file their tax returns accurately.
It's important to note that tax laws and slab rates may change annually, and taxpayers should stay updated with the latest information to make informed decisions. Consulting a tax professional can be beneficial to optimize one's financial plan, especially during dynamic years with anticipated tax changes.
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Frequently asked questions
The new tax law, also known as the new tax regime, was introduced to reduce compliance burden on individuals and HUFs. It offers lower tax rates but eliminates most deductions.
The new tax regime is the default for FY 2024-25. However, the old regime is still an option for taxpayers. The best regime for you will depend on your income and the tax deductions you are eligible for.
Imagine a staircase, where each step denotes a level of income. The first slab of income is tax-free up to a certain amount. The second slab is taxed at a higher rate, and so on.
Rs. 0 to Rs. 4 lakhs – Nil, Rs. 4 lakhs to Rs. 8 lakhs – 5%, Rs. 8 lakhs to Rs. 12 lakhs – 10%, Rs. 12 lakhs to Rs. 16 lakhs – 15%, Rs. 16 lakhs to Rs. 20 lakhs – 20%, Rs. 20 lakhs to Rs. 24 lakhs – 25%, and above Rs. 24 lakhs – 30%.
The new regime reduces the compliance burden on individuals, as they no longer need to obtain various tax-saving investments and document them to lessen their tax. It also simplifies the tax structure, making it easier to file taxes.
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