Income Tax Slabs Comparison for FY 2025-26

The Indian government has introduced significant changes to the income tax system for the Financial Year (FY) 2025-26, aiming to simplify taxation and increase disposable income for taxpayers. The new tax regime, now the default option, offers revised tax slabs and higher rebates, impacting how individuals plan their finances. Understanding the differences between the old and new tax regimes is crucial for making informed decisions that align with one's financial goals. This article provides a comprehensive overview of both regimes, detailing the tax slabs, deductions, rebates, and factors to consider when choosing the appropriate tax structure. By evaluating these aspects, taxpayers can optimise their tax liabilities and enhance their financial well-being in the current fiscal year.

Understanding the Tax Regimes

India offers two income tax regimes: the old and the new. The old regime allows various deductions and exemptions, catering to those who invest in tax-saving instruments. In contrast, the new regime simplifies taxation by offering lower tax rates without exemptions. As of FY 2025-26, the new regime is the default, but taxpayers can opt for the old regime based on their financial preferences.

Overview of Old Tax Regime

The old tax regime provides taxpayers with the opportunity to reduce their taxable income through various deductions and exemptions. These include benefits under sections like 80C, 80D, and allowances for house rent and travel. This regime is beneficial for individuals who make significant investments in tax-saving instruments and have eligible expenses that qualify for deductions

Overview of New Tax Regime

The new tax regime, introduced to simplify the tax structure, offers lower tax rates across different income slabs but eliminates most deductions and exemptions. It is designed for taxpayers who prefer a straightforward tax calculation without the need to invest in specific instruments for tax benefits. This regime is now the default option for all taxpayers starting FY 2025-26.

Income Tax Slabs for FY 2025-26

The income tax slabs for FY 2025-26 have been revised, especially under the new tax regime. These changes aim to provide relief to taxpayers and simplify the tax structure. Understanding these slabs is essential for accurate tax planning and compliance.

Old Tax Regime Slabs

Up to Rs. 2,50,000: Nil


Rs. 2,50,001 to Rs. 5,00,000: 5%


Rs. 5,00,001 to Rs. 10,00,000: 20%


Above Rs. 10,00,000: 30%


These slabs remain unchanged, allowing taxpayers to avail deductions and exemptions to reduce their taxable income.

New Tax Regime Slabs

Up to Rs. 4,00,000: Nil


Rs. 4,00,001 to Rs. 8,00,000: 5%


Rs. 8,00,001 to Rs. 12,00,000: 10%


Rs. 12,00,001 to Rs. 16,00,000: 15%


Rs. 16,00,001 to Rs. 20,00,000: 20%


Rs. 20,00,001 to Rs. 24,00,000: 25%


Above Rs. 24,00,000: 30%


These revised slabs under the new regime are designed to offer tax relief and simplify the tax calculation process.

Deductions and Exemptions

Deductions and exemptions play a crucial role in reducing taxable income under the old tax regime. However, the new tax regime has minimized these benefits to simplify the tax structure. Understanding the available deductions is essential for effective tax planning.

Deductions Available in Old Regime

The old tax regime offers various deductions, including:

Section 80C: Investments in PPF, NSC, ELSS, etc., up to Rs. 1.5 lakh.


Section 80D: Premiums paid for health insurance.


House Rent Allowance (HRA): For salaried individuals living in rented accommodations.


Leave Travel Allowance (LTA): Expenses incurred on travel within India.


These deductions can significantly reduce taxable income when utilized effectively.

Standard Deduction in New Regime

Under the new tax regime for FY 2025-26, a standard deduction of Rs. 75,000 is available to salaried individuals. This deduction simplifies the tax calculation process by providing a flat reduction in taxable income without the need for specific investments or expenses. It is designed to offer relief to taxpayers who opt for the new regime.

Section 87A Rebate

Section 87A of the Income Tax Act provides a rebate to individual taxpayers whose income falls below a specified threshold. This rebate reduces the tax liability, offering relief to low and middle-income earners. The rebate amounts and eligibility criteria differ between the old and new tax regimes.

Rebate in Old Regime

In the old tax regime, taxpayers with a total income up to Rs. 5,00,000 are eligible for a rebate under Section 87A. The rebate amount is Rs. 12,500, effectively reducing the tax liability to zero for individuals within this income bracket. This provision aims to provide tax relief to low-income earners.

Rebate in New Regime

Under the new tax regime for FY 2025-26, the Section 87A rebate has been enhanced. Taxpayers with a total income up to Rs. 12,00,000 are eligible for a rebate of Rs. 60,000. This substantial increase aims to provide significant tax relief to middle-income earners, making the new regime more attractive for a broader segment of taxpayers.

Choosing the Right Regime

Selecting between the old and new tax regimes depends on individual financial situations, including income levels, investment habits, and eligibility for deductions. Taxpayers should evaluate both regimes to determine which offers greater tax savings and aligns with their financial goals. Utilising online tax calculators can assist in making an informed decision.

Factors to Consider

When choosing the appropriate tax regime, consider the following factors:

Income Level: Higher-income individuals may benefit more from the new regime's lower tax rates.


Investment Habits: Those who invest in tax-saving instruments may find the old regime more beneficial.


Eligible Deductions: Assess the availability and amount of deductions under the old regime.


Simplicity: The new regime offers a straightforward tax calculation without the need for extensive documentation.

Impact on Take-Home Salary

The choice of tax regime directly affects an individual's take-home salary. Opting for the new regime with its higher standard deduction and rebates can increase net income, especially for those without significant deductions. Conversely, individuals who can claim substantial deductions under the old regime may find it more advantageous. Evaluating both options is essential to maximise take-home pay.

Declaration and Compliance

Taxpayers must declare their chosen tax regime to their employers at the beginning of the financial year. This declaration ensures accurate computation of Tax Deducted at Source (TDS) and compliance with income tax regulations. Failure to declare may result in default taxation under the new regime.

Deadline for Tax Regime Declaration

Salaried individuals are required to inform their employers of their chosen tax regime at the start of the financial year, typically in April. This timely declaration allows employers to compute TDS accurately and avoid discrepancies in tax deductions throughout the year.

Consequences of Not Declaring

If a taxpayer fails to declare their preferred tax regime, the employer will default to the new tax regime for TDS calculations. This automatic selection may not align with the individual's financial interests, potentially leading to higher tax liabilities or reduced take-home pay. Therefore, proactive declaration is crucial.

Conclusion

The introduction of the new tax regime in FY 2025-26 offers taxpayers a simplified and potentially more beneficial tax structure. By understanding the differences between the old and new regimes, including tax slabs, deductions, and rebates, individuals can make informed decisions that align with their financial goals. Careful evaluation and timely declaration of the chosen regime are essential steps in effective tax planning and compliance.