Income Tax - Meaning, How It Works, Who Pays, Deductions, and Exemptions FY 2024-25 (AY 2025-26)

Income tax is a direct tax charged on the annual income earned in a financial year. In India, the income tax system is governed by the Income Tax Act, 1961. It provides the rules and regulations for income tax calculation, assessment, and collection.

For the current FY 2025-26, the income of salaried taxpayers up to Rs. 12.75 lakh is tax-free (under the new regime). This number has been widely mentioned in government press releases, parliamentary discussions, and numerous newspaper reports.

Rs. 12.75 lakh was presented as the threshold below which a salaried taxpayer would not be required to pay any tax under the new tax regime. However, upon closer examination of the Finance Act, 2025, it has been observed that the actual tax-free limit under the new regime is Rs. 12,50,000.

This discrepancy has led to confusion among taxpayers. Therefore, you must thoroughly understand the Income Tax rules mentioned in the Finance Act rather than relying solely on secondary sources.

Want the right information? In this article, we will understand the definition of income tax, who is required to pay it, and the process of filing an Income Tax Return (ITR).

We will also cover the procedures for e-filing income tax and discuss how income tax is calculated. Additionally, we will examine the list of income tax deduction sections and provide an overview of the various income tax forms.

Definition of income tax

Income tax is a charge imposed by the government on the income earned by individuals or businesses during a financial year. In India, the system of income tax is governed by the Income Tax Act, 1961. This act provides the rules for:

• Calculating
• Assessing
• Collecting income tax

Be aware that every taxpayer must file an ITR each year within the specified deadline (usually 31st July). The ITR is a form where taxpayers:

• Declare their income
• Calculate taxes owed
• Request a refund (if applicable)

The ITR filing can be done through the official Income Tax Department website or via authorised third-party platforms.

Additionally, the Indian tax system also provides certain deductions and exemptions. These reduce the total taxable income and also the income tax payable.

Who is required to pay income tax?

As per the Income Tax Act, any individual who earns more than Rs. 4 lakh (under the new regime) and Rs. 2.5 lakh (under the old regime) in a financial year, must pay income tax to the government.

Known as taxpayers, they are categorised into different groups based on their identity and age. Let’s check out some types of taxpayers in India:

• Individuals
  • This group includes people earning income through salaries, business, or other sources.
  • Individuals are further divided based on age:
    • Those under 60 years.
    • Senior citizens aged 60 to 80 years.
    • Super senior citizens aged above 80 years.
• Hindu Undivided Family (HUF)
  • A family-based entity where members are descendants of a common ancestor (called “karta”).
  • Income earned collectively by the family is taxed under this category.
• Association of Persons (AOP)
  • A group of individuals who come together to earn an income.
  • The group is taxed as a single entity.
• Artificial Juridical Person
  • Entities that are not natural persons but are recognised by law, like trusts and deities.
• Firms
  • Partnerships and Limited Liability Partnerships (LLPs) that earn income are taxed as firms.
• Companies
  • Corporations registered under the Companies Act that generate income.

Additionally, the scope of taxation varies based on the residential status of an assessee. There are three residential statuses provided by the Income Tax Act:

• Resident and Ordinarily Resident (ROR)
  • These individuals live in India.
  • They are taxed on their global income, including earnings from both India and abroad.
• Resident but Not Ordinarily Resident (RNOR)
  • These individuals reside in India but do not fulfil the criteria to be considered ordinarily resident.
  • They are taxed only on income that:
    • Is earned or received in India.
    • Arises from a business controlled from India.
    • Comes from a profession set up in India.
• Non-Resident (NR)
  • These individuals do not live in India for most of the financial year.
  • They are taxed only on income that:
    • Is earned or received in India.
    • Arises or is deemed to arise in India.

Income tax law in India

Income tax in India is governed strictly according to the law. The Constitution of India states that the government can impose taxes only through laws. Any tax not covered under a legal provision is considered unconstitutional.

The primary law that governs income tax in India is the Income Tax Act, 1961. This Act contains all the rules for how income tax is calculated, collected, and assessed.

Since income tax is part of the Union List, only the Central Government has the authority to make laws related to it. This means that the Parliament is the only body that can create or amend laws concerning income tax.

Role of the Finance Bill and Finance Act

Every year, the government introduces a Finance Bill during the Budget session. This bill proposes changes to the Income Tax Act, such as:

• Introducing new rules
  or
• Removing old ones

Once the bill is passed by the Parliament, it becomes the Finance Act. The Finance Act officially brings the proposed changes into force.

For example,

• Say the Finance Bill suggests raising the income tax exemption limit.
• Now, it becomes a rule only after the bill is passed.

Other components of Income Tax law

Apart from the Income Tax Act, several other elements enforce income tax regulations:

• Income tax rules: These specify the procedures for implementing the Act’s provisions.

• Circulars: They are issued by the Central Board of Direct Taxes (CBDT) and provide clarifications on various aspects of tax law.

• Notifications: These are formal announcements by the government that bring certain provisions into action.
• Case laws: These are judgments passed by courts related to income tax disputes.

The importance of amendments

Income tax laws must be updated regularly to reflect changes in the:

• Economy
• Social structure
• Tax policies

Please note that amendments made through the Finance Act address these needs.

Budget 2026 income tax expectations: Will new income tax regime be made more lucrative?

The past year saw wide-ranging tax reforms, and now all eyes are on Budget 2026 to see what changes, if any, will be announced on the income tax front. In Budget 2025, Finance Minister Nirmala Sitharaman introduced significant revisions to the new income tax regime. These included revised tax slabs, a higher basic exemption limit, and improved rebate benefits. The government has also been steadily encouraging taxpayers to shift to the new regime by making it the default option. Unless a taxpayer specifically chooses the old regime while filing the return on time, the new regime automatically applies.

As with every Budget, salaried individuals and middle-class families are hoping for changes that leave more disposable income in their hands. Based on recent trends, any fresh measures—if announced—are more likely to focus on the new regime rather than the old one.

New Income Tax Regime: What tax relief was announced last time?

In the previous Budget, the government announced that individuals earning up to Rs. 12 lakh annually under the new regime would not have to pay any income tax (excluding special rate income such as capital gains). For salaried individuals, this effective tax-free income rose to Rs. 12.75 lakh due to a standard deduction of Rs. 75,000.

Earlier, the new income tax regime for FY25 followed the structure below:

Earlier tax slabs under New Income Tax Regime (FY25)

Total income (in Rs.)	Rate of tax u/s 115BAC(1A)
Upto 3,00,000	Nil
3,00,001 to 7,00,000	5%
7,00,001 to 10,00,000	10%
10,00,001 to 12,00,000	15%
12,00,001 to 15,00,000	20%
Above 15,00,000	30%

The exemption threshold was later increased from Rs. 3 lakh to Rs. 4 lakh, and slab ranges were widened to make taxation more gradual.

Latest income tax slabs FY 2025–26 (under New Income Tax Regime)

Income tax slab	Income tax rate
0 – 4 lakh	Nil
4 – 8 lakh	5%
8 – 12 lakh	10%
12 – 16 lakh	15%
16 – 20 lakh	20%
20 – 24 lakh	25%
Above 24 lakh	30%

These changes significantly reduced tax outgo across income groups. For example:

 

• A person earning Rs. 12 lakh could save up to Rs. 80,000 in tax.
• Someone earning Rs. 18 lakh could benefit by about Rs. 70,000.
• At Rs. 25 lakh income, the benefit could go up to Rs. 1,10,000.

 

The table below shows how tax savings worked across income levels:

Tax benefit across salary levels

Total income	Tax as per existing rates (as per Finance (No.2) Act, 2024)	Tax per proposed rates	Benefit of Rate/ Slab	Rebate Benefit [with reference to (3)]	Total Benefit [computed when compared to current slab rates]	Tax Payable under new regime
-1	-2	-3	(4) = (3)-(2)	-5	(6) = (4)+(5)	-7
8 lakh	30,000	20,000	10,000	20,000	30,000	0
9 lakh	40,000	30,000	10,000	30,000	40,000	0
10 lakh	50,000	40,000	10,000	40,000	50,000	0
11 lakh	65,000	50,000	15,000	50,000	65,000	0
12 lakh	80,000	60,000	20,000	60,000	80,000	0
13 lakh	1,00,000	75,000	25,000	0	25,000	75,000
14 lakh	1,20,000	90,000	30,000	0	30,000	90,000
15 lakh	1,40,000	1,05,000	35,000	0	35,000	1,05,000
16 lakh	1,70,000	1,20,000	50,000	0	50,000	1,20,000
17 lakh	2,00,000	1,40,000	60,000	0	60,000	1,40,000
18 lakh	2,30,000	1,60,000	70,000	0	70,000	1,60,000
19 lakh	2,60,000	1,80,000	80,000	0	80,000	1,80,000
20 lakh	2,90,000	2,00,000	90,000	0	90,000	2,00,000
21 lakh	3,20,000	2,25,000	95,000	0	95,000	2,25,000
22 lakh	3,50,000	2,50,000	1,00,000	0	1,00,000	2,50,000
23 lakh	3,80,000	2,75,000	1,05,000	0	1,05,000	2,75,000
24 lakh	4,10,000	3,00,000	1,10,000	0	1,10,000	3,00,000
25 lakh	4,40,000	3,30,000	1,10,000	0	1,10,000	3,30,000
50 lakh	11,90,000	10,80,000	1,10,000	0	1,10,000	10,80,000

These revisions made the new regime more competitive, especially for those who do not claim large deductions.

Will New Income Tax Regime be made more lucrative?

After the wide-ranging changes in Budget 2025, many experts believe that major additional revisions in Budget 2026 are unlikely. The new income tax regime already offers wider slabs, higher rebates, and a simplified structure without multiple deductions.

Recent filing data shows that a large majority of taxpayers have already shifted to the new regime, suggesting growing acceptance. Many professionals point out that for individuals who do not claim substantial deductions such as housing loan interest or large Section 80C investments, the new regime generally results in lower tax liability.

Given the fiscal pressures and the need for stable tax collections, the government may prefer continuity rather than another major restructuring. Instead of dramatic slab changes, the focus could remain on stability, ease of compliance, and smooth implementation of earlier reforms.

New Tax Regime: What more can be done?

Even though the new regime has become more attractive, some taxpayers—especially those with home loans, insurance premiums, and retirement investments—still find the old regime beneficial because of available deductions.

Below is a simplified comparison:

Category	Old Regime	New Regime
Tax slabs and rates	0% up to Rs. 2.5 lakh; 5% up to Rs. 5 lakh; 20% up to Rs. 10 lakh; 30% above	0% up to Rs. 4 lakh; gradual increase to 30% above Rs. 24 lakh
Basic exemption and rebate	Limited rebate (up to Rs. 12,500 for income ≤ Rs. 5 lakh)	Higher rebate makes income up to around Rs. 12 lakh tax-free
Deductions and exemptions	Multiple deductions allowed (80C, HRA, 80D, etc.)	Most deductions removed; only limited benefits allowed
Standard deduction and compliance	Standard deduction Rs. 50,000	Standard deduction Rs. 75,000; default regime
Who benefits more	Those with high deductions	Those preferring simplicity and moderate-income levels

 

Experts suggest a few possible measures that could make the new regime even more appealing:

Policy area	Suggested change	Purpose/ Impact area
Standard deduction	Increase from Rs. 75,000 to Rs. 90,000	Higher take-home pay for salaried taxpayers
Housing benefit	Allow limited home loan interest deduction	Relief for homeowners
Retirement savings	Extend NPS deduction under Section 80CCD(1B)	Encourage long-term savings
Health insurance	Permit deduction for medical insurance premiums	Support rising healthcare costs

If selective deductions, such as a capped home loan interest benefit of up to Rs. 2 lakh or limited health insurance relief, are introduced, the new regime could become more attractive to a wider range of taxpayers. However, since the government’s stated goal has been simplification, any additional benefits may be carefully targeted rather than broad-based.

As Budget 2026 approaches, the key question remains whether the government will prioritise further tax relief or focus on maintaining stability after last year’s sweeping changes.

What is the Income Tax Act?

The Income Tax Act, 1961, is the main law that governs how income tax is collected and managed in India. It provides the rules and regulations that taxpayers must follow. The Act also defines the role of the Income Tax Department in collecting taxes and managing tax returns.

Please note that the Act is divided into various sections and sub-sections. Each section deals with a specific aspect of income tax. For example:

• Section 80C allows deductions for certain investments, like life insurance premiums and contributions to provident funds.
• Section 80D provides deductions for health insurance premiums.
• Section 80G covers deductions for donations to approved charitable institutions.
• Section 10(10D) gives a list of exempted incomes

Using these sections, taxpayers can reduce their taxable income legally by claiming deductions and exemptions. Moreover, the act also guides taxpayers on how to calculate their tax liabilities and remain compliant.

What is Income Tax Return (ITR)?

An Income Tax Return (ITR) is a form that taxpayers in India must file with the Income Tax Department. It contains details of the:

• Income earned during a financial year
  and
• Amount of tax that needs to be paid

Please note that filing an ITR is mandatory under Section 139 of the Income Tax Act, 1961. If a taxpayer fails to file the ITR by the due date, they have to pay a:

• Late fee u/s 234F
  and
• Interest charges u/s 234A

Now, be aware that there are two ways to file an ITR in India:

Offline	Online (e-filing)
Submitting a physical paper form at the designated Income Tax office.	Filing through the official Income Tax e-filing portal or through authorised third-party websites.

What is e-filing income tax?

E-filing is the process of submitting your Income Tax Return (ITR) online. The government has made it possible for taxpayers to file their returns from their homes or offices through the Income Tax e-filing portal.

Taxpayers can enter their income details, and the system automatically calculates the tax amount. Also, since the online process is user-friendly, taxpayers do not necessarily need to hire a chartered accountant (CA) or tax professional.

Another benefit is that e-filing is available 24/7. Taxpayers can file returns at any time. Additionally, once the return is submitted, taxpayers can track the status of their refunds and claims online.

How to calculate income tax in India?

By calculating your income tax liability, you can learn how much tax you need to pay. Such a calculation is based on:

• Your annual income
  and
• The tax slab you fall under

As a taxpayer, you can calculate income tax manually or use an online income tax calculator.

If we talk about the calculation process, you first add up income from all your sources to determine “gross taxable income”. Next, you apply deductions and exemptions to calculate “net taxable income”. Some common deductions available (under the old regime) are:

• Life Insurance Premiums under Section 80C.
• Investments in Public Provident Fund (PPF).
• National Pension Scheme (NPS) contributions.
• Standard deduction of Rs. 50,000 for salaried individuals (this limit is Rs. 75,000 under the new regime).

Lastly, you calculate your tax liability using the applicable tax slabs for the financial year. Please note that these tax slabs vary depending on the:

• Income level
  and
• Age of the taxpayer (like senior citizens and super senior citizens)

If you have already paid some tax through Tax Deducted at Source (TDS) or advance tax, you can reduce this amount from your total tax liability. This lets you determine the final amount payable or refundable.

What are the different types of income tax forms?

In India, taxpayers must file their ITR using specific forms. The selection of the right type of form is based on their:

• Income type
• Source
• Employment status

The Income Tax Department has provided multiple forms so that taxpayers can file returns according to their financial situation. Let’s check out the different ITR forms forms and their uses:

1. ITR 1 (Sahaj)

Applicable for individual residents whose total income does not exceed Rs. 50 lakh. It is suitable for those earning from:

• Salary or pension
• One house property (excluding cases where there is a loss brought forward)
• Other sources (like interest income or dividends)
• Agricultural income up to Rs. 5,000

Not applicable for individuals having income from business or capital gains.

2. ITR 2

For individuals and Hindu Undivided Families (HUFs) whose total income exceeds Rs. 50 lakh. This form is used by those who do not have any income under the head “Profits and gains from business or profession (PGBP)”.

Also, it is suitable for Non-Resident Indians (NRIs) who do not earn income from business or professional activities.

Primarily, this form covers income from:

• Salary/ pension
• Multiple house properties
• Capital gains
• Other sources
• Foreign assets and income

3. ITR 3

Applicable for individuals and HUFs with income under the head PGBP. It can also be used by individuals with an income exceeding Rs. 50 lakh.

It covers these income sources:

• Income from business or profession
• Income from salary/ pension
• House property
• Capital gains
• Other sources

It is suitable for professionals like doctors, lawyers, and business owners.

4. ITR 4 (Sugam)

For individuals, HUFs, and firms (other than LLP), being residents with income up to Rs. 50 lakh. This form is used when income comes from business and professions under presumptive taxation schemes (Sections 44AD, 44ADA, or 44AE).

It is suitable for taxpayers earning from:

• Business or profession
• One house property
• Other sources
• Agricultural income up to Rs. 5,000.

Taxpayers who have income from capital gains cannot use this ITR form.

5. ITR 5

Applicable to entities other than individuals, HUFs, companies, or those filing ITR-7.
It is mainly used by:

• Partnership firms
• Limited Liability Partnerships (LLPs)
• Associations of Persons (AOPs)
• Bodies of Individuals (BOIs)
• Artificial Juridical Persons
• Estate of deceased persons or insolvents

6. ITR 6

Used by companies that are not claiming exemption under Section 11 (income from property held for charitable or religious purposes). This form must be mandatorily e-filed using a digital signature.

7. ITR 7

For assessees (including companies), who are required to file under the following sections:

• 139(4A): Income from charitable or religious trusts
• 139(4B): Political parties
• 139(4C): Institutions like research associations and news agencies
• 139(4D): Institutions covered under specific provisions
• 139(4E): Business trusts
• 139(4F): Investment funds

8. ITR V

It is an acknowledgement form used to verify the tax return. If e-verification is not possible, the signed copy of ITR-V must be sent to the Centralised Processing Centre (CPC) in Bangalore.

Types of Income – What are the 5 heads of income?

Under the Income Tax Act, 1961, income earned by a taxpayer is categorised into five distinct heads. This classification helps in:

• Determining the nature of income
  and
• Accurate calculation of tax liability

Please note that each head covers specific types of income. Let’s study them through the table below:

Head of income	Nature of income covered
Income from salary	Income earned from salary or pension. This includes: Basic salary Allowances Perquisites Retirement benefits like pensions and gratuity
Income from house property	Income earned from renting a house property. If a person owns more than one house property, only one can be treated as self-occupied, and the others are taxable.
Income from business/ profession	Profits earned by: Self-employed individuals Businesses Freelancers Contractors Also, covers income from professional services like CAs, doctors, lawyers.
Income from capital gains	Income generated from the sale of capital assets like: Mutual funds Shares Real estate Jewellery, etc. Gains can be short-term or long-term.
Income from other sources	Income not falling under the above categories. Generally, includes: Interest from savings accounts Fixed deposit interest Dividend income Winnings from lotteris, and more

 

The Income Tax Act, 1961, provides several tax deductions that reduce the taxable income of a taxpayer. These deductions are allowed under various sections of the Income Tax Act, 1961.

You can claim them based on:

• Investments
• Medical expenses
• Loan repayments
• Other specified criteria

Let’s understand certain key income tax deduction sections in detail:

Section 80C

• Deduction for investments and expenses like PPF, life insurance premiums, ELSS, tax-saving FDs, NPS, etc.
• Deduction limit: Up to Rs. 1.5 lakh per annum

Section 80CCC

• Deduction for contributions to pension funds provided by life insurance companies.
• Covers purchase, renewal, and continuation of pension plans.
• Deduction limit: Up to Rs. 1.5 lakh per annum

Section 80CCD

• Deduction for contributions to National Pension Scheme (NPS) and Atal Pension Yojana (APY).
• Additional benefit for contributions to the NPS Tier I account.
• Deduction limit: Up to Rs. 1.5 lakh under 80CCD(1) + Rs. 50,000 under 80CCD(1B)

Section 80D

• Deduction for medical insurance premiums for self, spouse, dependent children, and parents.
• Higher limit if the insured is a senior citizen.
• Deduction limit: Up to Rs. 25,000 (regular) + Rs. 50,000 (senior citizens); maximum Rs. 1 lakh

Section 80DDB

• Deduction for medical expenses for specified diseases and ailments like cancer, chronic renal failure, and severe illnesses.
• Deduction limit: Up to Rs. 40,000 (regular) + Rs. 1 lakh (senior citizens)

Section 80E

• Deduction for interest paid on education loans for higher studies.
• Applies to loans taken for self, spouse, or children.
• Deduction limit: No upper limit; valid for 8 years or till interest payment
• Deduction for interest paid on a home loan for first-time homebuyers.
• Deduction limit: Up to Rs. 50,000 per annum

Section 80EE

• Section 80EE of the ITA permits first-time home owners to claim deductions on the interest component of the home loan.
• Deduction limit: Up to Rs. 50,000 per financial year.

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• Deduction for income from royalties on patents registered after April 1, 2003.
• Applies to Indian residents only.
• Deduction limit: Up to Rs. 3 lakh or actual royalty income, whichever is less

Section 80TTA

• Deduction for interest earned from savings accounts in a bank, post office, or co-operative society.
• Deduction limit: Up to Rs. 10,000 per annum

Section 80U

• Deduction for disabled individuals with at least 40% disability as certified by a medical authority.
• Deduction limit: Up to Rs. 75,000 (regular) + Rs. 1.25 lakh (severe disability)

Section 24

• Deduction on interest paid on a home loan.
• Applicable if the house is self-occupied or rented out.
• Deduction limit: Up to Rs. 2 lakh per annum

From April 1, 2025, a new financial year has begun. It has brought several changes to income tax rules in India. These changes were announced by Finance Minister Nirmala Sitharaman in the Union Budget 2025-26.

Let’s understand them:

A) New income tax slabs for FY 2025-26 (New tax regime)

The basic exemption limit under the new tax regime has increased from Rs. 3 lakh to Rs. 4 lakh. This means that individuals earning up to Rs. 4 lakh between April 1, 2025, and March 31, 2026, are not required to file income tax returns.

For more clarity, study the latest tax slabs from the table below:

Income	Tax rate
0 - Rs. 4,00,000	NIL
Rs. 4,00,001 - Rs. 8,00,000	5%
Rs. 8,00,001 - Rs. 12,00,000	10%
Rs. 12,00,001 - Rs. 16,00,000	15%
Rs. 16,00,001 - Rs. 20,00,000	20%
Rs. 20,00,001 - Rs. 24,00,000	25%
Rs. 24,00,001 and above	30%

B) Changes in tax rebate (Section 87A)

The government has also increased tax rebate under Section 87A. Till March 31, 2025, individuals could claim a tax rebate of Rs. 25,000 if their net taxable income was up to Rs. 7 lakh. This made the tax payable zero on incomes up to Rs. 7 lakh.

From April 1, 2025, this rebate increases to Rs. 60,000. Now, individuals whose net taxable income does not exceed Rs. 12 lakh will pay no tax.

This change provides a tax saving of Rs. 83,200 (including cess) for individuals with a net taxable income of Rs. 12 lakh from the new financial year onwards.

C) Deductions and standard benefits

The government has not changed the deductions available under the new tax regime. Salaried taxpayers will still receive:

• A standard deduction of Rs. 75,000
  and
• Employer's contribution to NPS at 14% of the basic salary.

Income tax slabs under the old tax regime

The old income tax regime continues to be an option for taxpayers, even after the introduction of the new tax regime. Many individuals still prefer the old regime because it offers a wide range of deductions and exemptions.

These benefits can significantly reduce taxable income and make it more favourable for those who claim multiple deductions.

Let’s check out the old tax regime tax slabs for FY 2025-26:

Income	Tax rate
0 - Rs. 2.5 lakh	NIL
Rs. 2.5 lakh - Rs. 5 lakh	5%
Rs. 5 lakh - Rs. 10 lakh	20%
Above Rs. 10 lakh	30%

Please note that the tax slabs under the old regime have remained unchanged for several years, including FY 2025-26. Unlike the new tax regime, which has seen updates, the old regime maintains its traditional structure.

Furthermore, the old tax regime remains attractive for some taxpayers as it still offers several deductions, such as:

• House Rent Allowance (HRA): Allows employees to claim a tax exemption on rent paid
• Leave Travel Allowance (LTA): Exempts travel expenses during leaves (subject to conditions)
• Section 80C: Offers a deduction of up to Rs. 1.5 lakh for investments and expenses like PPF, ELSS, and life insurance premiums
• Additional NPS Deduction (Section 80CCD(1B)): Allows an extra deduction of Rs. 50,000 for contributions to the National Pension Scheme (NPS)

To choose between the old and new tax regimes, you must calculate your tax liability under both options. You can even use an income tax calculator to avoid manual calculations.

New Tax Regime: These are key 7 points to know

The new tax regime is now the default regime for taxpayers. It offers lower tax rates with fewer exemptions and deductions. To remain compliant in the financial year 2025-26, you must understand the key features and implications of this regime:

1. Default regime

The new tax regime has become the default option for all taxpayers. This means that unless a taxpayer explicitly opts for the old regime while filing their income tax returns, the new regime will automatically apply.

To continue with the old tax regime, taxpayers must:

• Inform their employer
  or
• Indicate their preference while filing the ITR

If not communicated, it will be assumed that the taxpayer is following the new regime.

2. Concessional rates

The new tax regime offers lower tax rates compared to the old regime. The basic exemption limit under the new regime starts from Rs. 4 lakhs as compared to Rs. 3 lakhs under the old regime (for FY 25-26). This reduces the burden on lower-income groups.

3. Applicable tax rates

The tax rates under the new regime differ from those under the old regime. From April 1, 2025, the new tax regime rates are as follows:

Income	Tax rate
0 - Rs. 4,00,000	NIL
Rs. 4,00,001 - Rs. 8,00,000	5%
Rs. 8,00,001 - Rs. 12,00,000	10%
Rs. 12,00,001 - Rs. 16,00,000	15%
Rs. 16,00,001 - Rs. 20,00,000	20%
Rs. 20,00,001 - Rs. 24,00,000	25%
Rs. 24,00,001 and above	30%

 

In comparison, the old tax regime rates are:

Income	Tax rate
0 - Rs. 2.5 lakh	NIL
Rs. 2.5 lakh - Rs. 5 lakh	5%
Rs. 5 lakh - Rs. 10 lakh	20%
Above Rs. 10 lakh	30%

Please note that the new tax regime offers more tax slabs with lower rates, while the old regime has higher rates with fewer slabs.

4. Informing the employer

If you are a salaried individual, you must inform your employer about your choice of tax regime at the beginning of the financial year. Failing to do so will result in your employer:

• Assuming you are opting for the new tax regime
  and
• Deducting tax accordingly as per Section 115BAC

You must make this communication to avoid unnecessary tax deductions from your salary.

5. House Rent Allowance (HRA)

One significant change in the new tax regime is the non-availability of HRA exemption. In the old regime, salaried individuals could claim a tax deduction on house rent paid. However, under the new regime, this deduction is not allowed.

6. Permitted deductions

Most common deductions and exemptions provided under Chapter VI-A are not available in the new tax regime. This means you cannot claim deductions under sections like:

• 80C (investments)
• 80D (medical insurance)
• 80DD (medical treatment)
• 80G (donations) cannot be claimed.

However, a few deductions are still permitted:

• Section 80CCD(2): Employer’s contribution to the National Pension System (NPS)
• Section 80CCH: Contribution to Agni Vayu Defence Funds
• Section 80JJAA: Deduction for employment generation expenses by businesses.

7. Flexibility to switch regimes

One of the advantages of the new tax regime is the flexibility it offers. Individual taxpayers can switch between the new and old tax regimes every year. This means if you opted for the old regime last year, you can choose the new regime this year, and vice versa.

The tax-free income structure under the new tax regime

The new tax regime introduced in the Budget 2025-26 seems to offer a tax-free income of Rs. 12.75 lakh. However, this benefit is not as straightforward as it appears. You must understand that this relief is not available to all taxpayers. It applies specifically to small taxpayers who meet certain conditions.

Let's see where the confusion arises:

How the tax-free income structure was understood initially

1. Income and deduction 
   • Say the taxpayer earns a total taxable income of Rs. 12.75 lakh (including salary)
   • They chose the new tax regime under Section 115BAC.
   • The taxpayer claims a standard deduction of Rs. 75,000.
   • After this deduction, the taxable income becomes Rs. 12 lakh.
2. Tax calculation
   • Based on the new tax regime slab rates, the tax payable on Rs. 12 lakh is Rs. 60,000.
   • The taxpayer then claims the tax rebate of Rs. 60,000 under Section 87A.
   • This reduces the net tax liability to zero.
3. Assumption of tax-free income
   1. The calculation makes it seem that earning Rs. 12.75 lakh under the new regime results in zero tax liability after deductions and rebate. 

Where the problem lies

The confusion comes from the interaction between three key provisions:

1. Section 16: Deductions from salary income (including the standard deduction of Rs. 75,000).
2. Section 87A: Tax rebate applicable for net taxable income up to Rs. 12 lakh.
3. Section 115BAC: The new tax regime itself, which determines how tax slabs are structured.

The primary issue is that these three provisions do not align. It appears that after applying the standard deduction, the taxable income falls to Rs. 12 lakh, and this makes the taxpayer eligible for the Section 87A rebate. However, the interpretation of provisions in the Finance Act does not support this calculation..

What actually happens

The Finance Act, 2025, does not clearly explain how the standard deduction (Rs. 75,000) and tax rebate (Rs. 60,000) interact with each other.

The new tax regime does allow a standard deduction of Rs. 75,000, but it does not clearly state that this deduction should be subtracted first before applying the tax rebate. Due to this lack of clarity, the tax authorities might calculate the taxable income before the deduction.

As a result, if your total income is Rs. 12.75 lakh, the tax authorities may consider it as Rs. 12.75 lakh (without deduction). This means your net taxable income exceeds Rs. 12 lakh, so you do not qualify for the Rs. 60,000 rebate under Section 87A.

Income tax calendar 2025 – Important dates

Understanding these basics helps taxpayers navigate their obligations and rights under the income tax regime.

Staying informed about key income tax deadlines is essential for effective tax planning and compliance. Below is a comprehensive calendar outlining important dates for the Financial Year (FY) 2024-25 (Assessment Year 2025-26):

1. Income Tax Return (ITR) Filing Deadlines for FY 2024-25:

Category	Due Date
Individuals, Hindu Undivided Families (HUFs), Association of Persons (AOPs), and Body of Individuals (BOIs) (not requiring audit)	July 31, 2025
Businesses requiring audit	October 31, 2025
Businesses requiring transfer pricing reports	November 30, 2025
Belated/Revised Returns	December 31, 2025
Updated Returns	March 31, 2029 (within two years from the end of the relevant Assessment Year)

2. Advance tax payment schedule for FY 2025-26:

Due Date	Instalment	Tax Liability
June 15, 2025	First installment	15% of total tax liability
September 15, 2025	Second installment	45% of total tax liability
December 15, 2025	Third installment	75% of total tax liability
March 15, 2026	Fourth installment	100% of total tax liability
March 15, 2026	For taxpayers under the presumptive taxation scheme	100% of total tax liability

3. Tax Deducted at Source (TDS) payment and return filing deadlines:

Quarter ending	Month of deduction	TDS payment due date	TDS Return Filing Due Date
June 30, 2025	April 2025	May 7, 2025	July 31, 2025
	May 2025	June 7, 2025
	June 2025	July 7, 2025
September 30, 2024	July 2025	August 7, 2025	October 31, 2025
	August 2025	September 7, 2025
	September 2025	October 7, 2025
December 31, 2025	October 2025	November 7, 2025	January 31, 2026
	November 2025	December 7, 2025
	December 2025	January 7, 2026
March 31, 2026	January 2026	February 7, 2026	May 31, 2026
	February 2026	March 7, 2026
	March 2026	April 7, 2026 (for government deductors) / April 30, 2026 (for other deductors)

4. Financial Year (FY) and Assessment Year (AY) clarification:

• Financial Year (FY): The period during which income is earned, spanning from April 1 to March 31 of the following year. For example, FY 2023-24 covers income earned between April 1, 2023, and March 31, 2024.
• Assessment Year (AY): The period following the Financial Year, from April 1 to March 31, during which the income earned in the preceding FY is assessed and taxed. For instance, AY 2024-25 pertains to income earned in FY 2023-24.

5. Consequences of missing deadlines:

Filing or paying taxes after the stipulated deadlines can lead to penalties and interest charges. For example, a delay in filing ITR may attract a penalty under Section 234F of the Income Tax Act, and interest may be charged under Section 234A for late payment of taxes. Additionally, late filing may result in the loss of certain benefits, such as the ability to carry forward specific losses for future set-off.

For the most accurate and up-to-date information, always refer to official communications from the Income Tax Department or consult with a tax professional.

 

Other topics you might find interesting
Income Tax Slab	How Much ITR Required for Home Loan	How to Claim HRA While Filing ITR
How to File ITR for Non Salaried Person	How to File ITR for Home Loan	How to File Income Tax Return for Pensioners
How to File ITR for Previous Years	How to File ITR Using Form 16	ITR for Business Income

Types of taxes in India

India's tax system comprises various types of taxes, broadly categorized into direct and indirect taxes.

Direct taxes:

1. Income tax: Levied on individual and corporate earnings, based on tax slabs determined by the government.
2. Corporate tax: Imposed on the profits of companies.
3. Capital gains tax: Charged on the profit from the sale of assets or investments.
4. Property tax: Assessed on real estate owned by individuals or entities.

Indirect taxes:

1. Goods and Services Tax (GST): A comprehensive tax on the manufacture, sale, and consumption of goods and services. GST is divided into CGST (Central GST), SGST (State GST), and IGST (Integrated GST).
2. Customs duty: Levied on goods imported into India.
3. Excise duty: Charged on the manufacture of goods within India.
4. Service tax: Previously applicable to services but now subsumed under GST.

Understanding these taxes is crucial for compliance and effective financial planning.t

List of different types of taxes

Indirect Taxes	Direct Taxes	Other Taxes
Sales Tax	Corporate Tax	Professional Tax
Goods & Services Tax (GST)	Securities Transaction Tax	Entertainment Tax
Value Added Tax (VAT)	Capital Gains Tax	Education Cess
Custom Duty	Gift Tax	Toll Tax
Octroi Duty	Wealth Tax	Registration Fees
Service Tax	Income Tax	Property Tax

Income Tax Return (ITR) filing deadline for Assessment Year (AY) 2025-26

Why the deadline was extended

In May 2025, the Central Board of Direct Taxes (CBDT) announced an extension to the ITR filing deadline for the Assessment Year (AY) 2025-26. The original deadline of 31 July 2025 was moved to 15 September 2025. This change was made due to substantial updates in the structure and content of the new ITR forms. These changes are designed to simplify tax compliance and improve transparency for taxpayers.

According to the CBDT, more time was needed to make the e-filing system ready for use, particularly due to major updates across multiple ITR forms.

Forms still awaited for AY 2025-26

At present, many taxpayers and professionals are still waiting for essential ITR utilities to be released. Important forms like ITR-2, ITR-3, ITR-5, ITR-6, and ITR-7 are not yet available for AY 2025-26. Without these utilities, taxpayers cannot submit returns accurately and on time. This delay is especially concerning for those with more complex incomes like business owners, professionals, and organisations.

Audit forms not yet released

Apart from the regular forms, audit-related forms like Form 3CA/3CB-3CD are also pending. These forms are critical for taxpayers who are required to go through tax audits. Without these, professionals are unable to complete the audit process, which may lead to delayed or incorrect filings.

Older year utilities still missing

Another issue raised is that revised utility tools for previous assessment years—AY 2021-22 and AY 2022-23—are also missing. These need to be updated as per the latest amendments from the Finance Act 2025, but no timeline has been given for their release.

Will there be another extension?

Tax professionals are calling for a further extension, especially if the delay in releasing the necessary forms continues. Some experts have suggested that non-audit cases should get time until 30 September 2025, and audit-related cases until 30 November 2025. They argue that system delays shouldn't penalise compliant taxpayers.

For instance, Abhishek Kumar, a SEBI-registered investment adviser and founder of SahajMoney, said that taxpayers are ready to file, but lack of system readiness is holding them back.

Still waiting for official confirmation

So far, the Income Tax Department has not issued any additional updates or notices about another extension. Until then, taxpayers are in a state of uncertainty. The process of filing ITRs for AY 2025-26 remains complicated due to pending tools and incomplete access to important forms.

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ITR Filing FY 2024-25: 7 income tax mistakes can get you a tax notice

Filing your Income Tax Return (ITR) properly is very important to avoid penalties, unnecessary scrutiny, and long delays. The tax department is using technology and data to identify errors quickly. Here are seven common mistakes you should avoid when filing your return for the financial year 2024-25.

1. Choosing the wrong ITR form

Each taxpayer has to file their return using a form suited to their income type. Using ITR-1 when you have capital gains, or choosing ITR-4 with foreign income, can lead to defective return notices under Section 139(9). Always double-check your income types before selecting the form.

2. Not reporting all sources of income

You must declare all income, not just your salary. This includes interest from savings or fixed deposits, rental earnings, cryptocurrency gains, or income from foreign assets. Leaving out any of these can result in mismatches with your Form 26AS or AIS and may trigger scrutiny.

3. Mismatches in TDS details

Errors between the TDS you claim in your ITR and the TDS listed in your Form 26AS can lead to tax notices under Section 143(1). Check all TDS entries carefully before submitting your return.

4. Claiming deductions without proof

Claiming deductions under sections like 80C, 80D, or for house rent without supporting documents can result in notices and penalties. Only claim what you can prove with receipts, statements, or bills.

5. Sudden drops in income or large transactions

If there is a sharp drop in your declared income or you make large transactions (like high-value investments or property deals), it may raise red flags. Submit relevant explanations and documents where needed to avoid misunderstandings.

6. Missing documents or skipping e-verification

If you do not e-verify your return or forget to attach important documents such as interest certificates, capital gains reports, or rent receipts, your return could be invalid. This can lead to delays or rejections.

7. Ignoring notices and deadlines

If you receive any notice on the Income Tax portal, respond within the given time. Not replying to notices issued under Sections like 142(1), 143(2), or 148 can turn small issues into serious reassessment cases.

Claiming income tax refund

In case you have paid the government excess tax, you can claim an income tax refund online. To do so, file your ITR and verify it. A refund is issued after the Central Processing Team scrutinises your case. You may check your income tax refund status online, at the e-filing website or the TIN NSDL portal.

Now that you know what income tax is and how how to determine your liability, file ITR and claim refunds, submit your ITR well before 31 August and undertake tax planning for the next financial year to be able to hold on to a greater portion of your income.

Income tax refund delay explained: Why are FY 2024-25 refunds taking longer?

Many taxpayers have recently reported that their income tax refunds are taking longer than expected to arrive. Complaints about refund status remaining stuck at “processing” have become common across social media and grievance forums, creating concern among people who filed and e-verified their returns on time. Compared with earlier years, when refunds were often credited within a few weeks, the current assessment cycle appears slower, leading to growing frustration among salaried individuals and retirees who depend on these funds for planned expenses. Media reports have also highlighted that a large number of filed returns are still awaiting processing, adding to public anxiety about timelines.

One of the main reasons behind the delay is the introduction of stricter verification checks by the tax department. Returns are being matched more carefully against data available in Form 26AS, the Annual Information Statement (AIS), TDS records, and other financial disclosures. Even small mismatches between declared income and reported data can trigger additional scrutiny. Experts suggest that this enhanced review process is intended to prevent incorrect refunds and improve compliance, but it also means that refunds are moving more slowly through the system than in previous years. High-value refund claims and cases involving multiple income sources may undergo even closer review, which can further extend processing time.

Another factor contributing to the slowdown is the heavier processing workload at the Centralised Processing Centre (CPC). Reports indicate that while millions of returns have already been processed, a notable backlog remains, and many taxpayers continue to wait beyond the timelines they were accustomed to in earlier cycles. In addition, the department has reportedly increased the use of automated compliance messages, sometimes called “nudges”, encouraging taxpayers to recheck returns where possible discrepancies are found. Although this approach aims to reduce future disputes, it can result in longer review periods before refunds are released.

It is important to note that the law allows the tax department a longer statutory period to process returns, which means delays do not always indicate a problem with a specific filing. However, the lack of clear communication around expected timelines has led to uncertainty among taxpayers. In some situations, interest may be payable on delayed refunds under the Income-tax Act, depending on the reason for the delay and whether it is caused by the taxpayer or the department. Overall, the current situation has reopened discussions around efficiency and transparency in tax administration, while authorities continue to emphasise that stricter checks are necessary to safeguard revenue and ensure accurate refund issuance.

Conclusion

Income tax is a direct tax that individuals and businesses pay on their income to the government. It is regulated by the Income Tax Act, 1961. This law provides rules, tax slabs, deductions, and filing requirements.

As a taxpayer, you must file your ITR annually and accurately report your income earned from all sources. ITR filing can even be done online (e-filing) using the official Income Tax portal.

Be aware that to file taxes, you have two options: the old and new regime (default option). The new regime offers lower tax rates but fewer deductions, while the old regime provides various exemptions like HRA, Section 80C, and medical insurance premiums.

You should carefully choose your tax regime and stay updated on changes to maximise tax benefits.

Effective tax planning goes beyond choosing the right regime—it includes smart investment decisions like homeownership. A home loan not only helps you achieve your property dreams but also provides valuable tax benefits through interest deductions. Bajaj Finserv offers competitive rates starting from 7.15%* p.a., making homeownership more affordable while optimising your tax planning strategy.

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