Income Tax Slabs for FY 2025-26 (New vs Old Regime)

1. Associations of Persons, excluding co-operative societies

1. Bodies of Individuals Artificial Juridical Persons

Note: This means, the new tax regime will automatically apply unless a taxpayer makes a choice out of the system.

The new regime is significant for the following reasons:

1. It simplifies compliance through fewer records to maintain for deductions and exemptions.

1. It decreases tax rates, meaning it is potentially cheaper for taxpayers without many deductions.

1. It fosters transparency because it prescribes a standard method to calculate taxable income.

Features and Benefits of New Tax Regime

1. Lower tax rates compared to old regime

1. Limited deductions and exemptions (taxable income is closer to gross income)

1. Simpler return

1. Applies by default, but elected taxpayers may opt-out

1. Saves time with simpler filing and calculations

1. Lower tax liability for taxpayers without significant deductions

1. More predictable taxation due to easier computing of taxable income

1. Although non-business income is flexible by allowing taxpayers to switch each year by ITR, the switching for business/professional income is regulated by Form 10-IEA.

Old Tax Regime (Optional)

The old tax regime is simply the tax system before the new regime. It enables taxpayers to calculate their taxable income after deductions and exemptions.

 The old tax regime is important because it:

1. Enables opportunities for taxpayers to reduce tax liability through deductions

1. Assists taxpayers with large expenses, loans or investments, all of which declare reduced taxable income

1. Uses a slab-based taxation classification that taxpayers are already familiar with

Features and Benefits of Old Tax Regime

1. Eligible deductions (HRA, salary deduction, tuition fees, interest on loans)

1. Exemptions for certain incomes

1. Slab-based tax system where the tax rate is progressive

1. The ability to opt-out or revert from the new regime - subject to certain conditions

1. Lower effective tax liability, if the taxpayer has available deductions.

1. Encouragement to save/invest (tax savings instruments are deductible)

1. Allows taxpayers to manage the tax in accordance with their financial plans

1. Allows for an annual choice for non-business income taxpayers via ITR 

1. Allows taxpayers with business/professional income to opt-out of the new regime via Form 10-IEA.

Change of Regime for different types of income

With the Finance Act 2024, taxpayers have the option to choose between new and old tax regimes, however the processes involved depend on the type of income earned.

Non-Business Income

If taxpayers earn income from non-business activities (salary, pension, rent, interest, or other passive income), taxpayers are allowed to switch tax regimes every financial year because individuals and HUFs can optimise tax liability every year based on the deductions or exemptions claimed.

 How to switch:

1. Choose your desired regime in income tax return (ITR): The current ITR forms allow taxpayers to declare whether they want to be assessed under the new or old regime for that assessment year.

2. File the ITR before the due date under Section 139(1): You must file your return by the due date, to ensure the regime you choose is effective for that year.

 Legal significance and benefits:

1. Provides year-to-year flexibility for salaried employees and pensioners

2. Allows taxpayers to optimise tax liability depending on their deductions or exemptions

3. Provides compliance simplicity since direct compliance is with the ITR (no additional forms are required)

Business or Professional Income

Taxpayers that earn business or profession income have greater certainty as occasional regime switches are regulated to ensure intentional decisions and minimize switching simply for tax planning reasons.

Opting out of the new regime:

Taxpayers need to file Form 10-IEA on or before the ITR due date under Section 139(1). This will formally notify the tax department that the taxpayer is opting out of the new regime and is following the old regime instead of the new default regime.

Re-entering back into the new regime:

Taxpayers can re-enter the new regime by filing Form 10-IEA prior to the due date under Section 139(4). The option to switch this way is permitted once for a taxpayer with business/professional income. This option can be exercised in a subsequent assessment year only and not in the same year as the election to opt out.

Reasons why this is important:

1. It provides assurance that taxpayers are taking well-considered decisions instead of switching on a whim for a minor tax benefit

1. It allows taxpayers to have a clear legislation for switching regimes which makes compliance easier

1. It protects the taxpayer from making mistakes or even disputes over getting into the wrong regime

Income Tax Slabs under Old Regime for FY 2025–26

Income Tax Slabs FY 2024-25 – Individual (Resident or Non-Resident) less than 60 years

Old Tax Regime

New Tax Regime

Individual aged 60 years or more but less than 80 years

Old Tax Regime

New Tax Regime 

Individual aged 80 years or more

Old Tax Regime

New Tax Regime

Tax Slabs for Domestic Companies

Note: Companies under section 115BA face a 7% surcharge for income over Rs.1 crore and 12% above Rs.10 crore. Under sections 115BAA and 115BAB, the surcharge is fixed at 10% regardless of income.

Income Tax Rates for LLPs and Partnership Firms under Both Regimes

A partnership firm or an LLP is taxable at 30%

Note -

1. A Surcharge of 12% is levied on incomes above Rs.1 crore.
2. Health and Education Cess Rate - 4 %

Deductions and Exemptions under New Tax Regime

The new tax regime comes with changes that impact the deductions and exemptions available to taxpayers. While some deductions are still allowed, many from the old tax regime are no longer applicable. Below is a detailed comparison of the deductions allowed and deductions not allowed under the new tax system.

Deductions Allowed Under the New Tax Regime

Deductions Not Allowed Under the New Tax Regime

Surcharge

What is a Surcharge?

A surcharge is an additional levy imposed on the base income tax of individuals whose income exceeds certain thresholds. It is essentially ‘tax on tax,’ meaning it is calculated as a percentage of the tax payable rather than the total income. 

The purpose of a surcharge is twofold: 

1. It ensures that individuals with higher incomes contribute proportionally more to the government’s revenue.

1. It allows the government to generate additional funds from higher-income groups without altering the basic tax slabs applicable to all taxpayers.

The surcharge rate varies depending on the total taxable income and the chosen tax regime (Old or New). Certain types of income are exempt from the higher surcharge rates to maintain fairness. Specifically, capital gains under sections 111A, 112, 112A and dividend income have a maximum surcharge cap of 15%, except for special cases under sections 115A, 115AB, 115AC, 115ACA, and 115E.

Surcharge Rates for FY 2024-25

Key points: 

1. The surcharge is applied only on the income tax amount, not on the total income.

1. Higher-income earners are subject to higher surcharge rates, reflecting the progressive nature of taxation.

Rebate

What is a Rebate?

A rebate is a reduction in the income tax liability of resident individuals whose taxable income falls below a specified threshold. Unlike deductions, which reduce taxable income, a rebate directly reduces the tax payable. The main purpose of a rebate is to reduce the tax burden on lower-income earners, making the tax system more equitable.

The rebate limit and eligibility differ depending on the tax regime:

Rebate Details for FY 2024-25

Key points: 

1. In the old tax regime, if taxable income is at or below the threshold, the full rebate is available. There is no marginal relief, meaning if the income slightly exceeds the limit, the rebate is entirely lost.

1. In the new tax regime, marginal relief ensures that taxpayers whose income slightly exceeds the threshold can still claim a partial rebate. This prevents a sudden increase in effective tax liability.