Income Tax Rules for Taxpayers: Overview
Individual taxpayers need to file annual income tax returns and pay the applicable taxes if their net earnings exceed the minimum threshold, known as the basic exemption limit. Income tax applies to the earnings of individuals, Hindu Undivided Families (HUF), partnership firms, corporates, Association of Persons (AOP), and Trusts as per the Income Tax Act, 1961. Taxpayers are not levied a flat rate. They are required to pay according to their income tax slab.
The new income tax slabs for individuals are categorised under three groups – persons below the age of 60 years, taxpayers between the age range of 60 and 80 years, and individuals above the age of 80 years.
Importance of Knowing the New Income Tax Rules
Income tax is payable based on one’s salary bracket. The tax slabs were implemented to simplify and streamline the country's tax system. Since the income tax slabs can change with each budget announcement, it is important to be aware of the current income tax rules and how they may impact your tax returns.
Key Distinction between the Old and New Tax Regimes
A new tax structure was introduced in FY 2020-21 in addition to the existing tax regime. Taxpayers can choose to pay their taxes under any one of the two regimes.
Some of the major differences between the old and new tax regimes include:
- First of all, the new tax structure contains more slabs with lower tax rates than the old tax plan. As a result, your slab will vary based on whether you choose the new tax regime or the old tax regime.
- Secondly, under the new tax regime, you cannot avail numerous tax-saving deductions and exemptions applicable under the previous regime such as Section 80C, Section 80D, and so on.
The old tax structure allows you to claim 70 different deductions and exemptions. It enables you to decrease tax liability through savings and investments in specific financial instruments. The new tax regime has lower rates but provides few exemptions and rebates.
New Income Tax Rates for FY 2025-26 (AY 2026-27)
The tables below show the revised income tax slabs announced in the latest budget session of FY 2025-26:
New Income Tax Slabs under the New Tax Regime for Taxpayers under 60 Years of Age
| Income Tax Slabs | Income Tax Rates |
|---|---|
| Up to 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% |
| Above Rs.24,00,000 | 30% |
Income Tax Slabs under the Old Tax Regime for Individuals under 60 Years of Age and NRIs
| Tax Slabs | Tax Rates |
|---|---|
| Up to Rs.2,50,000 | NIL |
| Rs.2,50,001 - Rs.3,00,000 | 5% |
| Rs.3,00,001 - Rs.5,00,000 | 5% |
| Rs.5,00,001 - Rs.10,00,000 | 20% |
| Rs.10,00,001 and above | 30% |
Income Tax Slab under the Old Tax Regime for Senior Citizens between 60 and 80 Years of Age
| Income Tax Slabs | Income Tax Rates |
|---|---|
| Up to Rs.2,50,000 | NIL |
| Rs.2,50,001 - Rs.3,00,000 | NIL |
| Rs.3,00,001 - Rs.5,00,000 | 5% |
| Rs.5,00,001 - Rs.10,00,000 | 20% |
| Rs.10,00,001 and above | 30% |
Income Tax Slab under the Old Tax Regime for Senior Citizens above 80 Years of Age
| Income Tax Slabs | Income Tax Rates |
|---|---|
| Up to Rs.2,50,000 | NIL |
| Rs.2,50,001 - Rs.3,00,000 | NIL |
| Rs.3,00,001 - Rs.5,00,000 | NIL |
| Rs.5,00,001 - Rs.10,00,000 | 20% |
| Rs.10,00,001 and above | 30% |
Changes in Income Tax Slab Rate for New Tax Regime
The table here depicts the HUF and individual tax slab under the new tax regime:
| Income Slab | New Tax Regime (Before Budget 2025 – until 31 March 2025) | New Tax Regime (After Budget 2025 – 1 April 2025 onwards) |
|---|---|---|
| Up to Rs.3,00,000 | NIL | NIL |
| Rs.3,00,001 - Rs.4,00,000 | 5% | NIL |
| Rs.4,00,001 - Rs.7,00,000 | 5% | 5% |
| Rs.7,00,001 - Rs.8,00,000 | 10% | 5% |
| Rs.8,00,001 - Rs.10,00,000 | 10% | 10% |
| Rs.10,00,001 - Rs.12,00,000 | 15% | 10% |
| Rs.12,00,001 - Rs.15,00,000 | 20% | 15% |
| Rs.15,00,000 - Rs.16,00,000 | 30% | 15% |
| Rs.16,00,001 - Rs.20,00,000 | 30% | 20% |
| Rs.20,00,001 - Rs.24,00,000 | 30% | 25% |
| Rs.24,00,001 and above | 30% | 30% |
Income Tax Slab Under the Old Regime
As opposed to the new tax rules, the tax rates for individuals below 60 years, HUF and NRIs in the old tax regime are:
| Tax Slab | Tax Rates |
|---|---|
| Up to Rs.2.5 Lakh | Nil |
| Rs.2.5 Lakh to Rs.5 Lakh | 5% |
| Rs.5 Lakh to Rs.10 Lakh | 20% |
| Above Rs.10 Lakh | 30% |
Claiming Deductions Under the Old Tax Regime
Individuals who are entitled to considerable rebates under the old tax regime may file for deductions under the previous tax rules. For instance, if you are servicing a Home Loan, you may avail substantial tax relief on the Home Loan EMI payments every financial year. Thus, if you have carefully chosen the Home Loan interest rate and tenure, you can maximise your credit viability even further by securing the applicable Home Loan tax benefits thereby reducing your debt obligation.
The new tax regime aims to simplify the tax filing process. If you have availed of a Home Loan, you can use our Income Tax Calculator to calculate tax benefits on your Home Loan. You may also use online income tax calculators to compare the tax-saving potential under both regimes. Furthermore, salaried employees can alternate between both tax plans as per convenience. Therefore, if you pick the old regime for the current financial year, you may then switch to the new tax plan the following year, and so on.
Different Types of Taxable Income in India
In India, income is taxed under five distinct heads as per the Income Tax Act, 1961. Understanding these categories is essential for accurate tax computation. The following are the major types of taxable income:
Income from Salary
This category includes the monthly income you receive from your employer. If you are a salaried individual, your earnings are taxed under the ‘Income from Salary’ head. Your salary package typically comprises several components such as Basic Salary, House Rent Allowance (HRA), Dearness Allowance, Gratuity, Provident Fund contributions, Travel Allowance, and other allowances. All these details are generally available in your monthly salary slip provided by your employer.
Income from Business or Profession
This head covers earnings generated from running a business or practising a profession. Whether you are self-employed, running a sole proprietorship, or providing professional services (such as consulting or freelancing), any income earned through such activities is considered taxable under this category.
Income from House Property
If you earn rental income from letting out a residential or commercial property, it falls under ‘Income from House Property.’ Regardless of whether the property is residential or commercial, any rental income generated is subject to tax under this head.
Income from Capital Gains
Capital gains refer to the profits made from selling or transferring capital assets such as real estate, stocks, or mutual funds. These gains are classified into Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG) depending on how long the asset was held. This classification is important, as the applicable tax rates differ for STCG and LTCG.
Income from Other Sources
Any income that doesn’t fit into the categories above is reported under ‘Income from Other Sources.’ This includes earnings from lotteries, interest on savings or fixed deposits, gifts exceeding Rs.50,000 per annum, and similar miscellaneous income.
How to Calculate Income Tax with Tax Slabs?
Calculating your income tax using the slab system involves several key steps as given below:
1. Determine Your Gross Total Income:
- Income from Salary: Include your basic salary, allowances (such as HRA, Dearness Allowance), bonuses, and other employment benefits.
- Income from Other Sources: This encompasses earnings such as rental income, interest from savings accounts, fixed deposits, or any other taxable income.
2. Choose Between the Old and New Tax Regimes:
- Old Tax Regime: Offers various exemptions and deductions (e.g., HRA, LTA, and deductions under sections 80C, and 80D).
- New Tax Regime: Provides concessional tax rates but with limited exemptions and deductions.
3. Compute Taxable Income:
- Under the Old Regime: Subtract eligible exemptions and deductions from your gross total income to arrive at the taxable income.
- Under the New Regime: Few deductions are allowed, so the taxable income is generally closer to the gross total income.
4. Apply the Relevant Tax Slabs:
- For FY 2025-26 (AY 2026-27), under the New Tax Regime:
| Income Range (Rs.) | Tax Rate |
|---|---|
| Up to 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% |
| Above Rs.24,00,000 | 30% |
- For the Old Regime: The tax slabs remain unchanged from previous years.
5. Calculate Tax Liability:
- Under the New Regime: Apply the above slab rates directly to your taxable income.
- Under the Old Regime: Apply the existing slab rates after accounting for deductions and exemptions.
6. Consider Rebates and Cess:
- Rebate under Section 87A: For FY 2025-26, individuals with taxable income up to Rs.12,00,000 are eligible for a rebate, making their tax liability zero.
- Health and Education Cess: A 4% cess is added to the income tax payable.
Example Calculation:
Suppose your gross total income is Rs.15,00,000, and you are a salaried individual opting for the New Tax Regime:
- Standard Deduction: Rs.75,000
- Taxable Income: Rs.15,00,000 - Rs.75,000 = Rs.14,25,000
- Tax Calculation:
- First Rs.4,00,000: NIL
- Next Rs.4,00,000 (Rs.4,00,001 to Rs.8,00,000) at 5%, that is, Rs.20,000
- Next Rs.4,00,000 (Rs.8,00,001 to Rs.12,00,000) at 10%, that is, Rs.40,000
- Remaining Rs.2,25,000 (Rs.12,00,001 to Rs.14,25,000) at 15%, that is, Rs.33,750
- Total Tax Before Cess: Rs.20,000 + Rs.40,000 + Rs.33,750 = Rs.93,750
- Health and Education Cess (4%): Rs.3,750
- Total Tax Payable: Rs.93,750 + Rs.3,750 = Rs.97,500
New Income Tax Rules: FAQs
The new income tax regime comprises a higher number of income slabs and lower tax rates aimed at easing tax calculations. Taxpayers can compute the taxes payable according to their slab without claiming any deductions and/or exemptions. Meanwhile, individuals also have the option to continue with the old tax structure.
For FY 2025-26, if you calculate your taxes under the previous tax rules, you may claim the deductions and exemptions as applicable, and then compute the net taxable income. Under the new tax regime, you will need to forego these concessions and instead, file your returns based on your income slab and the incremental tax rates.
For example, if you have a taxable income of Rs.9 Lakh, the calculation will be:
| Income Slab | Applicable Tax Rate | Taxable Income | Payable Tax |
|---|---|---|---|
| Up to Rs.3 Lakh | No tax | NIL | NIL |
| From Rs.3 Lakh to Rs.7 Lakh | 5% | Rs.4 Lakh | Rs.20,000 |
| Rs.7 Lakh to Rs.9 Lakh | 10% | Rs.2 Lakh | Rs.20,000 |
| Total income tax payable | - | - | Rs.40,000 |
Therefore, you need to pay a tax of Rs.40,000 (excluding cess) on your taxable income of Rs.9 Lakh.
Taxes calculated under the old tax structure will vary as compared to tax computation done on the basis of the new tax rules. Hence, it is essential to understand the current tax scheme so that one may determine which tax regime offers better savings and suits them best.
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