Budget 2025: Major Income Tax Changes for FY 2025-26

Major Income Tax Changes for FY 2025-26

Major Income Tax Changes for FY 2025-26 The Union Budget 2025 has introduced significant changes to the income tax structure, bringing relief to middle-income earners while making substantial revisions to the rebate system under Section 87A. This budget aims to simplify tax compliance and enhance revenue collection by moving towards a unified tax regime. Below, we explore the key changes in income tax for the financial year 2025-26 and their implications for taxpayers.

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Key Highlights of Income Tax Changes

1. No Tax on Income Up to Rs. 12 Lakh
   • Under the new tax regime, individuals earning up to Rs. 12 lakh per annum will not have to pay any income tax. Major Income Tax Changes for FY 2025-26
   • This is made possible by an increase in the rebate limit under Section 87A, which has been raised from Rs. 25,000 to Rs. 60,000.
   • The change is expected to provide significant relief to middle-class taxpayers, encouraging higher disposable income and savings.

1. Changes in Rebate Under Section 87A
   • The rebate under Section 87A has increased substantially, making income up to Rs. 12 lakh effectively tax-free.
   • However, this rebate does not apply to special income types such as capital gains from investments.
   • Individuals earning through salaries or business income can benefit from this rebate, while those earning from special categories must comply with existing tax structures.
2. Revised Income Tax Slabs Under the New Tax Regime
   • The new tax slab rates have been modified to accommodate different income brackets:
     • Income up to Rs. 12 lakh – No tax (due to the rebate under Section 87A)
     • Income from Rs. 12 lakh to Rs. 15 lakh – 15% tax
     • Income from Rs. 15 lakh to Rs. 20 lakh – 20% tax
     • Income above Rs. 20 lakh – 25% tax
   • These revised slabs make the tax structure more progressive, ensuring higher contributions from high-income earners.
3. Old Tax Regime Remains Unchanged, but Its Removal Is Expected
   • Despite the introduction of the new tax regime, the old tax regime remains unchanged for now.
   • The government has expressed its intent to eliminate the old tax regime in the near future due to widespread misuse of deductions and exemptions.
   • The removal aims to streamline tax compliance, reduce fraudulent deductions, and enhance tax transparency.

Impact on Taxpayers

Benefits for Middle-Income Earners

• Salaried individuals and small business owners earning up to Rs. 12 lakh will experience the most significant benefits, as they will not need to pay any tax.
• Higher disposable income can lead to increased savings and investments, boosting economic activity.

Implications for High-Income Groups

• Taxpayers earning above Rs. 12 lakh will see a new tax slab structure with progressive rates up to 25%.
• While the increased rebate reduces the burden on lower brackets, individuals with annual incomes above Rs. 15 lakh will experience a higher tax liability.

Impact on Investors and Special Income Earners

• The rebate does not apply to special income types such as capital gains from stock trading, property sales, or dividends.
• Investors in stocks, mutual funds, and real estate will still be taxed according to existing capital gains rules.
• This clarification resolves previous confusion regarding the applicability of Section 87A.

Future Taxation Trends: What to Expect?

Possible Removal of the Old Tax Regime

• With the government planning to phase out the old tax regime, all taxpayers may soon have to adopt the new tax regime.
• This shift will eliminate exemptions and deductions like HRA, LTA, and Section 80C benefits.

Changes in TDS and TCS Regulations

• The budget also hints at upcoming modifications in TDS (Tax Deducted at Source) and TCS (Tax Collected at Source) rules.
• Future discussions will clarify the impact of these changes on salary payments, business transactions, and international remittances.

Conclusion

Budget 2025 brings a significant shift towards a simplified and streamlined tax system, benefiting lower and middle-income earners while ensuring better compliance from high-income individuals. The substantial increase in the Section 87A rebate makes incomes up to Rs. 12 lakh tax-free, while new tax slabs ensure a progressive contribution from higher earners. However, the exclusion of capital gains and special income from this rebate means investors and high-income professionals must still adhere to separate taxation rules. With the government moving toward removing the old tax regime, taxpayers should start adapting to the new structure for a smoother transition in future financial years.

Stay updated for further announcements on TDS, TCS, and other tax regulation changes in upcoming discussions.

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