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Introduction to Income Tax Slabs and Rates for FY 2025-26
The Union Budget 2025 introduced important refinements to India’s income tax framework, further strengthening the new tax regime while keeping the old tax regime optional for taxpayers who rely heavily on deductions and exemptions.
Whether you are a salaried employee, self-employed professional, business owner, or retiree, choosing the correct tax regime can make a significant difference to your take-home income. The revised slabs, higher rebate under Section 87A, and simplified structure aim to reduce tax burden for middle-income earners while encouraging compliance.
This guide explains the new income tax slabs for FY 2025-26 (AY 2026-27), compares them with the old regime, and helps you decide which option is best for your financial situation.
New Tax Regime for FY 2025-26 (AY 2026-27)
The new tax regime applies to income earned between 1 April 2025 and 31 March 2026, corresponding to Assessment Year 2026-27. It offers lower tax rates across more slabs, but most exemptions and deductions are not allowed.
The biggest change in Budget 2025 is:
- A higher basic exemption limit
- A significantly increased rebate under Section 87A, making income up to ₹12 lakh effectively tax-free for many individuals
Income Tax Slabs Under the New Regime (FY 2025-26)
| Annual Taxable Income | Tax Rate |
|---|---|
| Up to ₹4,00,000 | Nil |
| ₹4,00,001 – ₹8,00,000 | 5% |
| ₹8,00,001 – ₹12,00,000 | 10% |
| ₹12,00,001 – ₹16,00,000 | 15% |
| ₹16,00,001 – ₹20,00,000 | 20% |
| ₹20,00,001 – ₹24,00,000 | 25% |
| Above ₹24,00,000 | 30% |
✔ These rates apply before surcharge and cess
✔ Health and Education Cess of 4% continues to apply
Section 87A Rebate Explained (Biggest Benefit)
Under Budget 2025, the Section 87A rebate has been increased to ₹60,000 under the new tax regime.
What this means in practice:
- If your taxable income is up to ₹12 lakh, your entire tax liability becomes zero
- This effectively makes the new regime extremely attractive for middle-income earners
Example:
- Taxable income: ₹12,00,000
- Calculated tax: ₹60,000
- Section 87A rebate: ₹60,000
👉 Final tax payable: ₹0
This change benefits millions of salaried taxpayers and professionals who do not claim large deductions.
Old Tax Regime: Should You Switch?
The old tax regime remains available and continues to offer popular deductions and exemptions, including:
- Section 80C (up to ₹1.5 lakh): PPF, ELSS, EPF, LIC
- Section 80D: Health insurance premiums
- House Rent Allowance (HRA)
- Home loan interest (Section 24)
- Standard deduction (as applicable)
- Other allowances and exemptions
Who benefits more from the old regime?
- Taxpayers with high deductions
- Individuals paying home loan EMIs
- Families with large insurance premiums
- Investors maximising 80C + 80D + HRA
If your total deductions exceed ₹3–4 lakh, the old regime may still result in lower tax outgo.
Old vs New Tax Regime: Key Differences
| Feature | Old Tax Regime | New Tax Regime |
|---|---|---|
| Tax rates | Higher | Lower |
| Deductions allowed | Yes | Mostly No |
| Section 80C / 80D | Allowed | Not allowed |
| HRA & LTA | Allowed | Not allowed |
| Complexity | Higher | Simpler |
| Best for | High deductions | Low or no deductions |
How to Choose the Right Tax Regime
1. Calculate Tax Under Both Regimes
Include income from:
- Salary
- Business or profession
- Interest and other sources
2. List All Deductions & Exemptions
Only applicable under the old regime:
- Investments
- Insurance premiums
- Home loan interest
- Rent paid
3. Compare Net Tax Payable
Use trusted online income tax calculators to compare:
- Old regime tax
- New regime tax (after Section 87A rebate)
4. Consider Future Financial Plans
- Planning to buy a house? Old regime may help
- Prefer simplicity and higher take-home pay? New regime suits better
💡 You can switch regimes every year if you are salaried. Business taxpayers have limited switching flexibility.
FAQs on Income Tax Slabs 2025
When do the new tax slabs apply?
The revised slabs apply from 1 April 2025 for FY 2025-26 (AY 2026-27).
Is the new tax regime compulsory?
No. Taxpayers can choose between the old and new tax regimes. The new regime is the default, but you can opt out.
Is income up to ₹4 lakh completely tax-free?
Yes. Under the new regime, income up to ₹4 lakh is exempt. Additionally, with the Section 87A rebate, income up to ₹12 lakh effectively attracts zero tax.
Can salaried employees change regimes every year?
Yes. Salaried individuals can choose their preferred regime each financial year when filing their income tax return.
Does the 4% cess still apply?
Yes. Health and Education Cess of 4% continues to apply on calculated tax.
Final Takeaway
The new tax regime for FY 2025-26 strongly favours taxpayers seeking simplicity, lower rates, and higher rebates, especially those earning up to ₹12 lakh with minimal deductions. However, the old regime still makes sense for individuals who actively invest in tax-saving instruments or have housing loans.
The smartest approach is to calculate both options every year and choose the one that legally minimises your tax.
