What government’s push to the New Income Tax regime in Union Budget 2025-26 means for taxpayers

Sitharaman’s Budget was at least partly designed to address perceived middle-class resentment at a time of slowing economic growth that the vital demographic had not received its due from her previous fiscal packages, which had focused on boosting investment in infrastructure, stoking manufacturing and stirring corporate activity and rural spending. Lack of sufficient job creation has been another grouse.

“By increasing income tax exemptions and putting nearly Rs 1 lakh crore back into the hands of consumers, disposable income will rise significantly. This move will stimulate growth in key sectors like FMCG (Fast Moving Consumer Goods), real estate, and textiles,” says Naveen Malpani, Partner and Consumer Industry Leader at Grant Thornton Bharat.

Indeed, Prime Minister Narendra Modi described the Budget as the most pro-middle class in Indian history, comparing the exemption limit and tax payable with what prevailed during the terms of his Congress predecessors.

True, the Budget had no shortage of critics. Congress leader Rahul Gandhi likened the Budget to a "band aid" to dress "bullet wounds."

“The masses deserved money in their hands. That means GST (Goods and Services Tax) should have been cut or taxes on petrol and diesel should have been reduced," former Finance Minister P. Chidambaram said at the India Today-Business Today Budget Round Table 2025 on February 5.

Chidambaram cautioned: “The Finance Minister has put Rs 1 lakh crore in the hands of taxpayers, but not all of it will go into consumption. Some will go into bank deposits, some to repay loans, and some on foreign travel. The question is how much of it will be actually spent to drive domestic consumption."

Even so, by the time Sitharaman had completed her 74-minute Budget speech in Parliament, 10 million additional taxpayers had reason to celebrate. The finance minister had freed them of direct taxation.  

In the 2023 Budget, the surcharge on individuals earning over Rs 5 crore under the NTR had already been reduced from 37% to 25%. Now, with the latest increase in the maximum rebate under Section 87A of the Income-Tax Act, 1961, to Rs 60,000, the new regime has become attractive both for middle-income earners and high-net-worth individuals (HNIs).

Beyond raising the exemption limit, the finance minister also revised tax slabs, leaving more money in taxpayers’ hands.

According to the revised rates, individuals earning between Rs 24 lakh and Rs 50 lakh can save up to Rs 1.10 lakh (excluding cess). Those with an income of Rs 20 lakh will save Rs 90,000, and those earning Rs 16 lakh can save Rs 50,000.

"For higher earners, the tax relief translates into an additional Rs 10,400 per month in disposable income. The updated tax structure also accounts for inflation, pushing the 30% tax rate threshold from Rs 15 lakh to Rs 24 lakh-a 60% adjustment," says Adhil Shetty, CEO of BankBazaar, an online marketplace for financial services.

"Under the new regime, someone earning Rs 25 lakh annually will pay Rs 3.43 lakh in total tax, compared to Rs 4.57 lakh under the 2024 regime,” adds Shetty.

FINE PRINT

If you’re a resident individual, you woudn’t have to pay tax on your regular income as long as it doesn’t exceed Rs 12 lakh. For salaried individuals, the threshold increases to Rs 12.75 lakh due to the standard deduction benefit.  

But does income up to Rs 12 lakh become tax-free for everyone? Not quite. “Non-resident individuals, as well as resident HUFs, AOPs, or BOIs, are not eligible for the Section 87A rebate and will be taxed according to the slab rates on income exceeding Rs 4 lakh,” said Balwant Jain, a Mumbai-based tax and investment expert.

HUFs is short for Hindu Undivided Families, AOPs for Association of Persons, such as a limited liability partnership, and BOIs for Body of Individuals, who band together for earning income.

And income subjected to special tax rates, such as long-term capital gains, short-term capital gain and cryptocurrencies, will still be taxable. For example, if your entire income consists of Rs 5 lakh in long-term capital gains, you’ll still need to pay tax on Rs 1 lakh at a 12.5% rate, despite your income being below Rs 12 lakh under the NTR, explained Jain.

TDS, TCS thresholds

Along with changes to tax slabs, the Budget also increased thresholds for Tax Deducted at Source (TDS) and Tax Collected at Source (TCS). The exemption limit for TDS on interest income for senior citizens has doubled from Rs 50,000 to Rs 1 lakh, offering more liquidity to the elderly whose primary income is from bank interest.

Additionally, the TCS threshold for remittances under the Reserve Bank of India’s Liberalized Remittance Scheme (LRS ) has been raised from Rs 7 lakh to Rs 10 lakh. The removal of TCS on education-related remittances, when funded by a loan from a recognised financial institution, reduces the compliance burden.

"These changes aim to increase discretionary income for taxpayers, while the compliance framework has been strengthened to ensure fiscal discipline. The (Finance) Ministry has also implemented measures for monitoring crypto transactions and extended the limit for filing updated tax returns for up to four assessment years,” says Neeraj Agarwala, Partner at Nangia Andersen India.

The Budget increased the annual TDS threshold on rent from Rs 2.4 lakh to Rs 6 lakh for properties let out for commercial purposes. “This will reduce the tax burden on smaller landlords and increase their disposable income. Additionally, the reduction in TDS transactions will enhance operational efficiency," says Vimal Nadar, Senior Director and Head of Research at Colliers India.

NEW V/S OLD TAX REGIME

A key takeaway from the finance minister’s speech was an announcement that a new Income Tax Bill was on its way, to be presented in Parliament in this Budget session and which, when it becomes law, would replace the I-T Act of 1961. It is designed to simplify and clarify tax laws and reduce litigation.

Now the question that arises is this: What will happen to the old tax regime? Following reductions in tax rates in the last Budget, nearly three-fourths of taxpayers have already switched to the new tax regime. With more rationalization expected, it’s anticipated that nearly all taxpayers will eventually migrate to the new regime.

Central Board of Direct Taxes (CBDT) Chairman Ravi Agarwal told Business Today that around 95-97% of the taxpayers would join the new tax regime from the current 74-75%. He estimated the number of taxpayers at present at 80-85 million.

"A straight computation of income tax is available in the new tax regime with reduced rates. About 74% of the people have already adopted the new tax regime. I am sure that with this change that has been brought out in this amendment in the Finance Bill, more people would be prompted to join the NTR," Agarwal said.

The Old Tax Regime allows for deductions like Housing Rent Allowance (HRA), Leave Travel Allowance (LTA), housing loan interest, and Section 80C deductions. These deductions are not available under the new regime, but the lower tax rates in the new regime are seen to make it more advantageous.

“Given the favourable bias towards the New Tax Regime, I had expected the Finance Minister to scrap the Old Tax Regime altogether. Instead, she has placed it on life support,” says Jain, the tax expert.

To avail of deductions under the old tax regime, taxpayers must maintain documentation and submit it to their employers. Some deductions, like LTA, are limited to domestic travel expenses within India.

Under Section 80C, many investments are locked in for long periods. "The New Tax Regime requires no such long-term commitments. It is a simpler, less burdensome regime," explains Amit Singhania, Partner at Areete Law Offices. To be sure, the old tax regime remains relevant for certain taxpayers, especially those who maximise deductions and exemptions, especially "high earners who claim significant HRA deductions, particularly those paying high rent in metro cities,” says Jain.

Taxpayers with ongoing financial commitments-such as large investments in tax-saving instruments, significant house rent payments, home loan interest, and Mediclaim premiums-should carefully evaluate their tax liabilities under both regimes before making a decision.

A thorough comparison can help determine which regime offers the most benefits based on individual circumstances. “The new proposals under the New Tax Regime are essentially the final nail in the coffin for the Old Tax Regime. It might be time to bid farewell to it, as it has served its purpose,” Singhania says.

@teena_kaushal