Significant changes to India’s income tax structure have been laid out by the Central Board of Direct Taxes (CBDT) through the introduction of Circular No. 3/2025, which outlines amendments and clarifications for the financial year 2024-25. These updates relate to tax deductions from salaries under Section 192 of the Income Tax Act, 1961, and they are expected to impact compliance processes for both salaried employees and employers.
The recent circular clarifies several key aspects of income taxation. The income tax deductions from salaries have been adjusted according to the modifications brought about by the Finance (No. 2) Act, 2024, the Finance (No. 1) Act, 2024, and the Finance Act, 2023. One prominent change includes amendments to Form 16 and Form 24Q, which now feature updates aimed at improving the reporting of tax deductions.
The updated Form 24Q will now include a new column (388A), allowing employers to report additional TDS/TCS deductions effectively. Similarly, Form 16 has been revised to accommodate changes impacting the reporting of various tax deductions and perquisites offered to employees. Such modifications are expected to facilitate clearer compliance for both individuals and organizations.
Perquisites associated with employee compensation have also seen significant attention. Amendments to Section 17(2) show how employer-provided benefits—such as rent-free or concessional accommodation—are to be valued and taxed. These changes aim to standardize how non-cash benefits are accounted for, ensuring fairness and transparency.
The salary provisions have been redefined. According to Section 17(1), the definition of salary now includes contributions made by the Central Government to the Agniveer Corpus Fund under the Agnipath Scheme. Such inclusion marks the government's commitment to adapting the tax regime to contemporary contexts, acknowledging new employment pathways.
For taxpayers opting for the New Tax Regime under Section 115BAC, the applicable tax slabs for the Assessment Year 2025-26 remain largely unchanged. Currently, individuals earning up to Rs 3,00,000 will not pay any tax, whereas those with incomes from Rs 3,00,001 to Rs 7,00,000 will incur taxes of 5%. The rates progress incrementally up to 30% for those earning above Rs 15,00,000. Importantly, individuals whose earnings fall under Rs 7 lakh can benefit from the full tax rebate under Section 87A.
Employing stricter measures, the CBDT has introduced various surcharge rates for high-income earners under the Old Tax Regime. Notably, these rates include 10% for income between Rs 50 lakh and Rs 1 crore, and up to 37% for income exceeding Rs 5 crore. High-income taxpayers will need to familiarize themselves with these revised rates to navigate their tax obligations effectively.
Another pivotal change is the potential exemption for non-government employees on leave encashment at retirement, which can now reach up to Rs 25 lakh. This exemption is part of CBDT Notification No. 31/2023 and provides retirees with improved financial security during their transition from employment to retirement.
The circular also implements stringent rules concerning non-compliance with TDS regulations. Under Section 271C, failing to deduct TDS can result in penalties, and under Section 276B, not paying deducted taxes may result in imprisonment ranging from three months to seven years. These measures highlight the CBDT's commitment to ensuring adherence to tax regulations and protecting government revenue.
Employers are urged to pay close attention to the changes outlined, as they will be responsible for executing accurate tax deductions aligned with the revised surcharge rates and tax slab structures. Employees, on their part, must assess their eligibility to choose between the old and new tax regimes appropriately. Given the consequences of non-compliance, businesses must implement timely deductions and payments to avoid potential penalties or legal repercussions.
To aid taxpayers and employers during this transition, full details of the Circular No. 3/2025, including all amendments and clarifications, can be found on the Income Tax Department's official website. By simplifying tax rules and making compliance more straightforward, the CBDT aims to ease the taxpayer’s burdens and promote transparency across the tax administration process for the financial year 2024-25.