As the new financial year begins on April 1, 2025, significant changes in income tax regulations are now in effect, following the enactment of the Finance Act 2025. These updates, which were announced by Finance Minister Nirmala Sitharaman during the Union Budget presentation, aim to simplify tax calculations, provide relief to taxpayers, and enhance compliance.
One of the most notable alterations is the introduction of new income tax slabs under the new tax regime. The highest tax rate of 30% applies to individuals earning above Rs 24 lakh. The revised tax slabs for the financial year 2025-26 are as follows:
- Income from Rs 0 to Rs 4,00,000: 0%
- Income from Rs 4,00,001 to Rs 8,00,000: 5%
- Income from Rs 8,00,001 to Rs 12,00,000: 10%
- Income from Rs 12,00,001 to Rs 16,00,000: 15%
- Income from Rs 16,00,001 to Rs 20,00,000: 20%
- Income from Rs 20,00,001 to Rs 24,00,000: 25%
- Income above Rs 24,00,000: 30%
In a move to ease the tax burden, the government has also raised the income threshold for tax exemption from Rs 7 lakh to Rs 12 lakh. This means individuals earning up to Rs 12 lakh annually will not need to pay any income tax, though they must still file their Income Tax Returns (ITRs) to claim the rebate under Section 87A of the Income Tax Act, 1961. Previously, a taxable income of Rs 12 lakh would have incurred a tax liability of Rs 80,000.
Additionally, the standard deduction for salaried individuals has been enhanced to Rs 75,000, effectively increasing the non-taxable income limit to Rs 12.75 lakh annually under the new regime. This adjustment provides a significant advantage for middle-income earners and aims to prevent abrupt tax burdens for those earning just above the Rs 12 lakh threshold.
The Finance Act 2025 also introduces changes to the taxation of unit-linked insurance plans (ULIPs). Proceeds from ULIPs not exempt under Section 10 (10D) will now be classified as capital assets and taxed accordingly. Short-term gains will be taxed at 20%, while long-term gains will be taxed at 12.5% without indexation benefits. This change addresses previous ambiguities regarding the taxation of ULIPs, which invest a significant portion of premiums in the stock market.
Moreover, the government has rationalized Tax Deducted at Source (TDS) provisions, increasing thresholds for various sections. For instance, the TDS threshold for bank interest for senior citizens has been raised from Rs 50,000 to Rs 1 lakh, while for others, it has increased to Rs 50,000. The TDS threshold for dividend income has also doubled to Rs 10,000. These changes are designed to help taxpayers retain more of their income and reduce the compliance burden.
Significantly, the provisions for higher TDS and Tax Collected at Source (TCS) on non-filers of ITRs have been removed. This means that individuals who have not filed their ITR in specified years will no longer face higher tax deductions or collections from April 1, 2025. This decision aims to alleviate the compliance burden and streamline the verification process for taxpayers.
In addition, the government has introduced a new deduction for contributions made to the NPS Vatsalya under Section 80CCD, but this is only available to individuals opting for the old tax regime. This change reflects the government's commitment to promoting retirement savings among citizens.
The calculation of the annual value of self-occupied property has also been simplified. Taxpayers can now claim the annual value of any two self-occupied houses as zero, making it easier to file income tax returns without complex calculations.
From April 1, 2025, the government has exempted the prosecution of delayed payments of TCS in certain cases, provided the payment has been made to the credit of the Central Government before the prescribed deadline for filing quarterly statements.
Furthermore, the deadline for filing updated returns has been extended, allowing taxpayers up to 48 months from the end of the assessment year to file their updated returns. Previously, the deadline was set at 24 months.
In a significant shift for digital transactions, the Finance Act 2025 abolishes the equalisation levy imposed on e-commerce operators and online advertisements. This levy, introduced in 2020, charged a 2% fee on e-commerce transactions and 6% on online ads. The removal of this levy is expected to simplify digital transactions and encourage foreign investment in India's digital economy.
As part of ongoing efforts to enhance compliance and security, the National Payments Corporation of India (NPCI) will begin unlinking UPI IDs associated with inactive mobile numbers. This measure aims to prevent unauthorized access to UPI-linked accounts and enhance overall security for digital transactions.
With these comprehensive changes, the government aims to create a more streamlined, equitable, and taxpayer-friendly tax system. As the new financial year unfolds, individuals and businesses alike will need to navigate these updates to optimize their tax liabilities and ensure compliance.
