Comprehensive Guide to Income Tax Calculation in India (FY 2025-26 & FY 2026-27)
The Indian Income Tax framework operates on a progressive slab-based structure governed by the Income Tax Act, 1961 and updated annually through the Union Budget. For Financial Year 2025-26 (Assessment Year 2026-27), the Ministry of Finance announced monumental changes to the New Tax Regime, making it the most attractive tax structure for the vast majority of salaried and non-salaried individuals across India.
1. Major Budget 2025-26 Amendments to the New Tax Regime
Under the Finance Act 2025, several critical enhancements were introduced to simplify compliance and significantly reduce individual tax burdens:
- Zero Tax Liability Up to ₹12 Lakh: Through an enhanced Section 87A tax rebate, individuals with taxable income up to ₹12,00,000 pay zero income tax under the New Tax Regime.
- Standard Deduction Raised to ₹75,000: Salaried taxpayers and pensioners receive a flat ₹75,000 standard deduction under the New Regime (up from ₹50,000). This means salaried income up to ₹12.75 Lakh is effectively 100% tax-free!
- Revised Slab Structure: The tax slabs under the New Regime were broadened, reducing effective tax rates across the ₹7L to ₹15L brackets.
- Marginal Relief on ₹12L Threshold: To prevent steep tax spikes for incomes marginally above ₹12 Lakh, marginal relief ensures that the tax payable does not exceed the income earned above ₹12 Lakh.
2. Detailed Comparison: New Tax Regime vs Old Tax Regime
The fundamental difference between the two systems lies in deductions and tax rates. The New Tax Regime offers substantially lower slab rates and a high rebate limit, but disallows most exemptions. The Old Tax Regime features higher slab rates (20% above ₹5L, 30% above ₹10L) but allows extensive deductions under Chapter VI-A.
3. Key Deductions Under the Old Tax Regime
- Section 80C (Limit ₹1,50,000): Employee Provident Fund (EPF), Public Provident Fund (PPF), Equity Linked Savings Schemes (ELSS), Life Insurance premiums, National Savings Certificate (NSC), and home loan principal repayment.
- Section 80D (Health Insurance): Up to ₹25,000 for self/family, plus an additional ₹25,000 to ₹50,000 for senior citizen parents.
- Section 24(b) (Home Loan Interest): Up to ₹2,00,000 deduction on interest paid for a self-occupied residential property.
- House Rent Allowance (HRA - Sec 10(13A)): Least of actual HRA received, 50% of basic salary (metro) / 40% (non-metro), or rent paid minus 10% of basic salary.
Frequently Asked Questions on Income Tax
Yes. Under the New Tax Regime for FY 2025-26, the enhanced Section 87A rebate provides a full 100% tax rebate for resident individuals whose total taxable income does not exceed ₹12,00,000. Additionally, salaried employees get the ₹75,000 standard deduction, making gross salary up to ₹12.75 Lakh completely tax-free.
Salaried individuals (taxpayers with no business or professional income) have the flexibility to switch between the New and Old Tax Regimes every financial year while filing their ITR on or before the due date (usually July 31st). Taxpayers with business or professional income (ITR-3 / ITR-4) can only switch back once in a lifetime.
Under Section 234F, a late filing fee of ₹5,000 applies if the return is filed after July 31 but on or before December 31. For taxpayers with total income up to ₹5,00,000, the late fee is capped at ₹1,000. In addition, penal interest under Section 234A at 1% per month is charged on any unpaid tax liability.