New Income Tax Rules & Changes in Budget 2025

The Union Budget for the financial year 2025-26 (AY 2026-27), proposed some new changes in the income tax rules, effective from April 1, 2025, to the already prevailing income tax rules after Budget 2024.

It revised the income tax slab rates and introduced some new updates in income tax rules for FY 2025-26.

Let’s see how these recent income tax updates for FY 2025-26 will affect the taxpayers’ money!

Read the given below important new tax rules 2025 that will impact all types of taxpayers from FY 2025-26:

1. Revised Income Tax Slabs Under New Tax Regime

One of the most significant Budget 2025 income tax changes is the revision of tax slabs under the new tax regime for FY 2025-26. The revised income tax slab rates are:

2. Basic Exemption Limit Under New Tax Regime

The Budget 2025 hiked the basic exemption limit by ₹1 lakh. From April 1, 2025, the basic exemption under the new tax regime is ₹4 lakhs, which was ₹3 lakhs for all individual taxpayers, irrespective of age.

It implies that from FY 2025-26, individuals opting for the new tax regime will not have to pay any tax if their income from all sources is up to ₹4 lakhs in a financial year.

3. Higher Tax Rebate Under Section 87A

Under Budget 2025, individuals do not have to pay any tax if they have an annual income of up to ₹12 lakhs (after claiming all the eligible deductions) under the new tax regime, in a given financial year. Earlier this rebate was up to ₹7 lakhs.

Thus, as per the latest changes in income tax, taxpayers can enjoy a tax rebate under Section 87A where they can claim a tax rebate of up to ₹60,000. So, they need not invest in tax-saving instruments as their entire income up to ₹12 lakhs would be tax-free.

4. Tax Relief on Second Self-occupied House

From April 1, 2025, both self-occupied properties will be tax-free. This means there will be no tax on notional rental income.

Previously, only one self-occupied house was treated as tax-free, while the second house was taxed based on its notional rental value.

5. Changes in TDS and TCS

The recent tax updates have further simplified the application of TDS and TCS as follows:

• The TDS threshold on rental income has been increased from ₹2.4 lakh to ₹6 lakh per year to provide relief to small landlords. However, this is applicable only when rental payments exceed ₹50,000 per month.
• The TDS limit (for taxpayers up to 60 years of age) for interest income from bank FD has been hiked to ₹50,000, which earlier was capped at ₹40,000.
• The TCS exemption limit on Liberalized Remittance Scheme (LRS) transactions has also been raised from ₹7 lakh to ₹10 lakh. It aims to boost outbound tourism, education, and the airline sectors.

6. For Senior Citizens

Budget 2025 also proposed changes to provide relief to senior citizen taxpayers; here’s how:

• For senior citizens, the TDS limit for interest income from bank FD, RD, etc., is doubled. From April 1, 2025, the interest income will only be taxed if the total amount in their bank is more than ₹1 lakh in a financial year. This means if a senior citizen's interest income is below ₹1 lakh, then no TDS will be applied.
• From August 29, 2024, withdrawals from old National Savings Scheme (NSS) accounts will not be taxed.

7. Tax Deduction in NPS Vatsalya Accounts

Budget 2025 increased the tax deduction amount up to ₹50,000 under Section 80CCD (1B) for contributions to NPS Vatsalya accounts over and above the benefit of the existing ₹1.5 lakh tax benefits available to regular NPS accounts.

Thus, the maximum deduction limit is ₹2 lakhs under Section 80CCD(1) + Section 80CCD(1B)

8. ULIP Taxation Changes

From FY 2025-26, ULIPs with annual premiums more than ₹2.5 lakh or exceeding 10% of the policy value will now be taxed as capital gains instead of income from other sources. So, ULIPs held for more than a year will be treated as long-term capital gains (LTCG) and will be taxed at 12.5%.

Earlier, ULIPs were taxed as income from other sources at a high of 30%.

9. ITR Last Date Extended

Budget 2025 extended the date of filing updated Income Tax Returns (ITR). Taxpayers will now have 4 years to file an updated ITR, instead of 2 years previously. This aims to provide more time for individuals to correct errors and disclose missed income.

Following are the major income tax rule changes that have been effective since April 1, 2024.

1. Hiked Standard Deduction

From April 1, 2024, salaried individuals and pensioners who opt for the new regime will be eligible to claim tax benefits from a hiked standard deduction of ₹75,000. While for family pensioners, this deduction has been hiked to ₹25,000 under the new regime.

2. Hiked Employer's Contribution to NPS in Taxable Salary

Under Section 80CCD (2), employees opting for the new tax regime will now get a higher deduction on the salary contribution made to NPS by the employer. After Budget 2024, this deduction has been hiked up to 14% of salary (basic + DA) for all private and public sector employees. However, remember that this benefit is available under the new tax regime only.

3. Capital Gains Taxation

The Union Budget 2024-25 made significant changes to the capital gains taxation, which are as follows:

• Uniformity in the holding period for determining long-term and short-term for all listed securities to a period of 12 months, and for other assets 24 months, is proposed.
• No indexation of any long-term capital asset will be available for sale from July 23, 2024. However, the assets bought before 1 April 2001 will continue to get the indexation benefit.
• The Budget 2024 rationalized the Long-term Capital Gains (LTCG) Tax to 12.5% without indexation (Section 112). Previously, this rate was 20% with indexation.
• Short-Term Capital Gains (STCG) Tax u/s 111A also hiked to 20%.
• Further, the exemption limit u/s 112A has been increased to ₹1.25 lakhs.
• The Budget has also removed an anomaly in the taxation of gold mutual funds, gold ETFs, fund of funds, and international equity funds. Now, investors will have to pay 12.5% LTCG tax, if the holding period is more than 24 months.
• However, as per the previous Budget 2023, the investment in Market Linked Debentures (MLDs) from April 1, 2023, will continue to be taxed as per the slab rates for STCG or debt funds.

4. Simplification of TDS

The recent tax updates have simplified the application of Tax Deducted on Source (TDS). Here are the changes:

• From FY 2024-25, the 5% TDS rate applicable to various payments has been reduced to 2%.
• The TDS rate levied on e-commerce operators has also been significantly reduced to 0.1%, which was earlier 1%.
• Further, the 20% TDS on the repurchase of mutual funds or UTI units has been removed.
• The Budget 2024-25 also proposed allowing a credit of Tax Collected at Source (TCS) against the TDS deducted on salaries. Further, failure of TDS payment within the due date has been decriminalized.
• Also, buybacks will be taxed in the hands of the recipient as deemed dividends from 1st October 2024.