As of today, April 1, 2025, India has ushered in the financial year 2025-26 with significant updates to its income tax regime, aimed at providing relief to taxpayers, boosting investment, and simplifying compliance. These changes, primarily under the new tax regime introduced in 2020 and now enhanced, reflect the government’s ongoing efforts to make it the default choice for individuals while offering tangible benefits to salaried workers, investors, and depositors. Below is a comprehensive breakdown of the key updates effective today.
Higher Exemption Limit: Rs 4 Lakh from Rs 3 Lakh
The basic exemption limit under the new tax regime has been raised from Rs 3 lakh to Rs 4 lakh. This adjustment means that individuals earning up to Rs 4 lakh annually will pay no income tax, provided they opt for the new regime, which forgoes most deductions and exemptions available under the old regime (e.g., Section 80C, 80D). This increase, likely announced in the Union Budget of July 2024 or a subsequent amendment, offers relief to lower-income earners amid rising living costs—India’s retail inflation hovered around 5-6% in 2024, per RBI estimates.
For example:
- Old Exemption (Rs 3 lakh): An individual earning Rs 3.5 lakh would have Rs 50,000 taxable, attracting a 5% tax (Rs 2,500) plus cess.
- New Exemption (Rs 4 lakh): The same Rs 3.5 lakh income is now fully exempt, saving the taxpayer Rs 2,600 (including 4% cess).
This shift benefits approximately 1-2 crore taxpayers in the lower income bracket, particularly young professionals and gig workers, aligning with the government’s goal to widen the tax net without burdening modest earners.
Rebate Ensuring Zero Tax Up to Rs 12 Lakh
A standout feature effective today is the enhanced tax rebate under Section 87A of the Income Tax Act, now ensuring zero tax liability for incomes up to Rs 12 lakh in the new regime. Previously, the rebate capped tax-free income at Rs 7 lakh (introduced in Budget 2023). This dramatic increase—likely a populist measure ahead of upcoming elections or economic stimulus—means taxpayers earning up to Rs 12 lakh face no tax outgo, provided they adopt the new regime.
Here’s how it works:
- Tax Slabs (New Regime, indicative as of 2025):
- Rs 0–4 lakh: 0%
- Rs 4–7 lakh: 5%
- Rs 7–10 lakh: 10%
- Rs 10–12 lakh: 15%
- Above Rs 12 lakh: Higher rates apply (e.g., 20%, 25%, 30%).
- Without Rebate: An income of Rs 12 lakh would incur tax on Rs 8 lakh (Rs 12 lakh – Rs 4 lakh exemption):
- Rs 4–7 lakh: 5% of Rs 3 lakh = Rs 15,000
- Rs 7–10 lakh: 10% of Rs 3 lakh = Rs 30,000
- Rs 10–12 lakh: 15% of Rs 2 lakh = Rs 30,000
- Total tax = Rs 75,000 + 4% cess = Rs 78,000.
- With Rebate: The full Rs 78,000 tax liability is offset, resulting in zero tax.
This rebate effectively doubles the tax-free income threshold from Rs 7 lakh to Rs 12 lakh, benefiting middle-income salaried individuals and professionals earning between Rs 7–12 lakh annually—potentially 2-3 crore taxpayers. It also incentivizes adoption of the new regime, which the government has been promoting as simpler and deduction-free since its inception.
TDS Threshold Increases
Two key changes to Tax Deducted at Source (TDS) thresholds, effective today, provide relief to depositors and investors:
- Interest Income: The TDS threshold for interest from bank deposits, post office schemes, or other financial instruments under Section 194A has increased from Rs 40,000 to Rs 50,000 per year. For senior citizens, the limit rises from Rs 50,000 to Rs 60,000. This means no TDS is deducted if annual interest income falls below these amounts, reducing paperwork and enhancing cash flow for small savers.
- Impact: A depositor earning Rs 45,000 in interest from a fixed deposit previously faced TDS at 10% (Rs 4,500 deducted); now, no TDS applies, leaving the full amount in hand until tax filing.
- Context: With deposit rates around 6-7% in 2024-25 (per RBI data), this benefits those with savings of Rs 7-8 lakh, a common corpus for middle-class households.
- Dividend Income: The TDS threshold for dividends from equity shares or mutual funds under Section 194 has doubled from Rs 5,000 to Rs 10,000 annually. Companies or mutual fund houses will now deduct TDS at 10% only if dividends exceed Rs 10,000 in a financial year.
- Impact: An investor receiving Rs 8,000 in dividends from stocks or equity funds avoids TDS entirely (previously, Rs 800 would be deducted), easing compliance and boosting returns for retail investors.
- Context: This aligns with India’s growing equity market participation—Demat accounts crossed 14 crore in 2024—and supports small investors amid volatile markets.
Broader Implications
Investors and Depositors: The TDS threshold hikes reduce administrative hassles and align with rising interest and dividend incomes due to inflation and market growth (e.g., Sensex hit 85,000 in late 2024).
Taxpayers: The higher exemption and rebate reduce tax burdens significantly—e.g., an Rs 12 lakh earner saves Rs 78,000 annually—while TDS changes free up liquidity for depositors and investors. This could spur consumption and investment, key drivers of India’s projected 6.8-7% GDP growth in FY 2025-26.
Government Strategy: These reforms aim to simplify taxation, encourage the new regime (now default for those not filing under the old regime), and broaden the tax base without aggressive rate hikes. Revenue loss may be offset by higher compliance and economic activity.
