Key Income Tax Changes You Must Know for AY 2025–26

The income tax landscape in India is set to undergo significant changes in the Assessment Year (AY) 2025–26, driven by the announcements made in Budget 2025 and the newly introduced Income Tax Bill, 2025. These changes aim to simplify the tax system, improve compliance, and make tax filing more taxpayer-friendly. Key updates include revisions in tax slabs under the New Tax Regime, a simplification of tax terminology, and an overhaul of income tax laws to make them more transparent. These changes are set to take effect for the Financial Year (FY) 2024-25, and understanding them will be crucial for taxpayers to make informed decisions and optimize their tax obligations.

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Table of Contents

• Key Income Tax Changes for AY 2025-26

• Introduction of New Tax Slabs under Section 115BAC (New Tax Regime)

• Replacement of "Previous Year" and "Assessment Year" with "Tax Year"

• Simplification and Rationalization of the Income Tax Law

• Inclusion of Virtual Digital Assets in Undisclosed Income Definition

• No Change in Corporate and Other Tax Rates

• Reduction in TDS Rates on Insurance Commission

• Empowering Government for Faceless Tax Administration Schemes

• Conclusion

• FAQs

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Key Income Tax Changes for AY 2025-26

The Income Tax Bill, 2025 introduces several changes that will significantly impact taxpayers in AY 2025-26. Among the most notable is the introduction of new income tax slabs under the New Tax Regime, which are designed to provide greater relief to middle-income earners and simplify the structure. Additionally, tax terminology has been simplified with the replacement of "Previous Year" and "Assessment Year" with "Tax Year." The bill also aims to streamline the law, making it easier for taxpayers to understand and comply with their tax obligations. These changes are part of a broader effort to modernize the tax system, including the inclusion of virtual digital assets in the definition of undisclosed income, as well as reducing compliance burdens for insurance agents.

Introduction of New Tax Slabs under Section 115BAC (New Tax Regime)

For AY 2025–26, the New Tax Regime has undergone a revision, introducing more progressive tax slabs. The changes aim to offer greater relief to middle-income taxpayers. The new slabs under the New Tax Regime are:

• Up to ₹4,00,000: NIL

• ₹4,00,001 to ₹8,00,000: 5%

• ₹8,00,001 to ₹12,00,000: 10%

• ₹12,00,001 to ₹16,00,000: 15%

• ₹16,00,001 to ₹20,00,000: 20%

• ₹20,00,001 to ₹24,00,000: 25%

• Above ₹24,00,000: 30%

For comparison, the New Regime Tax Slabs for FY 2024-25 were as follows:

• Up to ₹3,00,000: NIL

• ₹3,00,001 to ₹7,00,000: 5%

• ₹7,00,001 to ₹10,00,000: 10%

• ₹10,00,001 to ₹12,00,000: 15%

• ₹12,00,001 to ₹15,00,000: 20%

• Above ₹15,00,000: 30%

The changes reflect a broader range and lower tax burden, especially for taxpayers earning in the middle brackets. It is crucial to note that these rates apply solely to the New Tax Regime.

Replacement of "Previous Year" and "Assessment Year" with "Tax Year"

The Income Tax Bill, 2025 proposes a significant shift in terminology by replacing the concepts of "Previous Year" and "Assessment Year" with the term "Tax Year." This change is aimed at simplifying tax reporting and improving clarity. In the current system, the term "Previous Year" refers to the year in which income is earned, while the "Assessment Year" is the year following the financial year during which the income is assessed for tax purposes. By aligning the term "Tax Year" directly with the financial year in which income is earned and assessed, the new terminology will reduce confusion and make income tax filings more intuitive for taxpayers. This change also aligns the tax year directly with the fiscal year from April 1 to March 31, streamlining the process and enhancing transparency in tax administration.

Simplification and Rationalization of the Income Tax Law

The Income Tax Bill, 2025 brings a substantial simplification to the entire tax law. The revised law aims to reduce the complexity by slashing the number of chapters and sections in half, from 47 chapters and 819 sections to just 23 chapters and 536 sections. This reduction will make the law more accessible and less burdensome for taxpayers, professionals, and tax authorities alike. One of the key aspects of this simplification is the removal of redundant provisions and the consolidation of related sections. The law now features clearer cross-references, reducing the need for taxpayers to navigate a labyrinth of complicated legal language. This reform also promises a reduction in the compliance burden, making tax filing more straightforward and reducing the potential for litigation.

Inclusion of Virtual Digital Assets in Undisclosed Income Definition

A notable change under the Income Tax Bill, 2025 is the inclusion of virtual digital assets, such as cryptocurrencies, tokens, and NFTs, within the definition of "undisclosed income." This change reflects the government's focus on regulating the rapidly growing digital assets sector and ensuring that taxpayers comply with their tax obligations in this area. In the past, virtual digital assets were not clearly covered under existing tax laws, creating potential loopholes. By explicitly including them in the definition of undisclosed income, the government aims to curb tax evasion and ensure that any income derived from digital assets is properly disclosed and taxed. This addition is expected to bring clarity and accountability to the growing market for virtual digital assets.

No Change in Corporate and Other Tax Rates

While the Income Tax Bill, 2025 introduces several changes for individual taxpayers, there are no changes to the corporate tax rates. The tax rates for domestic companies, cooperative societies, and other business entities remain the same as per previous regulations. The focus, however, is on simplifying the law rather than altering tax rates for these entities. This will ensure that businesses continue to operate under a stable tax framework while benefiting from the reduced compliance burden and clearer legal structure introduced by the new bill. The government has focused on streamlining processes to make tax administration more efficient without changing the core tax obligations for businesses.

Reduction in TDS Rates on Insurance Commission

In another significant development, the Finance Bill 2025 proposes reducing the Tax Deducted at Source (TDS) rate on insurance commission from 5% to 2%. This change aims to ease the tax compliance process for insurance agents and companies, who will benefit from a lower TDS rate. Insurance commission income, which was previously subject to a 5% TDS, will now be subject to a reduced rate, simplifying the overall tax filing process. This reduction is part of the government's broader strategy to reduce the compliance burden on smaller taxpayers and businesses while ensuring that the tax system remains efficient and easy to navigate.

Empowering Government for Faceless Tax Administration Schemes

The Income Tax Bill, 2025 empowers the government to implement faceless tax administration schemes, allowing for the seamless collection of information and assessment of tax cases without human interface. This change is expected to improve transparency, reduce errors, and enhance efficiency in the tax administration process. By reducing direct contact between taxpayers and tax officials, the faceless administration model aims to minimize the potential for corruption and ensure a more streamlined process for both taxpayers and authorities. The shift to faceless tax administration is part of a broader trend towards digitalization in government services, aimed at improving taxpayer experiences and increasing overall compliance.

Conclusion

The income tax changes for Assessment Year (AY) 2025–26, as presented in Budget 2025 and the newly proposed Income Tax Bill, 2025, mark a critical shift in India's tax system towards simplification, efficiency, and greater clarity. These reforms aim to streamline the taxation process, reduce litigation, and enhance the taxpayer's ability to navigate the complexities of the tax system.

Frequently Asked Question (FAQs)

Q1. What are the new income tax slabs under the New Tax Regime for FY 2025-26?

The new income tax slabs for the New Tax Regime for FY 2025-26 are:

• Up to ₹4,00,000: NIL

• ₹4,00,001 to ₹8,00,000: 5%

• ₹8,00,001 to ₹12,00,000: 10%

• ₹12,00,001 to ₹16,00,000: 15%

• ₹16,00,001 to ₹20,00,000: 20%

• ₹20,00,001 to ₹24,00,000: 25%

• Above ₹24,00,000: 30%

These revised slabs offer greater tax relief, especially for middle-income earners, compared to the previous year. They apply only under the New Tax Regime for FY 2025-26.

Q2. How does the change from "Previous Year" to "Tax Year" impact taxpayers?

The replacement of "Previous Year" and "Assessment Year" with the new term "Tax Year" simplifies the tax system. The Tax Year directly aligns with the financial year (April 1 to March 31), making it clearer when income is calculated for tax purposes. This change reduces confusion, as taxpayers no longer need to differentiate between the financial year in which income is earned and the year in which it is assessed. It streamlines tax filings, enhancing overall compliance and clarity.

Q3. What are the key changes in the Income Tax Bill, 2025?

The Income Tax Bill, 2025, introduces several key reforms aimed at simplifying the tax law. Some of the major changes include:

• The reduction of tax law complexity, with fewer chapters and sections.

• The introduction of "Tax Year" instead of the traditional "Previous Year" and "Assessment Year."

• The inclusion of virtual digital assets in the definition of undisclosed income, aligning with regulatory efforts for digital asset taxation.

• A focus on faceless tax administration, which will reduce human interface and improve efficiency.

These reforms aim to reduce taxpayer confusion and litigation, making the tax system more transparent and easier to navigate.

Q4. Does the reduction in TDS rates on insurance commission apply to both old and new tax regimes?

The reduction in the TDS rate on insurance commission from 5% to 2% applies to both the old and new tax regimes. This change is specifically designed to ease the tax burden on insurance agents and companies by simplifying compliance procedures. By reducing the rate, the government aims to make the process smoother for both parties.

Q5. What does the inclusion of virtual digital assets mean for taxpayers?

The inclusion of virtual digital assets, such as cryptocurrencies and tokens, under the definition of undisclosed income represents a shift in how digital assets will be treated for tax purposes. This change ensures that taxpayers are required to report income from virtual assets, preventing the use of digital currencies as a means to evade tax. Taxpayers dealing in virtual digital assets will need to comply with new reporting requirements, aligning their tax filings with digital asset regulations.

Q6. Are there any significant changes to corporate tax rates in AY 2025-26?

There are no significant changes to corporate tax rates for AY 2025-26. The tax rates for domestic companies, cooperative societies, and other corporate entities remain unchanged. The primary focus of the budget and Income Tax Bill, 2025, is on simplifying the tax laws rather than altering corporate tax rates. However, businesses may still experience changes due to the simplification of tax processes and reduced compliance requirements.

Q7. How does the simplification of the Income Tax Law affect tax filing?

The simplification of the Income Tax Law makes it easier for taxpayers to understand and comply with tax regulations. By reducing the number of sections and chapters in the tax law, the new Bill enhances clarity and reduces the complexity of the tax system. This will likely result in fewer errors, reduced litigation, and a more straightforward tax filing process for individuals and businesses alike.

Q8. Will taxpayers still have to file separate returns for the old and new tax regimes?

Yes, taxpayers will still have to choose between the old and new tax regimes and file separate returns accordingly. The new tax regime offers simplified tax slabs but eliminates several exemptions and deductions that were available under the old tax regime. Taxpayers will need to decide which regime is more beneficial for them based on their income and deductions, and file the appropriate return accordingly.

Q9. What is the government’s approach to faceless tax administration?

The government’s move towards faceless tax administration is designed to reduce human interaction in the tax filing and assessment process. This shift aims to enhance transparency, reduce errors, and improve the overall efficiency of tax administration. With faceless systems in place, taxpayers can expect a more streamlined process with fewer opportunities for bias or discrepancies, improving the overall fairness of the tax system.

Q10. How does the new "Tax Year" system improve tax compliance?

The introduction of the "Tax Year" system, which directly aligns with the financial year, simplifies the process for taxpayers by eliminating the confusion between "Previous Year" and "Assessment Year." This change ensures that taxpayers can directly associate their income with the year it was earned, improving accuracy in reporting and enhancing overall compliance. It also reduces the complexity of understanding when and how income is taxed.

Q11. Is there any change in the tax rate for individuals under the old tax regime?

There are no changes to the tax rates for individuals under the old tax regime for AY 2025-26. The old regime continues to provide the same tax slabs and deductions as before. However, taxpayers in the old regime may need to reassess their tax situation, as they will need to decide whether the old or new tax regime offers the most benefit based on their income and applicable deductions.

Q12. How do the new tax slabs benefit taxpayers in the new regime?

The new tax slabs under the New Tax Regime for AY 2025-26 offer a more progressive tax structure that benefits middle-income earners. By increasing the income range at each tax bracket, the new regime provides greater tax relief, especially for those with earnings in the lower to middle-income ranges. These revised rates make it easier for taxpayers to benefit from a lower tax burden while still offering a simplified filing process.