New Income Tax Rule Changes

The Union Budget brought several changes to India's income tax framework. Whether you are salaried, self-employed, or running a small business, these changes affect how much tax you owe and how you plan your finances. Here is what changed and what it means for you.

The New Tax Regime Is Now the Default

The new tax regime — with lower rates but fewer deductions — is now the default for all individual taxpayers. You can still opt for the old regime if its deductions work in your favour, but you need to actively choose it when filing your return. If you do nothing, you are on the new regime.

This matters because the two regimes lead to very different tax outcomes depending on your investment and spending patterns. Under the old regime, deductions under Section 80C, 80D, HRA, and others can significantly reduce your taxable income. Under the new regime, most of those deductions disappear, but the base rates are lower.

Updated Tax Slabs Under the New Regime

The slabs have been restructured to put more money in your pocket at lower income levels. Income up to Rs 4 lakh is now exempt. The 5 percent slab covers Rs 4-8 lakh. The 10 percent slab applies from Rs 8-12 lakh. Income between Rs 12-16 lakh is taxed at 15 percent, Rs 16-20 lakh at 20 percent, Rs 20-24 lakh at 25 percent, and anything above Rs 24 lakh at 30 percent.

The practical effect: a salaried individual earning Rs 12 lakh per annum pays zero tax under the new regime after the standard deduction and rebate under Section 87A. That is a meaningful change for the middle class.

Higher Standard Deduction

The standard deduction for salaried employees has been increased to Rs 75,000 under the new regime. This is a flat deduction — you do not need to show receipts or proof of spending. It replaces the earlier Rs 50,000 figure and applies automatically when your employer computes TDS.

For pensioners, the same Rs 75,000 deduction applies to pension income. Family pensioners continue to get a separate deduction of Rs 25,000.

TDS Threshold Changes

Several TDS thresholds have been raised to reduce the compliance burden on small transactions. The threshold for TDS on interest paid by banks and post offices under Section 194A is now Rs 50,000 for senior citizens and Rs 40,000 for others. The limit for TDS on rent under Section 194-I has been increased to Rs 50,000 per month. The threshold for TDS on insurance commission under Section 194D has been raised as well.

These changes mean fewer people will have tax deducted at source on small payments, which improves cash flow and reduces the number of TDS certificates you need to chase.

Capital Gains Tax Rationalisation

Short-term capital gains on listed equity and equity mutual funds are now taxed at 20 percent, up from 15 percent. Long-term capital gains on the same assets remain at 12.5 percent, but the exemption limit has been raised to Rs 1.25 lakh per year.

For real estate and unlisted assets, long-term capital gains are now taxed at 12.5 percent without indexation. The removal of indexation is significant — it means you can no longer adjust your purchase price for inflation before calculating the gain. For properties held over long periods where inflation was substantial, this could increase your effective tax.

NPS Changes

The employer contribution limit for NPS under Section 80CCD(2) has been increased to 14 percent of the basic salary for all employees, not just government employees. This makes the new regime slightly more attractive for salaried individuals whose employers contribute to NPS, since 80CCD(2) is one of the few deductions that survives in the new regime.

What Should You Do?

First, run the numbers for both regimes before choosing. If you have a home loan, significant medical insurance premiums, or max out your 80C investments, the old regime may still save you more. If your deductions are modest, the new regime's lower rates and higher standard deduction will likely win.

Second, review your TDS declarations with your employer. The default is the new regime, so if you want the old one, submit Form 10-IEA before the deadline.

Third, revisit your capital gains strategy. The higher STCG rate on equity means that holding for the long term is now relatively more tax-efficient than it was before. If you were a frequent trader, the gap between short-term and long-term treatment has widened.

Finally, if your employer offers NPS, consider increasing your contribution. The expanded 80CCD(2) limit is one of the few tax-advantaged moves that works under both regimes.