The Union Budget for FY 2025-26 was tabled in the Parliament by the Finance Minister of India on 01-Feb-2025. Here are the key proposals related to computation of tax on salary which payroll managers need to consider for FY 2025-26, effective 01-Apr-2025.
Changes to tax slabs under the new regime
Section 115BAC (New Regime) allows employees to opt for lower tax rates (as against the rates under the old regime) subject to their foregoing certain exemptions / losses / deductions. For FY 2025-26, the slab rates under the new regime have been modified as follows.
| Total Annual Income (Rs) | New Regime (%) – FY 2025-26 |
|---|---|
| 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 |
As in FY 2024-25, the new regime shall be the default regime for tax calculation for FY 2025-26. In other words, if an employee does not specify their preference with regard to the regime for tax calculation, the employer shall use the New Regime for the purpose of tax calculation.
Rebate under Section 87A increases for the New Regime
The rebate under section 87A has been increased to Rs 60,000 for FY 2025-26 (it was Rs 25,000 for Rs FY 2024-25). This means that employees with up to Rs 12 lakh as the total income (after all deductions and exemptions) will have zero tax liability. Please note that the enhancement in Section 87A relief shall be available only for the New Regime in FY 2025-26. For the Old Regime, the Section 87A relief shall remain the same as that for FY 2024-25.
Marginal Relief continues to be available
Please note that the calculation of tax under the New Regime is subject to the application of marginal relief if the income goes above Rs 12 lakh.
Surcharge stays unchanged
Rates of surcharge under the new regime remain the same as they were in FY 2024-25.
Health and Education Cess stays unchanged
The “Health and Education Cess” stays at 4% on income tax and surcharge, if applicable.
Slab rates for the Old Regime remain the same
The tax rates for salaried employees below 60 years of age for FY 2025-26 shall be the same as those for FY 2024-25.
The tax rates (for FY 2025-26) for salaried employees below 60 years of age shall be as follows.
| Total Income for the Year in Rs | Tax Rate in % |
|---|---|
| Up to 2,50,000 | Nil |
| 2,50,001 to 5,00,000 | 5 |
| 5,00,001 to 10,00,000 | 20 |
| Above 10,00,000 | 30 |
The tax rates (for FY 2025-2026) for salaried employees aged 60 years and above but below 80 years shall be as follows.
| Total Income for the Year in Rs | Tax Rate in % |
|---|---|
| Up to 3,00,000 | Nil |
| 3,00,001 to 5,00,000 | 5 |
| 5,00,001 to 10,00,000 | 20 |
| Above 10,00,000 | 30 |
Rebate under Section 87A, surcharge and education cess remain the same under the old regime.
Benefit under 80CCD(1B) to include contributions made to NPS Vatsalya Account
The scope of benefits under Section 80CCD (1B) has been broadened to include contributions to NPS Vatsalya accounts. However, this benefit is available only for employees opting for the old tax regime.
Annual value of house property – Section 23(2)
With regard to house properties owned by employees, a maximum of 2 house properties can be declared as self-occupied. Beyond 2 properties, any house property, even if it is self-occupied, should be declared as let-out and the deemed rental value should be calculated. This rule shall be continued with in FY 2025-26.
Currently, a property can be declared as self-occupied only if an employee occupies the house-property or is unable to occupy the same on account of work-related stay in another location. For FY 2025-26, a property can be declared as self-occupied for any reason in addition to the reasons specified in the previous sentence.
The inexorable shift to the new tax regime
With the reduction in the slab rates under the new regime, we expect almost all employees who chose the old regime in FY 2024-25 to shift to the new regime in FY 2025-26. The slab rates under the new regime have been reduced to such an extent that the tax calculated under the old regime will be higher for most employees even if they avail all exemptions and deductions such as those under Section 10 and Chapter VI of the Income Tax Act.