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Introduction

Income tax is a direct tax imposed on the income of individuals, companies, and other entities, and it plays a crucial role in the country’s revenue system. India follows a progressive tax system where the tax rate increases as the income rises, ensuring fairness and equity. The Income-tax Act, 1961, provides for two tax regimes: the Old Tax Regime, which offers various deductions and exemptions, and the New Tax Regime, which features lower tax rates but fewer deductions.

With the recent announcements in Budget 2025, significant updates have been made to the income tax slabs for the Financial Year (FY) 2024-25 and Assessment Year (AY) 2025-26. This guide will help you understand the latest income tax slabs, compare the new and old regimes, and make informed decisions regarding your tax planning.

What is an Income Tax Slab?

Income tax slabs are predefined ranges of income, with each slab attracting a different rate of tax. As an individual’s income increases, they move into higher tax brackets, resulting in higher tax liabilities. This system ensures a progressive tax structure, where higher earners contribute more to the nation’s revenue.

Income tax slabs are periodically revised during the annual budget to reflect the economic conditions and inflationary trends. The Budget 2025 introduced notable changes, especially in the New Tax Regime, aimed at providing relief to taxpayers and simplifying the tax structure.

Budget 2025 Highlights:

1. No income tax for income up to Rs. 12 Lakhs due to an increased rebate under the new regime, now set at Rs. 60,000.

2. Direct Tax Code to be presented in Parliament next week.

3. Modified slab rates for the New Regime for FY 2025-26 (AY 2026-27).

Income Tax Slabs for FY 2024-25 (AY 2025-26) Under New Regime

The New Tax Regime introduced in Budget 2024 brought significant changes to the income tax slabs, which are further updated in Budget 2025. The new rates are designed to simplify tax filing and provide relief to middle-income earners.

Key Features of the New Tax Regime (FY 2024-25):

1. Default Tax Regime: The new regime is the default option. Taxpayers who prefer the old regime must file Form 10-IEA.

2. Basic Exemption Limit: Rs. 4 lakhs, applicable to all taxpayers regardless of age.

3. Rebate under Section 87A: Available for incomes up to Rs. 12 lakhs, resulting in zero tax liability due to a rebate of Rs. 60,000.

4. Surcharge: The highest surcharge rate under the new regime is capped at 25%, compared to 37% in the old regime.

Income Tax Slabs for FY 2024-25 (AY 2025-26) Under Old Regime

The Old Tax Regime remains unchanged from previous years and continues to offer various exemptions and deductions under different sections.

Surcharge and Cess:

• Surcharge Rates:

  1. 10% for income between Rs. 50 lakh and Rs. 1 crore.

  2. 15% for income between Rs. 1 crore and Rs. 2 crore.

  3. 25% for income between Rs. 2 crore and Rs. 5 crore.

  4. 37% for income above Rs. 5 crore (reduced to 25% under the new regime).

• Health and Education Cess: 4% of the total tax payable.

Comparison: Old vs New Tax Regime for FY 2024-25 (AY 2025-26)

Which Regime Should You Choose?

Choosing between the old and new tax regimes depends on your financial situation and investment habits.

• Opt for the New Regime if:

  1. You prefer lower tax rates with minimal documentation.

  2. You don’t have significant deductions under sections like 80C, 80D, or HRA.

  3. You have income up to Rs. 12 lakhs, where the rebate ensures zero tax liability.

• Opt for the Old Regime if:

  1. You have significant tax-saving investments and deductions.

  2. You pay EMIs on education loans or home loans.

  3. You claim HRA, LTA, or other allowances.

Calculating Tax Under Both Regimes

Example 1: Tax Calculation Under Old Regime

X's taxable income: Rs. 8,00,000

Example 2: Tax Calculation Under New Regime

X’s taxable income: Rs. 8,00,000

Exemptions & Deductions: Old vs New Regime

Not Claimable Under New Regime:

1. HRA (House Rent Allowance)

2. LTA (Leave Travel Allowance)

3. Standard deductions (other than the revised standard deduction of Rs. 75,000)

4. Interest on housing loan for self-occupied property

5. Section 80C deductions (like PF, LIC, ELSS)

Available Under New Regime:

1. Standard Deduction of Rs. 75,000

2. Employer’s contribution to NPS (Section 80CCD(2))

3. Interest on home loans for let-out properties

4. Deduction for family pension (increased to Rs. 25,000)

Conclusion

The updates in Budget 2025 significantly reshape the tax landscape, offering more clarity and choices for taxpayers. While the new regime simplifies the tax process and provides relief through lower rates and rebates, the old regime remains advantageous for those leveraging multiple deductions and exemptions.

Taxpayers should carefully analyze both regimes, considering their income structure, investments, and financial goals. Using a tax calculator to compare liabilities under both regimes can be a practical approach to choosing the most beneficial option.

Stay updated with future changes, especially with the Direct Tax Code expected to be presented soon, which may bring further reforms in the taxation system.

The Direct Tax Code (DTC) 2025 represents a landmark reform aimed at replacing the Income Tax Act of 1961, ushering in a simpler, more efficient, and transparent taxation system for individuals and businesses in India. With its proposed implementation, the DTC aims to modernize tax laws, reduce complexities, and foster a tax-friendly environment.

What is the Direct Tax Code (DTC)?

The Direct Tax Code is India's legislative effort to overhaul its outdated tax framework. It replaces the Income Tax Act of 1961 with a streamlined structure designed to:

1. Simplify tax compliance.

2. Eliminate excessive exemptions and deductions.

3. Modernize tax calculations for individuals and corporations.

4. Ensure transparency and clarity in tax laws.

By focusing on residence-based taxation instead of the previous source-based model, the DTC seeks to align India’s tax regulations with global standards, ensuring efficient compliance for individuals with global income sources.

Why Was the Direct Tax Code 2025 Introduced?

Over the decades, the Income Tax Act of 1961 had undergone numerous amendments, resulting in a complex and cumbersome tax structure. Key reasons for introducing the DTC 2025 include:

1. Simplification of Tax Laws: The existing tax laws had become convoluted due to excessive exemptions and deductions.

2. Increasing Transparency: The DTC fosters transparency in tax compliance and reporting, reducing ambiguities.

3. Broadening the Tax Base: By minimizing exemptions, the DTC aims to bring more taxpayers into the fold.

4. Reducing Litigation: Simplified laws reduce tax disputes and facilitate faster resolution.

Key Features of the Direct Tax Code 2025

1. Simplified Tax Structure

The DTC eliminates numerous exemptions and deductions, ensuring clarity and ease in tax compliance. This streamlined approach reduces opportunities for tax evasion while broadening the tax base.

2. Rationalization of Tax Rates

The DTC aligns tax rates with global standards:

1. Offers relief to middle-income groups.

2. Ensures higher-income earners contribute proportionately.

3. Introduces unified corporate tax rates for domestic and foreign entities, making India more business-friendly.

3. Residence-Based Taxation

A significant shift under the DTC is taxing Indian residents on their global income. This change aligns India’s tax framework with international practices, simplifying compliance for individuals with overseas earnings.

4. Changes to Wealth and Capital Gains Taxes

• Wealth Tax: Abolished under the DTC, simplifying tax obligations for high-net-worth individuals.

• Capital Gains Tax: Now integrated into normal income, with tax rates determined by the holding period of assets:

  • Short-term capital gains: Taxed at higher rates.

  • Long-term capital gains: Subject to lower tax rates.

5. Introduction of Minimum Alternate Tax (MAT)

The DTC revises MAT provisions, ensuring profitable companies declaring minimal taxable income pay a fair share of taxes. This promotes transparency and prevents creative accounting practices.

6. General Anti-Avoidance Rules (GAAR)

The DTC strengthens anti-avoidance measures, allowing tax authorities to scrutinize and deny benefits for transactions lacking substantial commercial purpose. GAAR aims to curb aggressive tax planning and evasion.

7. Removal of Assessment and Previous Year Concepts

Tax filings are now based solely on the financial year, simplifying compliance and aligning with modern accounting practices.

Highlights of the Direct Tax Code Bill

The DTC introduces several amendments to redefine India's tax structure. Key features include:

1. Revised Income Tax Slabs:

   • ₹2.5 lakh to ₹5 lakh: Taxed at 10% (currently 5%).

   • ₹5 lakh to ₹10 lakh: Taxed at 20%.

   • Above ₹10 lakh: Taxed at 30%.

2. Corporate Tax Rates:

   • Domestic and foreign companies: Unified tax rate of 30%.

   • Foreign companies’ branch profits: Additional 15% tax.

   • Non-profit organizations: Taxed at 15%.

3. Capital Gains:

   • Capital gains are treated as part of regular income, except for securities listed on stock exchanges.

4. Wealth Tax:

   • The exemption limit has been raised from ₹15 lakh to ₹1 crore.

5. Anti-Avoidance Rules:

   • General Anti-Avoidance Rules (GAAR) empower authorities to investigate transactions structured solely for tax benefits.

6. Standard Deductions:

   • Simplifies filing by raising the standard deduction for salaried individuals by 50% to ₹75,000.

Evolution of the Direct Tax Code

The concept of the Direct Tax Code was first proposed in 2009 to replace the Income Tax Act of 1961. Over the years, successive drafts have undergone revisions based on feedback and evolving economic needs:

• 2009: Initial introduction focused on simplifying tax laws.

• 2010: Revised draft emphasized transparency and ease of compliance.

• 2017: Recommendations included reducing litigation and enhancing taxpayer services.

• 2025: Latest iteration aims at digitalization, taxpayer-friendly reforms, and alignment with global practices.

Aim of the Direct Tax Code

The DTC is not just about replacing outdated laws; it embodies a larger vision for a fair and efficient tax system. The primary goals include:

1. Unification of Tax Laws:

   • Combines income tax, dividend distribution tax, fringe benefit tax, and wealth tax under one framework for seamless compliance.

2. Expansion of the Taxpayer Base:

   • Targets an increase in the taxpayer population from 1% to 7.5% by phasing out various exemptions and deductions.

3. Clarity and Fairness:

   • Simplifies laws, reducing disputes, and ensuring equity by treating all taxpayer groups uniformly.

4. Streamlined Compliance:

   • Introduces mediation mechanisms between taxpayers and the Central Board of Direct Taxes (CBDT) to resolve disputes efficiently.

Key Features and Major Changes in the DTC 2025

1. Simplified Residential Status

• Taxpayers are now classified as Residents or Non-Residents, eliminating the Resident but Not Ordinarily Resident (RNOR) category.

2. Unified Tax Rates for Companies

• Both domestic and foreign companies will be taxed at the same rate, encouraging foreign investment and simplifying compliance.

3. Elimination of Assessment and Previous Year Concepts

• The DTC introduces "Financial Year" as the sole reference term for income tax filings, replacing "Assessment Year" and "Previous Year."

4. Capital Gains Tax Updates

• Short-term capital gains:

  • Taxed at 20%, up from 15%.

• Long-term capital gains:

  • Taxed at 12.5%, down from 20%.

• Except for securities listed on stock exchanges, capital gains are integrated into regular income.

5. Renaming of Income Categories

• Income from Salary is now Employment Income.

• Income from Other Sources becomes Income from Residuary Sources.

6. Simplified Tax Filing Structure

• The DTC organizes its 319 sections and 22 schedules into a user-friendly format, removing excessive sub-clauses.

7. Expanded TDS and TCS Application

• Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) now cover nearly all income types:

  • E-commerce operators: Reduced TDS from 1% to 0.1%.

8. Tax Audits by Diverse Professionals

• Allows Company Secretaries (CS) and Cost and Management Accountants (CMA) to conduct tax audits, broadening the pool of authorized auditors.

9. Reduced Deductions and Exemptions

• Most exemptions and deductions are phased out, simplifying tax calculations and compliance.

Direct Tax Code vs. Income Tax Act

Impact of the DTC 2025

For Individuals

• Simplified Compliance: Standardized deductions and streamlined slabs make filing easier.

• Transparency: Clear rules on income classification and taxation.

• Lower Tax Burden: Increased wealth tax exemption benefits high-net-worth individuals.

For Businesses

• Uniform Rates: Simplifies tax planning for domestic and multinational corporations.

• Reduced Litigation: Anti-avoidance rules and mediation mechanisms improve dispute resolution.

For the Economy

• Wider Tax Base: Reduced exemptions encourage broader participation.

• Increased Revenue: Regularized TDS and TCS mechanisms ensure steady government income.

Challenges in Implementing the Direct Tax Code

1. Transition Complexities

Adapting to new rules and terms requires re-education of taxpayers and administrators, potentially causing initial disruptions.

2. Political and Legislative Resistance

Balancing diverse stakeholder interests, including those of businesses and political entities, has delayed the DTC’s implementation.

3. Economic Considerations

Changes in capital gains taxation and other provisions may impact investment behavior, necessitating careful policy adjustments.

Key Takeaways

1. The DTC 2025 replaces the Income Tax Act of 1961 with a simplified, modernized framework.

2. Key reforms include residence-based taxation, unified tax rates, and the abolition of wealth tax.

3. Challenges in implementation include transition complexities, political resistance, and economic impacts.

Conclusion

The Direct Tax Code 2025 is poised to revolutionize India's taxation system, making it simpler, fairer, and more transparent. While its implementation may face hurdles, the long-term benefits include increased compliance, reduced disputes, and a more equitable tax environment. The DTC represents a significant step forward in aligning India’s tax framework with global standards, fostering economic growth, and ensuring fair taxation for all.