The Union Budget 2025-26, presented on 1 February 2025, introduced a series of significant changes to the direct tax framework that will shape tax planning for individuals and businesses for the coming assessment year and beyond. From substantially revised income tax slabs under the new regime to an expanded Section 87A rebate, from capital gains restructuring to TDS/TCS threshold adjustments, this Budget covers considerable ground. In this article, I break down every material change, explain who it affects, and provide practical guidance on how taxpayers should respond.
Before examining each provision in detail, it is worth understanding the overarching direction. The government has clearly signalled that the new tax regime is the future of personal income taxation in India. Budget 2025 makes the new regime even more attractive by widening slabs, increasing the rebate threshold, and retaining the enhanced standard deduction introduced in the previous year. The old regime remains available, but no changes have been made to its structure, which means the gap between the two regimes continues to widen in favour of the new one for most taxpayers.
For businesses, the Budget focuses on compliance simplification, threshold rationalization for TDS and TCS, and continued support for the startup ecosystem. Capital gains taxation, which was overhauled in Budget 2024, sees no further structural change, though taxpayers continue to adjust to the removal of indexation and the new 12.5% LTCG rate.
The most headline-grabbing change in Budget 2025 is the revision of income tax slabs under the new regime. The revised slabs applicable from AY 2026-27 are as follows:
Compare this with the previous new regime slabs where the nil slab was up to Rs. 3 lakh, 5% applied from Rs. 3-7 lakh, 10% from Rs. 7-10 lakh, 15% from Rs. 10-12 lakh, 20% from Rs. 12-15 lakh, and 30% above Rs. 15 lakh. The restructuring is substantial. The nil slab has been raised by Rs. 1 lakh, each bracket has been widened to Rs. 4 lakh, and a new 25% slab has been introduced between Rs. 20-24 lakh, providing graduated relief to higher-income taxpayers who previously jumped directly from 20% to 30% at Rs. 15 lakh.
The practical effect is a meaningful reduction in tax liability across virtually all income levels. A taxpayer earning Rs. 15 lakh under the new regime will see a noticeable drop in tax outgo compared to AY 2025-26. The benefit increases progressively at higher income levels due to the wider brackets and the introduction of the 25% slab.
Budget 2025 has increased the rebate under Section 87A for taxpayers opting for the new regime. The revised rebate ensures that individuals with total taxable income up to Rs. 12,00,000 pay zero income tax. When you factor in the standard deduction of Rs. 75,000 available to salaried individuals under the new regime, the effective zero-tax threshold for salaried employees rises to Rs. 12,75,000.
This is a significant jump from the previous threshold of Rs. 7 lakh (Rs. 7.75 lakh with standard deduction). The rebate effectively means that a salaried individual earning up to Rs. 12.75 lakh gross salary will have no income tax liability whatsoever under the new regime. For non-salaried individuals (freelancers, business owners who do not receive a salary), the threshold is Rs. 12 lakh.
It is important to understand how the rebate operates. Section 87A provides a rebate equal to the tax payable or Rs. 60,000, whichever is less. This means that if your total income is Rs. 12 lakh, your computed tax under the new slabs would be Rs. 60,000 (nil on the first Rs. 4 lakh, Rs. 20,000 on the next Rs. 4 lakh at 5%, and Rs. 40,000 on the next Rs. 4 lakh at 10%). The rebate of Rs. 60,000 wipes this out entirely. However, if your income is Rs. 12,10,000, the rebate does not apply in full, and you pay tax on the entire amount. This creates a marginal tax trap that taxpayers should be aware of.
Key insight: If your income is slightly above Rs. 12 lakh (or Rs. 12.75 lakh for salaried individuals), explore whether additional NPS contributions or any other permissible deduction under the new regime can bring your taxable income within the rebate threshold. The tax saving can be disproportionately large relative to the additional investment required.
The standard deduction of Rs. 75,000 for salaried individuals and pensioners under the new regime, which was introduced in Budget 2024, continues unchanged in Budget 2025. While there was no further increase this year, the deduction remains a valuable benefit, particularly when combined with the enhanced Section 87A rebate.
Under the old regime, the standard deduction remains at Rs. 50,000. This differential of Rs. 25,000 is one more factor tilting the balance toward the new regime for salaried taxpayers. It is worth reiterating that the standard deduction under the new regime is available only to salaried individuals and pensioners — those with income from business or profession do not benefit from it.
Budget 2025 has increased the limit on employer contribution to the National Pension System (NPS) that qualifies for deduction under Section 80CCD(2). The deduction limit for employer contributions has been raised to 14% of the employee's salary (basic plus dearness allowance) for all employees. Previously, the 14% limit was available only to central government employees, while private sector employees were capped at 10%.
This is a meaningful change for private sector employees whose employers contribute to NPS. If your employer is willing to restructure your CTC to route a higher percentage through NPS, the tax benefit under both the old and the new regime can be substantial. Under the new regime, employer NPS contribution under Section 80CCD(2) is one of the few deductions that remains available, making this provision especially relevant.
For an employee with a basic salary of Rs. 10 lakh per annum, the maximum employer NPS contribution eligible for deduction increases from Rs. 1,00,000 (at 10%) to Rs. 1,40,000 (at 14%) — an additional Rs. 40,000 of tax-free income at effectively zero cost to the employee, provided the employer agrees to the restructuring.
Budget 2025 introduces several rationalization measures in the TDS and TCS framework, aimed at reducing compliance burden and easing cash flow for taxpayers.
The threshold for TDS on interest income from banks has been raised from Rs. 40,000 to Rs. 50,000 per annum for non-senior citizens. For senior citizens, the threshold under Section 80TTB remains at Rs. 50,000 but the TDS trigger has been correspondingly adjusted. This means fewer fixed deposit holders will face TDS deductions, reducing the need to file refund claims or submit Form 15G/15H.
The TCS provisions on foreign remittances under the Liberalised Remittance Scheme (LRS) have been modified. The threshold for TCS applicability has been raised from Rs. 7 lakh to Rs. 10 lakh per financial year. Remittances up to Rs. 10 lakh in a year will not attract any TCS. Beyond Rs. 10 lakh, TCS at 5% applies for non-education and non-medical purposes (20% for amounts exceeding Rs. 10 lakh sent for purposes other than education or medical treatment, without an income tax return on record). For education funded through loans from specified institutions, TCS remains at 0.5% above the threshold.
This is welcome relief for parents sending money abroad for children's education, individuals making overseas investments, and NRIs repatriating funds. The higher threshold reduces upfront cash outflow and simplifies the reconciliation process at the time of return filing.
While Budget 2025 did not introduce fresh structural changes to capital gains taxation, the changes implemented through Budget 2024 (effective from 23 July 2024) continue to have significant implications that taxpayers are still coming to terms with. A recap is warranted.
For immovable property purchased on or after 23 July 2024, the indexation benefit under Section 48 has been removed. Long-term capital gains on such property are taxed at a flat rate of 12.5%. For property purchased before 23 July 2024, taxpayers have the option to compute tax under either the old method (20% with indexation) or the new method (12.5% without indexation), and pay whichever results in a lower liability.
This remains one of the most debated changes. For properties held over long durations where the cost inflation index would have significantly reduced the taxable gain, the removal of indexation can increase the effective tax substantially. However, for properties held for shorter periods where inflation adjustment was modest, the lower 12.5% rate may actually result in less tax than the old 20% rate with indexation.
Long-term capital gains on listed equity shares and equity-oriented mutual funds continue to be taxed at 12.5% (up from the earlier 10%) on gains exceeding Rs. 1,25,000 per financial year. The annual exemption limit of Rs. 1,25,000 provides a planning opportunity: by systematically booking gains within this limit each year, investors can effectively realize long-term gains tax-free.
Short-term capital gains on listed equity and equity-oriented mutual funds remain taxed at 20% (increased from 15% in Budget 2024). This higher rate makes the case even stronger for holding equity investments beyond the 12-month threshold to qualify for the more favourable LTCG treatment.
Budget 2025 has made adjustments to Securities Transaction Tax (STT) rates on certain categories of transactions. The STT on sale of options has been increased, reflecting the government's concern about excessive speculative activity in the derivatives segment. For delivery-based equity transactions and mutual fund redemptions, STT rates remain unchanged.
The higher STT on options primarily affects active traders and is intended as a deterrent against purely speculative trading. For long-term investors in equities and mutual funds, the practical impact is negligible. However, professional traders who derive a significant portion of their income from options trading should factor the increased STT into their cost calculations and trading strategies.
Salaried individuals are arguably the biggest beneficiaries of Budget 2025. Let me illustrate with concrete examples.
Under the new regime, after the standard deduction of Rs. 75,000, taxable income is Rs. 9,25,000. Tax computed under the revised slabs: nil on the first Rs. 4 lakh, Rs. 20,000 on the next Rs. 4 lakh at 5%, and Rs. 12,500 on the remaining Rs. 1,25,000 at 10%. Total tax before cess: Rs. 32,500. With 4% cess: Rs. 33,800. However, since the taxable income of Rs. 9,25,000 is below Rs. 12 lakh, the Section 87A rebate applies, and the entire tax is wiped out. Effective tax: nil.
Under the new regime, taxable income after standard deduction is Rs. 14,25,000. Tax computation: nil on the first Rs. 4 lakh, Rs. 20,000 at 5% on the next Rs. 4 lakh, Rs. 40,000 at 10% on the next Rs. 4 lakh, and Rs. 33,750 at 15% on the remaining Rs. 2,25,000. Total tax before cess: Rs. 93,750. With cess: Rs. 97,500. Under the previous new regime slabs, the same individual would have paid approximately Rs. 1,30,000. That is a saving of over Rs. 32,000.
Taxable income after standard deduction: Rs. 24,25,000. Tax computation under revised slabs: nil on Rs. 4 lakh, Rs. 20,000 at 5%, Rs. 40,000 at 10%, Rs. 60,000 at 15%, Rs. 80,000 at 20%, Rs. 1,00,000 at 25%, and Rs. 7,500 at 30% on the remaining Rs. 25,000. Total before cess: Rs. 3,07,500. With cess: Rs. 3,19,800. Under the old slabs, this would have been approximately Rs. 3,85,000. The saving exceeds Rs. 65,000.
The pattern is clear: the new regime under Budget 2025 delivers tax savings at every income level, and the savings are most pronounced in the Rs. 12-24 lakh bracket where the restructured slabs and the new 25% bracket create the maximum differential.
For business owners and professionals, Budget 2025 offers a mix of compliance relief and continued incentives.
The turnover limits under Sections 44AD and 44ADA remain unchanged, but the enhanced limits introduced in Budget 2023 (Rs. 3 crore for business with 95% digital receipts, Rs. 75 lakh for professionals) continue to benefit a large section of small businesses and professionals. The rationalization of TDS thresholds reduces the compliance burden for businesses that make numerous small payments.
The raised thresholds across multiple TDS sections mean fewer transactions will attract TDS, reducing the volume of quarterly TDS returns and lowering the compliance cost for businesses. However, businesses must update their accounting systems and TDS software to reflect the new thresholds from 1 April 2025.
No changes have been made to corporate tax rates. The effective rate remains 25.17% for domestic companies (under Section 115BAB for new manufacturing companies at 17.16%). The stability in corporate tax rates provides certainty for business planning and investment decisions.
Budget 2025 continues the government's supportive stance toward startups, with several provisions that benefit the ecosystem.
The tax holiday for eligible startups under Section 80-IAC, which provides a three-year tax exemption for startups incorporated before 1 April 2025, has seen its incorporation deadline extended to 1 April 2030. This is a substantial extension and ensures that new startups being incorporated today can still avail of the three consecutive year deduction of 100% of profits. To qualify, the startup must be recognized by DPIIT, have turnover not exceeding Rs. 100 crore in the relevant year, and not have been formed by splitting up or reconstruction of an existing business.
The carry-forward of losses for eligible startups continues to be permitted for up to ten years from the year of incorporation, even if there has been a change in shareholding, provided the original promoters continue to hold shares. This is more relaxed than the general rule under Section 79, which restricts loss carry-forward on change of shareholding for closely held companies.
For startups attracting angel investment, the "angel tax" provision under Section 56(2)(viib) had already been abolished in Budget 2024 for all categories of investors. Budget 2025 reaffirms this position, providing certainty to founders and early-stage investors.
Based on the Budget 2025 changes, here are concrete steps every taxpayer should consider:
Budget 2025 is unambiguously taxpayer-friendly for individuals earning up to Rs. 12.75 lakh, and meaningfully beneficial for those earning up to Rs. 24 lakh. However, the real value lies not in the headline numbers but in how you apply these changes to your specific financial situation. The difference between paying what you owe and paying more than you owe is almost always a matter of planning, not luck.
Disclaimer: This article is for informational purposes only and reflects tax laws as understood in April 2026. Tax legislation changes frequently. Always verify current provisions on official government portals and consult a qualified Chartered Accountant before making financial decisions.