What Income Tax Changes Were Introduced Under the Finance Act 2025?

Finance Act 2025 brings major income tax updates- ₹12 lakh tax-free income, ₹75,000 standard deduction, revised slabs, and higher TDS thresholds.

Written by : Knowledge Centre Team

2026-02-09

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The Finance Act 2025 marks a watershed moment for Indian taxpayers, introducing significant reforms to simplify compliance, reduce the tax burden on middle-income earners, and modernise outdated provisions. From revised tax slabs to enhanced rebates and streamlined TDS thresholds, these income tax updates are set to reshape how millions of Indians plan their finances in FY 2025-26 and beyond. 

Whether you're a salaried professional, a business owner, or an investor, understanding these changes is crucial to optimising your tax liability and making informed financial decisions this assessment year.

Key Takeaways

  • Income up to ₹12 lakh is tax-free under the new regime due to the enhanced Section 87A rebate of ₹60,000

  • 30% tax rate now applies only on income above ₹24 lakh, with a new 25% slab for ₹20-24 lakh

  • Standard deduction for salaried employees increased to ₹75,000 under the new regime, with no documentation required

  • TDS thresholds raised: Bank interest for seniors to ₹1 lakh, professional fees to ₹50,000, and LRS TCS to ₹10 lakh, easing compliance

  • Other key changes include: Start-up tax benefits extended through 2030, the return window increased to 48 months, and Sections 206AB and 206CCA removed

What is the Finance Act 2025? Quick Guide?

The Finance Act 2025 is the annual legislation that implements the tax proposals presented in the Union Budget 2025, passed by Parliament and notified for implementation. It took effect on April 1, 2025, for the Financial Year 2025-26 (Assessment Year 2026-27). 

The primary purpose of this Act is to amend the Income Tax Act, 1961, by introducing structural reforms that reduce tax rates under the new regime, enhance deductions, increase TDS/TCS thresholds, and simplify compliance procedures. These amendments reflect the government's commitment to easing the tax burden on individuals while promoting transparency and digital integration in tax administration.

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Major Income Tax Updates

The Finance Act 2025 introduces transformative changes across multiple dimensions of income taxation, with most reforms designed to benefit middle-class taxpayers and streamline administrative processes.

  • Revised Tax Slabs Under Section 115BAC: The new tax regime under Section 115BAC has been substantially revised, with relaxed tax slabs and increased basic exemption limits. The threshold for the highest 30% tax rate has been raised from ₹15 lakh to ₹24 lakh, and a new 25% slab has been introduced for income between ₹20 lakh and ₹24 lakh. Here are the updated tax slab rates for FY 2025-26 (AY 2026-27):
Total IncomeTax Rate

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%

  • Enhanced Rebate Under Section 87A: The Finance Act 2025 significantly expands the tax rebate for middle-income taxpayers opting for the new tax regime.
    1. The income limit for claiming a rebate has been raised from ₹7 lakh to ₹12 lakh
    2. The rebate cap has been significantly enhanced, moving up from ₹25,000 to ₹60,000
    3. This makes income up to ₹12 lakh effectively tax-free for resident individuals under the new regime
    4. Special rate incomes like capital gains under Sections 111A and 112 are excluded from the rebate calculation

Consider Priya, a software professional earning ₹12 lakh annually. After claiming the ₹75,000 standard deduction, her taxable income becomes ₹11.25 lakh. Her tax liability under revised slabs would be ₹60,000 (₹20,000 on ₹4-8 lakh + ₹40,000 on ₹8-11.25 lakh). However, with the enhanced Section 87A rebate of ₹60,000, her entire tax liability is wiped out, making her net tax zero.

  • Increased Standard Deduction for Salaried Taxpayers: The standard deduction for salaried employees under the new tax regime has been increased to provide additional relief.
    1. Standard deduction increased from ₹50,000 to ₹75,000 for salaried individuals in the new default tax regime
    2. This deduction is available by default without requiring any investment or documentation
    3. The standard deduction differs by regime: ₹50,000 under the Old Tax Regime and ₹75,000 under the New Tax Regime, applicable for FY 2024–25 and FY 2025–26
    4. This reduces taxable salary income, resulting in lower overall tax liability for employees
  • TDS and TCS Reforms: The Finance Act 2025 introduces substantial reforms to TDS and TCS provisions, aimed at reducing compliance burden and rationalising tax collection at source.
    1. TDS Reforms:
      • Threshold for interest on securities (Section 193) increased from Nil to ₹10,000
      • Dividend threshold (Section 194) raised from ₹5,000 to ₹10,000 for individual shareholders
      • Interest income threshold (Section 194A) increased to ₹1,00,000 for senior citizens and ₹50,000 for others from banks
      • Rent TDS (Section 194-I) threshold changed to ₹50,000 per month from annual ₹2,40,000
      • Professional fees threshold (Section 194J) increased from ₹30,000 to ₹50,000
    2. TCS Reforms:
      • TCS provisions under Section 206C(1H) on the sale of goods have been completely withdrawn
      • LRS threshold for tax collection increased from ₹7 lakh to ₹10 lakh
      • TCS on timber and forest produce reduced from 2.5% to 2%
      • No TCS on remittances from education loans under Section 80E
  • Removal of Equalisation Levy on Digital Ads: The Finance Act 2025 addresses the taxation of digital transactions by removing outdated provisions.
    1. Equalisation levy provisions on digital advertising services have been rationalised
    2. This aligns India's tax regime with international digital taxation frameworks
    3. The change promotes ease of doing business for digital platforms and advertisers
    4. Reduces compliance complexity for non-resident digital service providers
trivia-img

Did You Know?

Finance Act 2025 cut TDS on insurance commission from 5% to 2%, boosting cash flow for agents and supporting growth through simpler tax collection

 

Source: Indiabudget

Guaranteed Returns 34K

Expansion of Presumptive Taxation Limits

Presumptive taxation schemes have been expanded to benefit more businesses and professionals.

  • A new presumptive tax scheme was introduced under Section 44BBD for non-residents providing services to Indian companies for electronics manufacturing

  • Under this scheme, 25% of the total amount paid is deemed as presumptive income

  • Eligible start-ups under Section 80-IAC can now be incorporated before April 1, 2030 (extended from April 1, 2025)

  • They now get an additional five-year window to claim a 100% deduction on their profits

Simplification of Search and Assessment Procedures:

Block assessment procedures have been comprehensively reformed to enhance efficiency and fairness.

  • Virtual digital assets are included in the definition of undisclosed income under Section 158B

  • Time limit for completing block assessment changed to twelve months from the end of the quarter (from the end of the month)

  • Sequential handling of multiple searches is rationalised to prevent overlapping assessments

  • Revival of abated proceedings provisions expanded to include recomputation and TPO references

  • Assessing Officer empowered to extend the return filing period by 30 days in specific circumstances

Tax Exemptions for Sovereign Wealth and Pension Funds:

Investment timelines and the scope of exemptions for foreign institutional investors have been extended.

  • Deadline for investments by foreign Sovereign Wealth Funds and Pension Funds extended from March 31, 2025, to March 31, 2030

  • Long-term capital gains from infrastructure investments remain exempt even if deemed short-term under Section 50AA

  • This encourages sustained foreign investment in Indian infrastructure projects

  • Abu Dhabi Investment Authority investments are also covered under these exemptions

Introduction of "Tax Year" Terminology:

The Finance Act 2025 introduces terminology changes to improve clarity and align with international practices. The concept of "tax year" has been introduced to replace or supplement existing references to the previous year and the assessment year in certain contexts. This modernisation aims to make tax provisions more comprehensible for taxpayers and align Indian tax terminology with global standards. The change is part of a broader structural simplification initiative to make the Income Tax Act more accessible.

Structural Simplification of the Income Tax Act:

The government has initiated a comprehensive simplification of the Income Tax Act's structure and language.

  • Removal of Section 206AB (higher TDS rates for non-filers) and Section 206CCA (higher TCS rates for non-filers)

  • Section 271BB (penalty related to discontinued Section 88A) has been omitted

  • Section 158BI relating to old block assessment provisions is omitted with retrospective effect

  • Faceless scheme provisions extended indefinitely by removing end dates for Sections 92CA, 144C, 253, and 255

  • Curative amendments made to replace "total income" with "total undisclosed income" in block assessment provisions

Other Notable Income Tax Updates

Beyond the major reforms, the Finance Act 2025 introduces several targeted changes across various income categories and taxpayer segments.

  • Updated Return Timeline Extended: Deadline to file updated returns extended from 24 months to 48 months from the end of the assessment year, with progressively higher additional tax rates
  • ULIPs as Capital Assets: All ULIPs not qualifying for Section 10(10D) exemption are now classified as capital assets, subject to capital gains taxation
  • NPS Vatsalya Scheme: Deduction of up to ₹50,000 allowed under Section 80CCD(1B) for contributions to minor children's NPS accounts
  • IFSC Sunset Dates Extended: Tax concessions for IFSC units extended till March 31, 2030, under multiple sections
  • House Property Annual Value: Annual value of up to two self-occupied properties taken as nil if no rental income is received
  • Transfer Pricing Block Assessment: An option was introduced for a three-year block TP assessment to reduce repetitive compliance
  • Crypto Asset Reporting: New Section 285BAA mandates reporting entities to furnish information on crypto asset transactions from April 1, 2026
  • Charitable Trust Registration: Validity period extended from five to ten years for smaller trusts with income below ₹5 crore
  • Penalty Time Limits Revised: New time limits prescribed for passing penalty orders under Section 275

Who Benefits Most From These Income Tax Updates?

The Finance Act 2025 delivers targeted benefits across diverse taxpayer segments, with the most significant advantages flowing to specific groups.

  • Middle-income salaried individuals earning up to ₹12 lakh annually gain the most, as their entire income becomes effectively tax-free under the new regime with enhanced rebate and standard deduction benefits

  • Young professionals and first-time taxpayers benefit from simplified compliance with higher TDS thresholds, reducing unnecessary tax deductions and quarterly refund hassles

  • Small business owners and professionals benefit from expanded presumptive taxation schemes and the removal of Section 206C(1H), significantly reducing their compliance burden

  • Senior citizens see increased interest income thresholds (₹1 lakh for bank interest), allowing them to earn more passive income without TDS deductions

  • Start-ups incorporated before April 1, 2030, can now claim full tax exemption for three consecutive years, promoting entrepreneurship and innovation

  • Foreign investors and sovereign wealth funds benefit from extended investment timelines till 2030 and continued tax exemptions on infrastructure investments

  • High-income earners with income between ₹15 lakh and ₹24 lakh benefit from the new 25% tax slab, reducing their marginal tax rate from 30% to 20-25%

What These Changes Mean for Tax Planning in 2025–26?

The Finance Act 2025 fundamentally reshapes tax planning strategies for Indian taxpayers in FY 2025-26. With the new regime becoming even more attractive through relaxed slabs and enhanced rebates, most salaried individuals earning up to ₹12 lakh will have zero tax liability, eliminating the need for aggressive investment-driven tax planning. However, higher earners should carefully evaluate whether the old regime's deductions still offer better savings or if the new regime's lower rates work in their favour. 

The increased standard deduction of ₹75,000 and higher TDS thresholds provide immediate relief without requiring documentation. For comprehensive financial security, integrating a term plan from Canara HSBC Life Insurance into your portfolio is a smart tax-planning strategy. It offers life cover and may qualify for Section 80C deductions under the old regime, ensuring your family's financial protection aligns seamlessly with your tax-optimisation goals.

Glossary

  1. Finance Act 2025: Annual law implementing Union Budget 2025 tax proposals, effective from 1 April 2025 (FY 2025–26)
  2. Section 115BAC: New tax regime with lower slab rates but without most deductions and exemptions
  3. Section 87A Rebate: Rebate of up to ₹60,000 for individuals with income up to ₹12 lakh, resulting in nil tax
  4. Standard Deduction: Flat ₹75,000 deduction for salaried individuals under the new tax regime, no proof required
  5. TDS: Tax deducted at source on salary, interest, or rent, with updated thresholds under the Finance Act 2025
glossary-img
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FAQs

The new regime under Section 115BAC offers nil tax up to ₹4 lakh, 5% up to ₹8 lakh, 10% up to ₹12 lakh, 15% up to ₹16 lakh, 20% up to ₹20 lakh, 25% up to ₹24 lakh, and 30% above ₹24 lakh. Income up to ₹12 lakh becomes tax-free with an enhanced rebate.

Yes, individual residents opting for the new regime with total income up to ₹12 lakh qualify for a full Section 87A rebate of ₹60,000, plus a ₹75,000 standard deduction, making their entire income effectively tax-free.

Salaried taxpayers get an enhanced standard deduction of ₹75,000 (previously ₹50,000) under the new regime without documentation. This applies automatically to reduce taxable salary income.

Yes, key increases include: bank interest, the TDS threshold for seniors raised to ₹1 lakh (₹50,000 for others), the dividend threshold raised to ₹10,000, professional fees raised to ₹50,000, and the monthly rent TDS threshold raised to ₹50,000.

Middle-income earners (up to ₹12-15 lakh) benefit most from the new regime, as they face zero tax liability. Higher earners with significant deductions (e.g., home loan interest, 80C investments) may prefer the old regime. Use the Income Tax Department's calculator for comparison.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

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