The Income Tax Act, 2025, marks an important turning point in India’s taxation context, as the government prepares to replace the six-decade-old Income Tax Act 1961 with a modern, simplified framework that starts from April 1, 2026. Over the years, frequent amendments, complex provisions, and interpretational issues have made tax compliance challenging for individuals, professionals, and businesses alike. By simplifying language, removing outdated laws, and setting up a more transparent and predictable tax system, the new act aims to address these ongoing problems.

Table of Contents

The New Income Tax Act, 2025, is more than just an update to the law; it reflects the government’s objective of building trust between the administration and taxpayers. By reducing litigation, fostering voluntary compliance, and aligning tax laws with today’s digital and economic realities, the Act aims to make taxation simpler and more citizen-centric. For taxpayers, this change is about a lot more than new laws; it’s about recognizing how a simpler tax system might impact long-term planning and everyday financial choices.

Key Changes Affecting Taxpayers

Tax-Free Income: Income up to ₹12 lakhs is exempt from tax under the new tax regime.
Simplified Tax Slabs: The new tax slabs are as follows:

o	Up to ₹4 lakhs	Nil
o	₹4 lakhs to ₹8 lakhs	5%
o	₹8 lakhs to ₹12 lakhs	10%
o	₹12 lakhs to ₹16 lakhs	15%
o	₹16 lakhs to ₹20 lakhs	20%
o	₹20 lakhs to ₹24 lakhs	25%
o	Above ₹24 lakhs	30%

Increased Rebate: The rebate under Section 87A has been increased to ₹60,000, making income up to ₹12 lakhs tax-free.
Standard Deduction: The standard deduction has been increased to ₹75,000 for salaried employees.

Why is there a 'Tax-Free up to ₹12 lakh' provision even though the slabs show rates of 5% and 10%?

According to the Income Tax Act 2025, the claim that income up to ₹12 lakh is tax-free under the new regime can seem deceptive as the tax slabs still define a 5% rate (₹4 lakh–₹8 lakh) and a 10% rate (₹8 lakh–₹12 lakh). The key to understanding this lies in how the Section 87A rebate works alongside the slab framework.

In accordance with the revised guidelines, taxpayers calculate the tax they pay utilizing the following slab rates: 0% on the first ₹4 lakh, 5% on the next ₹4 lakh, and 10% on the following ₹4 lakh. For income up to ₹12 lakh, just this would result in a positive tax amount.

However, the government has extended the refund under Section 87A so that the full amount of tax assessed up to ₹12 lakh of total income is reversed to zero. In other words, whatever tax emerges from applying the slab rates for income up to ₹12 lakh is fully offset by the rebate, making the net tax payable nothing.

The simplified justification used in announcements is that income up to ₹12 lakh is “tax-free” because this rebate completely removes the computed tax liability according to the Income Tax Act 2025. This does not mean that the slab rates disappear—they remain in effect in the internal calculation—but that the rebate cancels any tax payable up to that income level.

No tax on income up to Rs. 12 lakh, but it’s a rebate, not an exemption

A rebate applies after tax is calculated, reducing the final amount payable, much like a discount

Surbhi Gloria Singh describes in Business Standard that Budget 2025 has proposed making normal income up to Rs 12 lakh tax-free under the new tax regime for the fiscal year 2025-26. However, taxpayers need to be aware that this is not an exemption but a rebate.

“By virtue of the rebate, only taxpayers with incomes up to Rs 12 lakh under the new regime would not have to pay any tax owing to the rebate to offset the applicable tax calculated as per the applicable slabs,” said Amit Gupta, partner at Saraf and Partners.

Difference between exemption, deduction and rebate

“Whilst the terms ‘exemption,’ ‘deduction,’ and ‘rebate’ have distinct meanings attributable to each of them, in common parlance they tend to be used interchangeably even in the context of the Income Tax statute. However, the difference between exemptions, deductions, and rebates under the provisions of the Income Tax Act (ITA) is hinged on their treatment while determining the income tax outlay,” said Gupta.

He explained that the ITA broadly seeks to tax total income as per applicable rates:

Gupta added that this distinction is not always absolute, and there are overlaps within the ITA itself.

In Budget 2025, the announcement that no taxes would be payable on income up to Rs 12 lakh may appear to be an exemption. However, it is actually a rebate under Section 87A of the ITA, meaning that the nil tax outlay only applies if the total taxable income, after deductions under the new tax regime, is up to Rs 12 lakh.

What does “exemption until Rs 12 lakh” actually mean?

“Where an individual or HUF earns income up to Rs 12 lakh, the tax payable on such income (other than income chargeable to tax at special rates such as capital gains on listed equity shares, etc.) would be nil after considering the benefit of a rebate as per Section 87A,” said Mitesh Jain, Partner at Economic Laws Practice.

The rebate means that while no tax is paid on income up to Rs 12 lakh, the income itself is still subject to taxation. The calculation still follows existing slabs, with the rebate bringing down the final tax liability to nil.

Impact of the new Income Tax Act, 2025 on Traders, Industrialists and Professionals

1. Simplified Compliance and Lower Litigation Risk

The New Income Tax Act, 2025, significantly eases the complexity of compliance by simplifying tax laws by eliminating redundant components and decreasing ambiguous terms. This leads to fewer interpretative disputes, reduced legal proceedings risk, and increasingly clear tax positions for professionals, traders, and industrialists. A simpler legal framework encourages trust and allows businesses to focus more on operations than legal tax issues.

2. Unified ‘Tax Year’ Improves Planning

3. Enhanced TDS and TCS Thresholds Reducing Compliance Burden

The Act increases thresholds for Tax Deducted at Source (TDS) and Tax Collected at Source (TCS), reducing constraints for small and medium enterprises. Traders and small industrial units experience fewer frequent deductions, lowering immediate compliance and working capital constraints according to the Income Tax Act 2025. Professionals make money when reduced TDS/TCS entails less frequent tax administrative tasks.

4. Longer Time Window for Updated Tax Returns

Under the new Income Tax Act 2025, the time limit for filing updated tax returns has been extended significantly—giving taxpayers more opportunity to rectify errors or record previously neglected income without penalty. This flexibility gives traders, producers, and consultants further breathing room for proper reporting and reduces the pressure of short filing deadlines.

5. Predictable Digital-First Tax Administration

The Act increases reliance on digital processes (faceless assessments and electronic communication), removing human interface in tax proceedings. Industrialists dealing with many units gain from faster, more transparent assessments. Traders and professionals notice reduced administrative delays, fewer manual notices, and a more efficient tax procedure that allows seamless digital filings.

6. Revised Slabs and Rebate Impact Financial Outcomes

While not a major policy shift on tax rates, the Act retains the new tax slabs introduced by the 2025 Budget with enhanced rebates for incomes up to ₹12 lakh, effectively reducing tax for many earning below this threshold. For professionals and small traders, this broadens net take-home income and can boost businesses’ cash flows.

7. Explicit Treatment of Digital and Virtual Assets

Modern terms for digital assets, including cryptocurrencies, have been incorporated into the Income Tax Act of 2025. Traders engaged in digital markets must now account for these earnings right away, focusing compliance attention on proper disclosure of their income. Professionals advising clients on digital trading and asset assessment will also need updated expertise in taxation methods.

8. Clearer Presumptive and Business Threshold Rules

The new Income Tax Act 2025 modifies turnover constraints and presumptive taxation for professionals and business entities, modifying the levels where simpler tax computation is possible. Traders and smaller manufacturers may benefit by joining presumptive schemes, simplifying tax calculations, and reducing audit risk—while professionals enjoy clearer standards for being eligible.

Other Key Points to Note

The old Income Tax Act, 1961, will be abolished starting April 1, 2026, and replaced by the new Income Tax Act, 2025. However, the repeal will not affect existing rights, liabilities, and ongoing procedures under the old Act. Here’s what you need to know.

The new tax regime is the default option, but taxpayers can opt for the old regime.
The Act introduces a ‘Tax Year’ concept, replacing the ‘Previous Year’ and ‘Assessment Year’ framework.
Technology-driven compliance and faceless assessments are expected to benefit taxpayers.

ITRs for FY 2025-26, filed from June-July 2026 onwards, will be governed by the new Income Tax Act, 2025, effective April 1, 2026. The new Act simplifies tax laws, reduces litigation, and enhances compliance.

Existing Proceedings: Pending proceedings, notices, assessments, re-assessments, rectifications, penalties, references, revisions, and appeals will continue under the old Act.
Tax Returns: Returns filed for FY 2025-26 or earlier will be governed by the 1961 Act.
Rights and Liabilities: Any rights, privileges, obligations, or liabilities acquired or incurred under the old Act remain valid.
Correction Statements: Correction statements for certain periods can be submitted until March 31, 2026.
Tax Year Concept: The new Act introduces a unified ‘Tax Year’ framework, replacing the previous ‘Previous Year’ and ‘Assessment Year’ distinction.
New Tax Regime: The new tax regime is the default option, but taxpayers can opt for the old regime.
ITR Forms: The rules and forms for filing ITRs under the new Act are being framed and will be notified after the FY27 Budget.

Conclusion: Preparing for a Simpler, Smarter Tax Regime

The New Income Tax Act, 2025 marks a significant change in India’s taxation framework, aimed to simplify terminology, boost compliance, and solve long-standing confusion for taxpayers. From the introduction of an unified Tax Year to rationalized slabs and clearer procedural regulations, the law seeks to make tax administration easier and predictable for traders, industrialists, and professionals alike. However, as with each significant legislative reform, its real effect will depend on accurate interpretation, timely notifications, and practical implementation through rules, ITR forms, and digital systems.

It will be crucial for taxpayers to be informed when they adapt to this fresh structure. While general regulations are now obvious, specific compliance requirements—such as necessary ITR forms, filing procedures, and reporting obligations—will continue to evolve through notifications and circulars. Therefore, taxpayers ought to regularly visit the official Income Tax Department website and, if needed, seek help from qualified tax professionals for appropriate data when filing Income Tax Returns for FY 2025–2026 and beyond. Smoother compliance along with greater confidence under the new tax laws tomorrow can be assured by early preparation today.

Income Tax Act 2025: The New Act you need to Know