Knowledge Nugget | New income tax regime from April 1 – What all you need to know for UPSC Exam?

Why in the news?

From April 1, sweeping changes in India’s income tax regime came into effect, offering significant relief to nearly 1 crore taxpayers. Union Finance Minister Nirmala Sitharaman’s Budget 2025 proposals, which include a substantial hike in the tax exemption limit under the new tax regime (NTR), are expected to benefit millions by lowering the tax burden. In this context, let’s familiarise ourselves with the key features of the New Tax Regime and some basic concepts of income tax.

Key Takeaways :

1. Increase in Tax Exemption: The most important change in the new tax regime is the increase in the tax exemption limit from Rs 7 lakh to Rs 12 lakh under the new tax regime. This move ensures that individuals earning up to Rs 12 lakh annually will no longer have to pay any income tax. As per the revised slabs, the tax rates will be as follows:

For salaried individuals, a standard deduction of Rs 75,000 will continue to be applicable. This means that an individual with an annual salary of Rs 12.75 lakh will effectively fall within the tax-exempt bracket, owing to the deduction that lowers their taxable income to Rs 12 lakh.

While the higher exemption slab is a boon for many, it is essential to note that individuals earning slightly above Rs 12 lakh will not be entirely exempt. For instance, someone with a taxable income of Rs 12.1 lakh will incur a tax liability of Rs 61,500, calculated as follows:

– 5% on income between Rs 4 lakh and Rs 8 lakh
– 10% on income between Rs 8 lakh and Rs 12 lakh
– 15% on the amount exceeding Rs 12 lakh up to Rs 16 lakh

2. Lower TDS on Rent: Another key change is the increase in the TDS (Tax Deducted at Source) threshold on rental income, which has been raised from Rs 2.40 lakh to Rs 6 lakh. This revision aims to ease the compliance burden on smaller landlords and property owners.

Basic Concepts

After understanding the key features of the new tax regime, let’s now understand some basic concepts related to taxation.

1. Tax is a mandatory payment made by an economic entity to the government, without any guarantee of receiving a specific or direct return from the government in exchange.

2. The broad areas of taxes are: Tax on income and expenditure ( Tax on Personal Income, Corporate income, GST etc.), tax on commodities and tax on property and property transaction.

3. There are two types of taxes:

(i)  Direct taxes: The Central Board of Direct Taxes (CBDT) is responsible for administering various direct taxes. It consists of Income tax, Corporate tax, Securities transaction tax etc. The direct taxes are directly paid to the government by individuals and corporate entities.

(ii) Indirect taxes: An indirect tax is applied to the consumption of goods and services. The government collects this tax from the sellers and retailers of these products and services, who then pass the cost on to the buyers. When you buy a product or service, you not only pay for the item itself but also the tax. In this way, you are indirectly paying the tax to the government. Sales tax, Custom duty, GST are examples of Indirect taxes.

4. Difference between ITR Deductions and Exemptions: Understanding the distinction between ITR deductions and exemptions is crucial for maximising tax savings. While both aim to lessen your tax burden, they work in distinct ways. Deductions directly chip away at your taxable income, lowering the amount you pay taxes on. Think of it like shrinking the pie before anyone takes a slice. Examples of deductions include work-related expenses like professional fees, travel costs, or depreciation on business assets.

5. Exemptions, on the other hand, function differently. They act as specific allowances deducted from your total income before it’s assessed for taxes. Imagine carving out a slice of the pie before calculating how much is left. These exemptions can cover interest earned on certain investments, medical expenses, or income received for disabilities.

BEYOND THE NUGGET: New Income Tax Bill, 2025

After knowing about the new tax regime, it becomes essential to learn about the new income tax bill that aims to modernise India’s tax system by enhancing its efficiency and making it more taxpayer-friendly.

1. The present Income Tax Act of 1961 (“the 1961 Act”) has been subject to numerous amendments over the last six decades. As a result, the basic structure of the 1961 Act has undergone a significant change and the language of the provisions has become complex. It has resulted in ambiguity in interpretation of provisions and tax disputes leading to protracted litigation.

2. As a result, with the aim to make the income tax law concise, lucid, easy to read and understand, and with a view to reduce tax disputes and litigation and provide certainty to the taxpayers, the Finance Minister, in her Budget speech of July 2024, announced a comprehensive review of the 1961 Act.

3. After taking into account more than 6,500 suggestions, the new Income-tax Bill, 2025 (“the Bill”) has been formulated and was presented in Lok Sabha on February 13.

4. Compared to the 1961 Act, the Bill replaces the term “previous year” with “tax year”. Also, the concept of assessment year has been done away with. The tax year will continue to start on April 1 and end on March 31.

5. Another change is that under the Bill, the CBDT will have the authority to establish tax administration rules, implement compliance measures, and enforce digital tax monitoring systems without the need for frequent legislative changes.

6. Additionally, “Virtual digital space” has been defined in the powers to call for information by income tax authorities during surveys, searches and seizures to include email servers, social media accounts, online investment, trading and banking accounts, remote or cloud servers, and digital application platforms.

7. Presently, the bill is under scrutiny of Parliament’s Standing Committee on Finance. Scheduled to take effect on April 1, 2026, it emphasises a “trust first, scrutinise later” philosophy. The Bill ensures that taxpayers can navigate it with greater ease and confidence, ultimately fostering a more transparent and efficient tax environment.

Post Read Question

What is new in the Income Tax Bill, 2025?

1. The bill upholds the concept of “assessment year” (AY), which assesses tax on income earned in the “previous (financial) year” and rejects the suggestion of “tax year”.

2. “Virtual digital space” has been defined in the powers to call for information by income tax authorities.

Which of the above given statements is/are true?

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

(Sources: Union Budget 2025: Quick look at 5 basic terms every UPSC aspirant must know, ITR Deductions and Exemptions: Calculation, identification and difference; all you need to know, Recap of new income tax coming into effect from April 1, New Income Tax Bill: It aims to modernise India’s tax system)

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