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Complete Guide to Income Tax Returns for Salaried Individuals (FY 2025-26 / AY 2026-27)
Published on: January 2, 2026 | Updated as per Finance Act 2025
Welcome to CMA Knowledge. The financial year 2025-26 (Assessment Year 2026-27) introduces the most significant simplification of India’s personal income tax system in recent times, driven by the Finance Act 2025. This guide is tailored for salaried individuals to navigate the new tax landscape, understand the drastically revised tax slabs and rebates, and make an informed choice between the regimes.
Disclaimer: This content is for general guidance and overview purposes only. It is not exhaustive and does not constitute professional tax advice. For complete and binding details, always refer to the Income Tax Act, 1961 (and the forthcoming Income Tax Act, 2025), its Rules, and official Notifications. Consult a qualified tax professional for advice specific to your situation.
📑 Table of Contents
- The 2025 Tax Reset: Key Changes at a Glance
- Updated Income Tax Slabs & Regimes (FY 2025-26)
- The New ₹12 Lakh Tax-Free Threshold: How It Works
- Choosing Your Tax Regime: A Detailed Comparison
- Understanding Your ITR Forms & Key Documents
- Other Important Updates from Finance Act 2025
- Filing Process & Common Mistakes to Avoid
1. The 2025 Tax Reset: Key Changes at a Glance
The Finance Act 2025 has fundamentally reshaped the personal income tax structure to provide substantial relief to the middle class and simplify compliance. Here are the cornerstone changes effective from April 1, 2025:
- Revamped New Tax Regime Slabs: The tax brackets under the New Regime have been completely restructured into seven slabs, with the highest 30% rate now applying only to income above ₹24 lakh (instead of ₹15 lakh).
- Enhanced Rebate under Section 87A: The rebate has been increased to ensure zero tax liability for total income up to ₹12 lakh for individuals opting for the New Tax Regime.
- Increased Standard Deduction: The standard deduction for salaried individuals under the New Regime has been raised to ₹75,000, making salary up to ₹12.75 lakh effectively tax-free.
- New Tax Law from 2026: The Income Tax Act, 1961 will be replaced by the new Income Tax Act, 2025 from April 1, 2026 (FY 2026-27). This new law promises simpler language and more logical organization but is not expected to change core tax structures immediately.
2. Updated Income Tax Slabs & Regimes (FY 2025-26)
Your choice of tax regime—Old or New—is more consequential than ever. The New Regime has been made significantly more attractive through revised slabs and a massive rebate.
The New Tax Regime (Default & Revised)
This is the default regime and has been overhauled for FY 2025-26. It offers lower tax rates and the new, higher rebate but requires you to forgo most common deductions and exemptions (like HRA, 80C, 80D).
| Income Slab (₹) | Tax Rate | Tax Calculation for Income in this Slab |
|---|---|---|
| Up to 4,00,000 | 0% | Nil |
| 4,00,001 – 8,00,000 | 5% | 5% of income exceeding ₹4 Lakh |
| 8,00,001 – 12,00,000 | 10% | ₹20,000 + 10% of income exceeding ₹8 Lakh |
| 12,00,001 – 16,00,000 | 15% | ₹60,000 + 15% of income exceeding ₹12 Lakh |
| 16,00,001 – 20,00,000 | 20% | ₹1,20,000 + 20% of income exceeding ₹16 Lakh |
| 20,00,001 – 24,00,000 | 25% | ₹2,00,000 + 25% of income exceeding ₹20 Lakh* |
| Above 24,00,000 | 30% | ₹3,00,000 + 30% of income exceeding ₹24 Lakh |
*Note: Some calculations may show this as ₹1,20,000 + 25% of income exceeding ₹16 Lakh. The final tax payable is the same; it’s a matter of slab calculation methodology.
Key Feature: There are no separate slab benefits for Senior or Super Senior Citizens under the New Tax Regime. All individuals follow the same slabs shown above.
The Old Tax Regime (Unchanged)
The Old Regime remains unchanged from the previous year. It retains higher tax rates but allows you to claim a wide array of deductions (Sections 80C, 80D, HRA, etc.), which can significantly reduce your taxable income.
| Category | Income Slab (₹) | Tax Rate |
|---|---|---|
| Individuals & HUFs (Below 60 years) | Up to 2,50,000 | 0% |
| 2,50,001 – 5,00,000 | 5% | |
| 5,00,001 – 10,00,000 | 20% | |
| Above 10,00,000 | 30% | |
| Senior Citizens (60 to 80 years) | Up to 3,00,000 | 0% |
| 3,00,001 – 5,00,000 | 5% | |
| 5,00,001 – 10,00,000 | 20% | |
| Above 10,00,000 | 30% | |
| Super Senior Citizens (80+ years) | Up to 5,00,000 | 0% |
| 5,00,001 – 10,00,000 | 20% | |
| Above 10,00,000 | 30% |
3. The New ₹12 Lakh Tax-Free Threshold: How It Works
The most talked-about reform is the effective tax-free limit of ₹12 lakh for salaried individuals under the New Regime. This is achieved through a combination of two powerful tools:
- Enhanced Rebate under Section 87A: The maximum rebate under this section has been increased. It now fully covers the tax calculated on total income up to ₹12 lakh under the New Regime slabs.
- Increased Standard Deduction: For salaried individuals, the standard deduction under the New Regime has been raised to ₹75,000. This amount is deducted from your gross salary to arrive at your net taxable income.
Practical Example: Tax-Free Salary of ₹12.75 Lakh
Let’s see how this works for Rohan, a salaried professional with a gross salary of ₹12,75,000 in FY 2025-26, opting for the New Regime.
- Step 1: Apply Standard Deduction: Gross Salary (₹12,75,000) – Standard Deduction (₹75,000) = Net Taxable Income: ₹12,00,000.
- Step 2: Calculate Tax as per New Slabs:
- Up to ₹4,00,000: 0% = ₹0
- ₹4,00,001 – ₹8,00,000 (₹4 Lakh): 5% = ₹20,000
- ₹8,00,001 – ₹12,00,000 (₹4 Lakh): 10% = ₹40,000
- Total Tax before Rebate: ₹60,000
- Step 3: Apply Enhanced Rebate u/s 87A: Since Rohan’s total income is ₹12 lakh, he is eligible for the full rebate. The rebate amount is equal to the tax calculated, i.e., ₹60,000.
- Final Tax Payable: ₹60,000 – ₹60,000 = ₹0.
Result: Rohan pays zero income tax on his gross salary of ₹12.75 lakh.
Important Caveat: This enhanced rebate applies only to income taxed under the normal slab rates (like Salary, House Property, Other Sources). It does NOT apply to income taxed at special rates, such as:
- Long-Term Capital Gains (LTCG) on equity/shares.
- Short-Term Capital Gains (STCG) under Section 111A.
- Winnings from lottery, puzzles, or online gaming.
- Income from Virtual Digital Assets (Crypto Assets).
Such income will be taxed at their respective flat rates, and the rebate under Section 87A cannot be used to offset that tax.
4. Choosing Your Tax Regime: A Detailed Comparison
With the New Regime offering such a high tax-free threshold, the choice isn’t automatic. You must calculate based on your specific financial profile.
| Consideration | Old Tax Regime | New Tax Regime (FY 2025-26) |
|---|---|---|
| Tax Slabs & Rates | Higher rates (30% above ₹10L). Separate, beneficial slabs for seniors. | Lower, restructured rates (30% only above ₹24L). Same slab for all ages. |
| Rebate u/s 87A | Income up to ₹5 lakh can be tax-free (Rebate up to ₹12,500). | Income up to ₹12 lakh can be tax-free (Enhanced rebate covers tax). |
| Standard Deduction (Salaried) | ₹50,000 | ₹75,000 |
| Common Deductions & Exemptions | ALLOWED: HRA, LTA, 80C (1.5L), 80D (Mediclaim), 80CCD(1B) (NPS), 80E (Edu Loan), 24(b) (Home Loan Interest), Chapter VI-A deductions. | NOT ALLOWED (with few exceptions): Most exemptions (HRA, LTA) and deductions (80C, 80D, etc.) are unavailable. Key exception: Employer’s NPS contribution u/s 80CCD(2) and standard deduction are allowed. |
| Ideal For | Individuals with high qualifying investments/deductions (home loan, insurance, NPS, etc.) that can reduce taxable income substantially—typically above ₹3.5-4 lakhs. | Individuals with minimal investments for tax saving, those with income up to ₹12L (for zero tax), or those who prefer extreme simplicity over tracking deductions. |
Rule of Thumb for Salaried Individuals:
If your total eligible deductions under the Old Regime (HRA + 80C + 80D + 24(b), etc.) are less than approximately ₹3.5 to 4 lakhs, the New Regime with its higher standard deduction and rebate will likely be more beneficial for FY 2025-26. For incomes above ₹15-20 lakh, this threshold for deductions is even higher.
Action: Always calculate your tax liability under both regimes using an online calculator or with help from your Chartered Accountant before filing.
5. Understanding Your ITR Forms & Key Documents
While the core income tax rules have changed, the process of filing returns and the associated forms remain largely consistent for FY 2025-26.
Selecting the Correct ITR Form
The eligibility criteria for ITR forms (ITR-1, ITR-2, ITR-3, ITR-4) are unchanged. Your choice depends on the nature and sources of your income, not your chosen tax regime.
- ITR-1 (Sahaj): For resident individuals with income up to ₹50 lakh from Salary, One House Property, Other Sources, and agricultural income up to ₹5,000.
- ITR-2: For individuals and HUFs not having income from “Profits and Gains of Business or Profession” and who are not eligible for ITR-1 (e.g., have capital gains, foreign income, multiple house properties).
- ITR-3: Mandatory for individuals and HUFs having income from business or profession.
- ITR-4 (Sugam): For resident individuals, HUFs, and Firms (not LLP) having presumptive business income under sections 44AD, 44ADA, or 44AE and total income up to ₹50 lakh.
Essential Forms & Statements
| Form / Statement | Purpose | Key Update for FY 2025-26 |
|---|---|---|
| Form 16 | Certificate for TDS on Salary from your employer. | Will reflect your salary, the ₹75,000 standard deduction (if under New Regime), and TDS based on your declared regime/investments. |
| Form 26AS & AIS | Consolidated tax credit and annual information statement from the Income Tax Department. | Your single source of truth. Always reconcile the TDS and income details in Form 16 with your Form 26AS/AIS before filing to avoid mismatches. |
| Form 12BB | Declaration to employer for tax-saving investments/claims. | If you opt for the Old Regime, submit this with proofs to your employer to ensure lower TDS. For the New Regime, this is generally not required as deductions are not claimed. |
6. Other Important Updates from Finance Act 2025
- Clarity on ULIP Taxation: Profits from Unit Linked Insurance Plans (ULIPs) that do not qualify for exemption under Section 10(10D) will now be explicitly taxed as capital gains, removing prior ambiguity.
- Taxation of Virtual Digital Assets (VDAs): The 30% flat tax on income from crypto assets and the 1% TDS remain unchanged. A new reporting requirement (Section 285BAA) will be effective from April 1, 2026, requiring prescribed entities to furnish information on crypto transactions.
- Eased TDS/TCS Compliance:
- Sections 206AB and 206CCA, which imposed higher TDS rates on non-filers of returns, have been removed entirely.
- The threshold for Tax Collection at Source (TCS) on foreign remittances under the Liberalised Remittance Scheme (LRS) has been increased from ₹7 lakh to ₹10 lakh.
- GST Rationalization: Following the September 2025 GST Council meeting, the multi-slab structure has been simplified primarily to two principal rates—5% and 18%—for most goods and services, with a higher “demerit” rate for items like tobacco and luxury cars.
7. Filing Process & Common Mistakes to Avoid
Step-by-Step Filing Guide for AY 2026-27
- Gather Documents: Form 16, Bank Interest Certificates, AIS/26AS, Investment Proofs (if opting for Old Regime).
- Calculate & Choose Regime: Compute tax liability under both Old and New regimes using the updated slabs and rebate to make an informed choice.
- File Return: Use the correct ITR form on the Income Tax e-filing portal (https://www.incometax.gov.in). The portal will have the updated utility for AY 2026-27.
- E-Verify: This is the most crucial step. E-verify your return immediately using Aadhaar OTP, Net Banking, or other methods. An unverified return is considered not filed.
Common Pitfalls to Avoid
- Not Understanding the Rebate Limit: Assuming all income up to ₹12.75 lakh is tax-free. Remember, the ₹12 lakh rebate limit applies to total income after standard deduction, and it excludes special rate incomes like capital gains.
- Auto-Pilot Regime Selection: Sticking with last year’s choice without calculating for FY 2025-26. The New Regime is now beneficial for a much larger group.
- Mismatch with AIS/26AS: Filing return without reconciling income and TDS details with your Annual Information Statement (AIS). This is the #1 cause for receiving notices from the tax department.
- Missing the Due Date: The due date for salaried individuals not subject to audit is typically July 31, 2026. Late filing attracts penalties and interest.
Conclusion & Looking Ahead
The Finance Act 2025 has successfully reset India’s personal tax landscape towards remarkable simplicity and significant relief for the middle-class salaried taxpayer. The enhanced rebate and restructured slabs make the New Tax Regime a compelling default choice for millions. However, the disciplined investor with substantial home loan interest, insurance premiums, and NPS contributions may still find value in the Old Regime.
As you prepare for the filing season for FY 2025-26 (AY 2026-27), use this guide as a starting point. Remember, this also marks the final year of the Income Tax Act, 1961. From the next financial year (FY 2026-27), the new, rewritten Income Tax Act, 2025 will come into effect, promising a modern, plain-language law designed for the digital age, though core tax principles are expected to remain stable.
Your Final Filing Checklist for AY 2026-27:
- ✅ Calculated tax under both Old & New regimes.
- ✅ Chosen the beneficial tax regime.
- ✅ Gathered Form 16, AIS/26AS, and investment proofs.
- ✅ Selected the correct ITR form based on income sources.
- ✅ Reconciled all income and TDS with AIS/26AS.
- ✅ Filed return and E-VERIFIED it successfully.
