Union Budget 2025 Tax Changes: How the New Slabs, TDS Limits, and Exemptions Affect You in AY 2026-27

The Union Budget 2025, presented on 1 February 2025, introduced the most significant changes to India's personal income tax structure in years. With overhauled tax slabs under the new regime, a dramatically raised zero-tax threshold, and revised TDS limits, the impact on individual taxpayers filing for Assessment Year 2026-27 (Financial Year 2025-26) is substantial.

This guide breaks down every change that matters to you as a salaried individual, freelancer, or investor — with practical examples showing exactly how much you save.

Revised Tax Slabs Under the New Regime

The centrepiece of Budget 2025 is the restructured new regime slab table. The government widened lower brackets and added granularity at higher incomes:

The nil slab expanded from Rs 3 lakh to Rs 4 lakh, and the new 25% bracket at Rs 20-24 lakh replaced what used to jump straight to 30% above Rs 15 lakh. This graduated structure benefits virtually every taxpayer under the new regime.

What This Means in Rupees

Consider a salaried individual with a gross salary of Rs 16,00,000 per year. After the Rs 75,000 standard deduction, taxable income is Rs 15,25,000.

Under the old AY 2025-26 slabs (new regime):

• Rs 0–3L: Nil
• Rs 3–7L: Rs 20,000
• Rs 7–10L: Rs 30,000
• Rs 10–12L: Rs 30,000
• Rs 12–15L: Rs 60,000
• Rs 15–15.25L: Rs 7,500
• Total tax: Rs 1,47,500 + 4% cess = Rs 1,53,400

Under the new AY 2026-27 slabs (new regime):

• Rs 0–4L: Nil
• Rs 4–8L: Rs 20,000
• Rs 8–12L: Rs 40,000
• Rs 12–15.25L: Rs 48,750
• Total tax: Rs 1,08,750 + 4% cess = Rs 1,13,100

That is a saving of over Rs 40,000 — purely from the slab restructuring.

The Rs 12.75 Lakh Zero-Tax Threshold

Budget 2025 raised the tax rebate under Section 87A so that individuals with taxable income up to Rs 12,00,000 under the new regime pay zero tax. When you add the Rs 75,000 standard deduction for salaried individuals, this effectively means:

Salaried employees earning up to Rs 12,75,000 gross salary pay no income tax at all under the new regime.

For non-salaried individuals (freelancers, self-employed), the zero-tax ceiling is Rs 12,00,000 since they do not receive the standard deduction.

The Marginal Relief Mechanism

If your taxable income slightly exceeds Rs 12 lakh, marginal relief ensures that the tax you pay does not exceed the income above Rs 12 lakh. For example, if your taxable income is Rs 12,10,000, your tax will not exceed Rs 10,000 — so you are not suddenly burdened with the full slab-calculated amount.

This prevents the "cliff effect" that discouraged people from reporting small amounts of additional income.

Revised TDS Thresholds

Budget 2025 revised several TDS thresholds to reduce compliance burden and increase take-home amounts:

The rent TDS threshold jumping from Rs 2.4 lakh to Rs 6 lakh is particularly impactful — tenants paying monthly rent up to Rs 50,000 no longer need to deduct TDS, eliminating a significant compliance hassle for most urban renters.

For senior citizens, the doubled interest TDS threshold of Rs 1 lakh means most will not see TDS deducted on their FD interest at all, reducing the need to claim refunds. For a deeper understanding of how TDS on salary works, see our dedicated guide.

Updated Tax Regime Comparison

With the new regime becoming even more attractive, the crossover point where the old regime makes sense has shifted. The old regime retains its value only when your total deductions and exemptions are very high.

The new regime is now clearly better if:

• Your total deductions under the old regime (80C, 80D, HRA, home loan interest, etc.) are less than approximately Rs 3.75 lakh
• You do not have significant HRA exemptions from high-rent metro cities
• You prefer simplicity and higher take-home pay

The old regime may still win if:

• You claim substantial HRA exemption (metro rent above Rs 25,000/month)
• You max out Section 80C (Rs 1.5 lakh), 80D (Rs 75,000 for family + parents), 80CCD(1B) (Rs 50,000 NPS), and home loan interest under Section 24(b) (Rs 2 lakh)
• Your total claimable deductions exceed Rs 4-5 lakh

For a detailed comparison framework, read our guide on choosing between the old and new tax regime.

Higher Limit for Tax-Free Perquisites (Section 17)

Budget 2025 increased the employer-provided perquisite exemption limit, benefiting salaried employees who receive non-cash benefits. Specifically, the exemption for employer contributions to recognised provident funds remains at the Rs 7.5 lakh threshold introduced earlier, but certain fringe benefits like leave travel concession and food coupons continue under their existing limits.

Extended Time Limit for Filing Updated Returns

The window for filing an updated return (ITR-U) has been extended from 24 months to 48 months from the end of the relevant assessment year. This gives taxpayers significantly more time to correct errors or report omitted income, though the additional tax payable increases with delay:

While the penalties increase, having a four-year window provides meaningful relief for taxpayers who discover unreported income from past years. If you need to file a corrected return within the same assessment year, the process is different — see our guide on filing a revised return.

Rationalised TCS on Foreign Remittances

Tax Collected at Source (TCS) on foreign remittances under the Liberalised Remittance Scheme (LRS) has been rationalised:

• Education remittances funded by loans: TCS reduced to 0% up to Rs 10 lakh (from the earlier 0.5%)
• Other LRS remittances: the Rs 7 lakh threshold below which no TCS applies continues
• Tour packages: TCS remains at 5% for amounts up to Rs 10 lakh, and 20% above

For individuals sending money abroad for children's education or family support, the reduced TCS means less cash locked up as advance tax payments and fewer refund claims needed during ITR filing.

Impact on Advance Tax Obligations

With the raised zero-tax threshold, many taxpayers who previously had to pay advance tax in quarterly instalments will find themselves below the Rs 10,000 threshold. If your total tax liability for FY 2025-26 (after TDS) is under Rs 10,000, you are not required to pay advance tax at all.

For those who still have advance tax obligations, the quarterly schedule remains unchanged: 15% by 15 June, 45% by 15 September, 75% by 15 December, and 100% by 15 March.

How to Make the Most of These Changes

1. Re-evaluate your regime choice: If you defaulted to the old regime in previous years, run the numbers again. The widened slabs mean the new regime now saves more money for a larger proportion of taxpayers. 49Tax can automatically calculate your liability under both regimes and recommend the optimal choice based on your actual income and deductions.

2. Check your Form 16 against the new slabs: Employers should have applied the revised slabs for TDS from April 2025. Verify that your Part B of Form 16 reflects the AY 2026-27 rates — if your employer used the old rates, you are owed a larger refund.

3. Reassess your rent TDS compliance: If you pay monthly rent of Rs 50,000 or less, you no longer need to deduct TDS under Section 194-IB. Stop deducting from April 2025 payments onward.

4. Review your FD interest situation: With raised thresholds, check whether TDS was still deducted on your interest income. If it was deducted unnecessarily (below the new limits), claim the refund in your ITR.

5. File on time: The due date for non-audit individual taxpayers remains 31 July 2026 for AY 2026-27. Filing early means faster refund processing — the income tax department typically processes e-verified returns within 30 days.

Key Takeaway

Budget 2025 delivers tangible tax savings for the vast majority of individual taxpayers. The combination of widened slabs, the Rs 12.75 lakh zero-tax threshold for salaried employees, and raised TDS limits means both lower outgo and reduced compliance friction. If you have not yet recalculated your tax position under the revised structure, now is the time — the differences are significant enough to affect your investment and savings decisions for the rest of the financial year.