India’s Income Tax System: FY 2025-26
Income tax compliance in India for FY 2025-26 requires a clear understanding of how income is calculated, how tax regimes operate, and how residency status affects tax liability. With the new tax regime now being the default, it is important for taxpayers to understand the applicable rules, restrictions for non-residents, and the process of paying income tax. This blog provides an overview of income tax provisions applicable for FY 2025-26, explaining the method of computing taxable income, the basic exemption limits, the specific limitations applicable to non-residents, and the relevance of the new tax regime. It also outlines how tax is paid through TDS, advance tax, and self-assessment tax, ensuring clarity on compliance requirements under the current income tax framework.
How income tax is calculated
Income tax computation begins with the aggregation of income under various heads. From this gross total income, eligible deductions are reduced, and clubbing provisions are applied wherever applicable. The resulting figure is the net total income. From the net total income, the basic exemption limit is applied, and the balance amount becomes taxable income on which tax is calculated as per the applicable regime and rates.
Basic exemption limit and its restrictions for NRIs
The basic exemption limit i.e. the maximum amount not chargeable to tax, for an individual is Rs. 250,000. For a senior citizen (60-80 years) and super senior citizens (80+ years), the basic exemption limit is Rs. 300,000 and Rs. 500,000 respectively. These high limits are available only for resident taxpayers. Non-residents are not eligible for these higher exemption limits and their basic exemption limit of Rs. 250,000. Also, non-residents cannot get basic exemption benefit for any income which is taxed at special rate i.e. STCG @ 20% and LTCG @ 15%. Residents can enjoy basic exemption for all taxable income including capital gains. For non-resident taxpayers navigating exemption restrictions and capital gains taxation, ExpertNRI, NRI tax consultants India, provide guidance on accurate tax computation and compliance to ensure hassle-free return filing.
Taxation of NRIs under the old regime
While the new tax regime is now the default, non-resident individuals continue to be assessed under traditional slab rates where applicable. For FY 2025-26, non-resident income under the old regime is taxed at progressive slab rates, with income above Rs. 1,000,000 taxed at 30%.
The new tax regime
Finance Act 2020 introduced a new income tax regime for Individuals and HUFs with reduced tax rates, provided the taxpayers are willing to forego about 60+ exemptions and deductions.
The taxpayer won’t be able to claim any deductions under chapter VI like deduction for tax saving investments in PPF, insurance, etc., medical premium for self and parents, savings account / FD interest deduction, any donation, etc. Also, deduction for interest on housing loan, additional depreciation or set off of brought forward loss or unabsorbed depreciation are not allowed.
The salaried taxpayers cannot claim any allowances like Leave Travel Allowance, House Rent Allowance, Children Education Allowance, Deduction for professional tax, but can only claim Rs. 50,000 as standard deduction for F.Y. 2023-24 and Rs. 75,000 from F.Y 2024-25. They can still claim employer’s contribution to the National Pension Scheme (NPS) up to 10% of basic pay + Dearness Allowance.
This new tax system is made optional and co-exists with the old/existing regime. The individuals or HUF with business income can exercise the option only once, whereas Individuals and HUFs without business income can exercise the option and change the regime every year.
Finance Act 2023 gave extra push to the new tax regime by increasing the rebate, reducing the number of tax slabs, tax rates and surcharge for persons in the highest tax slab. Also, the new tax regime is now the default tax regime for all the taxpayers, but the taxpayers can still opt for the old tax regime.
Tax slabs under the new regime
The tax slab and tax rate application under the new regime are as follows:
0 – 400,000: 0%
400,001 – 800,000: 5%
800,001 – 1,200,000: 10%
1,200,001 – 1,600,000: 15%
1,600,001 – 2,000,000: 20%
2,000,001 – 2,400,000: 25%
2,400,001 or more: 30%
Rebate provisions applicable in 2026
The rebate under the new regime is for annual taxable income of up to Rs. 700,000 i.e. rebate of up to Rs. 20,000 for F.Y. 2023-24. The rebate has been increased to Rs. 60,000 for F.Y. 2025-26 for income up to Rs. 1,200,000. So, anyone having total income less than 700,000 and 1,200,000 for F.Y. 2024-25 and F.Y. 2025-26 respectively would not be required to pay any income tax.
From F.Y 2025-26, the rebate would not apply to income which is charged at specified rates i.e. short-term capital gain of 20% or long-term capital gain of 15%. Also, the rebate is available for resident individuals only and not available for non-resident individuals, HUFs or any other person.
Choosing between the old and new tax regime
Whether to choose an old or new regime depends on the total amount of deductions that are only available for the old regime. If the total deductions are more than the threshold mentioned, it is advisable to file return under the old regime. If it is less than the threshold, new regime will save taxes. In 2026, this choice has become more situational rather than universal, with the new regime being suitable for the majority of taxpayers.
Surcharge on high-value incomes
Surcharge is applicable where total income exceeds specified thresholds and is calculated on the tax amount. For incomes above Rs. 50 lakhs, surcharge rates range from 10% to 37%, depending on income levels. Surcharge on capital gains, irrespective of the regime, is capped at 15%. Importantly, from FY 2025-26, taxpayers opting for the new regime benefit from a cap of 25% surcharge on other income, significantly reducing the effective tax burden for high-income earners.
Education cess
In addition to income tax and surcharge, all taxpayers are required to pay education cess at 4% on the total tax liability, including surcharge.
Payment of Tax: TDS, Advance Tax, and Self-Assessment Tax
The income tax so computed needs to be paid as TDS, TCS, advance tax or self-assessment tax. Any tax deducted by the payer and paid to the income tax department on your behalf is called TDS (Tax Deducted at Source). Any tax collected by the receiver and paid to the income tax department on your behalf is called TCS (Tax Collected at Source). Any tax paid by the taxpayer during the financial year is called advance tax and any tax paid after the end of the financial year but before filing of the return is called self-assessment tax. If total tax payable for the year exceeds TDS/TCS by more than 10,000, advance tax is to be paid on or before 15th June (15% of tax payable), 15th September (45% of tax payable), 15th December (75% of tax payable) and 15th March (100% of tax payable). The due date and % limit is the same for all persons. If the advance tax is not paid by the due dates, interest @ 1% per month or part of a month until the next due date will apply. In case of capital gains, advance tax is to be paid in balance instalments. Any balance of tax payable including interest after adjusting TDS and advance tax is paid as self-assessment tax before filing the income tax return.
In 2026, income tax compliance for FY 2025-26 is shaped by the dominance of the new tax regime, enhanced rebates, reduced surcharge, and clearer differentiation between resident and non-resident taxpayers. While the old regime continues to exist as an option, its relevance is now largely dependent on the availability of substantial deductions. A clear understanding of exemption restrictions, rebate eligibility, surcharge impact, and advance tax obligations is essential for accurate compliance and effective tax planning under the current Indian income tax framework.
Resource: India’s Income Tax System: FY 2025-26
