What You Need to Know About India’s New Income Tax Rules 2026

If you have been following the financial headlines, you know that the landscape of Indian taxation is shifting. With the Income Tax Act 2025 passed on August 21, 2025, a new era of taxation becomes effective from April 1, 2026.

For many salaried professionals and retirees, this change brings good news: lower tax rates, higher standard deductions, and a simplified structure. However, it also signals a move toward a “Zero-Exemption” model where paper-heavy claims are replaced by flat rates.

Here is everything you need to know about the New Income Tax Act, explained simply.

1. The “Zero-Tax” Limit Increases to ₹12 Lakh

The biggest headline for FY 2025-26 (Assessment Year 2026-27) is the massive relief for middle-income earners. Under the New Tax Regime, if your taxable income is up to ₹12 Lakh, you may effectively pay zero tax.

How does this work?

It is a combination of wider tax slabs and an enhanced rebate under Section 87A.

• Rebate Limit: Taxpayers with income up to ₹12 Lakh get a rebate of ₹60,000.
• The Math: If you earn ₹12 Lakh, the calculated tax is exactly ₹60,000. The government provides a rebate of ₹60,000, bringing your final liability to ₹0.

Note: If your income crosses ₹12 Lakh (even by a small margin), the rebate is lost, and you will be taxed according to the slab rates.

2. New Income Tax Slabs (FY 2025-26)

The government has relaxed the slabs significantly to put more money in the hands of the taxpayer. The new regime is now the default option.

Data Source: Union Budget FY 2025-26 & ClearTax.

3. Standard Deduction Hiked to ₹75,000

For years, salaried employees and pensioners claimed a flat deduction of ₹50,000. Under the New Income Tax Act effective April 2026, this Standard Deduction has been increased to ₹75,000.

This deduction is applied automatically—you do not need to submit any bills or proof to claim it.

4. Retirement & NPS: The Hidden Benefit

While the New Regime removes deductions like HRA (House Rent Allowance) and Section 80C (LIC/PPF), it retains a powerful benefit for retirement planning: NPS (National Pension System).

• Employer Contribution: Under Section 80CCD(2), if your employer contributes to your NPS, that amount (up to 14% of salary for government/some corporate employees) is tax-deductible.
• Why it matters: This allows you to build a retirement corpus while lowering your taxable income, even under the new “no-exemption” rules.

5. Surcharge Capped for High Earners

For High Net-Worth Individuals (HNIs), the tax burden has been reduced. Previously, the surcharge on income tax could go up to 37%. Under the New Regime, the highest surcharge rate is capped at 25%, even for incomes exceeding ₹5 Crore.

6. Compliance Warning: The Age of AI Scrutiny

The “New Income Tax Act” isn’t just about rates; it’s about transparency. The Income Tax Department is ramping up data-driven scrutiny.

• Avoid Fake Claims: Notices are being sent for wrongful HRA claims and unverified donations.
• Digital Verification: Ensure your Annual Information Statement (AIS) matches your ITR. The days of under-reporting income are over.

Quick Comparison: Old vs. New Regime (2026)

Final Verdict: Which one should you choose?

The New Regime is designed to be “hassle-free.” If you do not have significant investments in home loans (Section 24) or tuition fees/insurance (80C), the New Regime will likely save you more tax. However, if you have high deductions (over ₹3-4 Lakhs), calculating your liability under the Old Regime is still recommended before filing

FAQs

1. When does the New Income Tax Act come into effect? The changes are effective from April 1, 2026, applicable for the income earned in FY 2025-26.

2. Is the Standard Deduction of ₹75,000 available to everyone? It is available to salaried individuals and pensioners under the New Tax Regime.

3. Can I still switch between Old and New Regimes? Yes. Salaried individuals can switch regimes every year. However, those with business or professional income can switch only once in their lifetime.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. Tax laws are subject to change. Please consult a Chartered Accountant (CA) or tax advisor before filing your taxes.

PiyushK

Piyush is a portfolio management executive with 15 years of experience in digital transformation and strategic finance. He holds an MBA from IIM Kozhikode and specializes in personal finance strategy, investment fundamentals, and AI-driven financial tools. He writes about making financial concepts accessible and building sustainable wealth through technology and automation.