Income Tax Rates for AY 2025–26 & AY 2026–27

The Assessment Years 2025–26 and 2026–27 represent a transitional period where the Government reinforced the New Tax Regime as the core framework, streamlined slabs, and narrowed exemptions. This document explains the rate architecture, policy drivers, practical consequences for taxpayers and advisors, and the path toward a modern tax code.

Policy drivers

Key policy drivers include simplification of tax slabs to reduce computation complexity, alignment with global tax architecture, digitalisation of return filing and assessment, emphasis on voluntary compliance, and legislative reforms proposed through the Income Tax Bill 2025. These informed slab architecture and deduction rationalisation.

Core principles

The New Regime continued as the default for AY 2025–26 and AY 2026–27. Core principles: lower slab rates, reduced exemptions, cleaner computation, and technology-driven assessments. Taxpayers may elect the Old Regime where deductions materially benefit them, but policy nudges consolidation toward the new system.

The slab structure preserves a zero-tax buffer for low incomes, then progresses through graded bands with gradually increasing rates. Marginal relief and minimal surcharges are retained to avoid cliff effects. The emphasis is on smooth progression and fewer abrupt liability jumps.

Taxpayers with substantial deductions (Section 80C, HRA, home loan interest etc.) may still find the Old Regime advantageous. However, the Old Regime generally retains higher base rates and therefore benefits a narrower taxpayer subset compared to the New Regime.

Surcharge applies to higher-income individuals above certain thresholds with marginal relief to smooth transitions. A uniform 4% Health & Education Cess applies across the board. The New Regime simplified surcharge application to reduce interpretative complexity.

Corporate rates remained stable with a moderate base rate and concessional regimes for certain new manufacturing companies. Companies opting out of deductions faced flatter, predictable rates. LLPs and other entities followed prescribed flat rates with surcharge and cess.

The New Regime retained essential deductions only — examples include standard deduction for salaried taxpayers, employer NPS contributions, limited personal NPS allowances, health insurance related deductions and certain retirement/termination benefits. The rationalisation reduces ambiguity and curbs aggressive tax planning.

AY 2025–26 reflects the transition into the simplified new regime; AY 2026–27 consolidates and stabilises the structure. Changes between the years are incremental and focus on refinement rather than redesign—improving digital alignment and predictability.

Both assessment years clarified treatment of capital gains, digital assets, lottery and casual incomes, dividends, interest and foreign income. These rules aimed to reduce litigation and align with contemporary economic activity, ensuring clearer reporting and reduced disputes.

The New Regime prioritised middle-class relief through lower slab rates, higher standard deductions, streamlined TDS thresholds and better pre-filled return mechanics—reducing compliance effort and increasing disposable income for many households.

Surcharge rationalisation and reduced incentive for complex tax structures provided predictability for high-income taxpayers while strengthening automated reporting and compliance to deter avoidance.

The regimes for these AYs preserved favourable treatment for senior citizens — relaxed compliance where income is pension/interest-based, enhanced medical deductions and straightforward filing options to reduce burden on older taxpayers.

The refined slabs and deduction framework aimed to increase disposable income, support consumption-led growth, encourage savings, strengthen tax base consistency and reduce compliance disputes—contributing to a more investor-friendly macro environment.

AY 2025–26 and AY 2026–27 mark an important step in India’s transition to a modern tax system—one that emphasises simplicity, predictability and digital compliance. Taxpayers and advisors should prioritise re-running models, updating payroll systems and reviewing investment strategies in light of the essential-only deduction approach and slab stabilisation.

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