Understanding the main features of income‑tax laws is essential for taxpayers to make informed decisions. The regular tax regime follows a conventional structure with exemptions and deductions, while the alternative tax regime offers low slab rates in exchange for foregoing most deductions. Beginning assessment year 2024‑25, the alternative regime becomes the default for individual and certain non‑corporate taxpayers, unless the regular regime is explicitly opted for. This shift marks a significant structural change in taxation, warranting a thorough explanation.
In this part, we describe who is affected by these regimes and the default‑option rules. We clarify definitions of key taxpayer categories such as senior and super senior citizens. We outline slab structures in narrative form. We highlight how exemptions and base exemption limits operate, and the broad idea of optionality in choosing tax regimes. Deeper exploration of rates, surcharge, cess, and marginal relief will follow in later parts.
Taxpayer Categories and Definitions
The concept of assessment year denotes the year in which income earned in the previous fiscal year is assessed to tax. For assessment year 2024‑25, the previous year is 2023‑24. For assessment year 2025‑26, the previous year is 2024‑25. Taxpayer categories include resident individuals and non‑residents, Hindu Undivided Families, Associations of Persons, Bodies of Individuals, and artificial juridical persons. Resident individuals are further classified by age to determine their exemption limits. A senior citizen is a resident individual who has attained the age of sixty but is less than eighty years at the end of the previous year. A super senior citizen is eighty years or older. Age thresholds differ slightly between assessment year 2024‑25 and 2025‑26, but conceptually they remain constant. The importance of these categories lies in their varying exemption limits and the structure of slab rates in the regular regime.
In the regular tax regime, the exemption limit for a normal individual is modest. Resident senior citizens enjoy a higher exemption threshold, and super senior citizens enjoy the highest threshold, with a lower overall tax burden due to larger bracket exemptions. This design aims to ease the tax burden on older taxpayers through higher initial tax‑free income.
Regular Tax Regime: Exemption Limits and Slab Structure
Under the regular regime, the baseline exemption limit is modest for individuals, HUFs, AOPs, BOIs, and artificial juridical persons. Resident senior citizens benefit from a higher exemption limit, reducing the first slab of taxable income. Super senior citizens enjoy an even higher exemption limit, further delaying the entry into taxation. The progression of tax liabilities in this conventional regime follows a tiered slab system. Taxable income falling within the next range beyond the exemption is taxed at a small rate, and then higher income attracts higher slab rates. Over time,, this progression ensures that lower income remains relatively untaxed while higher income bears a significant tax burden. The super senior category may begin paying tax only at much higher income thresholds.
For non‑residents, however, exemption limits align with the baseline rather than the elevated senior slabs. T, A senior citizen who qualifies as a non‑resident does not benefit from the higher initial exemption thresholds. The regular regime thus applies different treatment depending on residency.
In this regime, deductions and exemptions permitted by various sections of the law may be claimed by taxpayers, allowing them to reduce their total taxable income. The combination of base exemption, slab rates, and deductions makes tax calculation in the regular regime more complex but potentially more advantageous for those claiming multiple deductions.
Alternative Tax Regime: Default Status and Slab Structure
The alternative tax regime offers simplicity with lower slab rates but significantly limited deductions. Beginning assessment year 2024‑25, for individuals, HUFs, AOPs, Os and artificial juridical persons, the alternative regime becomes the default, unless the taxpayer opts for the regular regime. This reversal of default status places the burden on the taxpayer to actively choose the regular regime if that is preferable.
Within this regime, the exemption limit is uniform up to a certain amount. Income up to that level is tax‑free. The slab structure beyond that point is more granular than the regular regime, with multiple small ranges and increasing rates. For instance, income beyond the nil slab is immediately taxed at a modest rate, and further income falls within higher but still tiered rates. These rates remain moderate but rise progressively, culminating in a higher top rate. The intent is to simplify computation by removing most exemptions and deductions, replacing them with cleaner slab boundaries. For the taxpayer, this means clear and predictable tax outcomes as long as the simpler structure is suitable.
Assessment year 2024‑25 and assessment year 2025‑26 both follow this alternative structure, with slight adjustments to slab brackets between the two years. While the basic structure remains, the upper limit for certain slabs shifts upward in 2025‑26, reflecting inflation or policy adjustments.
Default Regime Shift and Option Mechanism
A key shift effective starting AY 2024‑25 is the reversal of the default regime for individual and similar taxpayers: the alternative regime becomes the default. Taxpayers who wish to use the regular regime must make an affirmative choice under the law. This represents a mindset shift. In the past, taxpayers needed to opt into the alternative regime; now, many will need to explicitly opt into the regular regime if they wish to continue claiming deductions and exemptions.
This shift underscores government policy favouring simplification and a broader tax base, potentially reducing tax avoidance facilitated by various exemptions. It also means taxpayer awareness becomes critical: those accustomed to using deductions must now remember to opt in to use them.
The mechanism to switch regimes resides in specified sections of the tax law. Taxpayers must exercise the option within the time and manner prescribed, often during return filing. Once exercised, the regime applies for that assessment year; switching mid‑year is not permitted. This procedural requirement merits awareness so taxpayers do not default into a higher tax outcome unintentionally.
Detailed Income Tax Slabs under the Regular Tax Regime for AYs 2024–25 and 2025–26
The regular income tax regime operates on progressive tax slabs where tax rates increase with higher income brackets. This regime allows taxpayers to claim various deductions and exemptions provided under different sections of the Income-tax Act. For the assessment years 2024–25 and 2025–26, the structure remains broadly consistent, although a taxpayer’s exact liability will depend on their residential status, age category, and income sources.
In the regular tax regime, resident individuals below the age of sixty years are allowed a basic exemption limit. Senior citizens, who are individuals aged sixty years or more but less than eighty, are provided a higher basic exemption limit. Super senior citizens, defined as those aged eighty years or more, enjoy an even higher exemption threshold. These tiered exemption limits are provided to ease the tax burden on senior populations.
For assessment year 2024–25, the basic exemption limit is a modest amount for individuals below sixty, while it increases by a moderate margin for senior citizens and by a further margin for super senior citizens. The slab rates that follow start with a low rate on income exceeding the exemption limit and gradually increase at set thresholds. The final slab applies a higher rate on income beyond a defined upper limit.
This structure continues for assessment year 2025–26. While the exemption limits and slab rates generally remain constant, slight tweaks may be introduced by the Finance Act of the preceding year. Nonetheless, the framework of age-based relief, deductions, and progressive slabs stays intact.
Regular Regime Slab Progression and Tax Calculation
Under the regular regime, tax calculation is influenced by several variables. First, the income is reduced by eligible deductions under various chapters of the Income-tax Act, such as deductions for investments, expenses, and allowances. Once the net taxable income is computed after deductions, the relevant slab rates are applied. The initial slab is tax-free up to the exemption limit. The next slab attracts a low tax rate, followed by a middle-range slab with a higher rate, and finally a top slab with the maximum rate. The tax is computed progressively, meaning the applicable rate only applies to income within the respective slab. After calculating the gross tax liability based on slab rates, applicable surcharges,, and cess are added to arrive at the final tax payable.
Senior and super senior citizens benefit by having higher thresholds before tax is applied. This means a portion of their income remains outside the tax net entirely. However, deductions under various sections remain equally applicable to all categories, allowing all taxpayers to reduce their taxable income by using the provisions for investment, insurance, education loans, housing, and other qualifying expenditures.
Overview of Deductions Allowed Under the Regular Regime
The regular tax regime permits a wide range of deductions and exemptions, which reduce taxable income. These deductions can be claimed under various sections, particularly under Chapter VI-A of the Income-tax Act. Popular deductions include those under sections 80C, 80D, 80E, 80G, and 80TTA, among others. Section 80C allows deductions for investments made in specified instruments such as life insurance premiums, employee provident fund contributions, principal repayment of housing loan, National Savings Certificates, and Public Provident Fund contributions. The deduction is limited to a capped amount. Section 80D allows for deductions on health insurance premiums for self, spouse, children, and parents. This section also includes preventive health check-ups within the overall cap. Section 80E permits deduction of interest on education loans, while Section 80G allows for deductions for donations made to specified funds and charitable institutions. Section 80TTA gives relief on interest income from savings accounts, up to a capped amount, for individuals and HUFs.
These deductions can substantially reduce the total taxable income, thereby reducing the final tax liability. Taxpayers using the regular regime are encouraged to keep proper records and documents for all eligible investments and expenditures to support their claims during return filing or potential scrutiny.
Detailed Income Tax Slabs Under the Alternative Tax Regime for AYs 2024–25 and 2025–26
The alternative tax regime follows a clean slab structure with uniform basic exemption and multiple progressive rates. This regime does not distinguish between age groups or residential status in determining exemption thresholds or slab applicability. For assessment year 2024–25, the basic exemption limit is provided uniformly. Beyond that, income is taxed progressively at multiple slab rates. The first slab beyond exemption attracts a modest rate. Further slabs apply incrementally higher rates at evenly spaced income intervals. The top slab rate is reached when income exceeds a high threshold. The progression of rates aims to smooth the tax curve, minimizing jumps in liability between income bands. The same general slab structure applies to assessment year 2025–26, although the Finance Act for that year may adjust the income thresholds slightly, especially to account for inflation or policy shifts. However, the general form and intent of the regime remainto simplify tax calculations and promote compliance.
Key Conditions and Restrictions Under the Alternative Tax Regime
The simplicity of the alternative tax regime comes with restrictions. To avail of the lower tax rates, taxpayers must forego most exemptions and deductions otherwise available under the regular regime. This includes forgoing exemptions for house rent allowance, leave travel allowance, children’s education, standard deduction, deductions under Chapter VI-A, and interest on housing loans under certain sections. The restriction also applies to deductions on investments and insurance premiums. The only permitted deductions include employer contributions to the National Pension Scheme under specified sections. The idea is to replace the complexity of claiming various benefits with a straightforward tax calculation based solely on income levels. Taxpayers need to assess whether the lower slab rates offset the tax savings they might otherwise get through deductions and exemptions. This regime favors those who do not have major deductible expenditures or who prefer a simple filing experience over managing multiple documents and claims.
Opting for the Regular or Alternative Regime
For assessment year 2024–25 onwards, the alternative regime is the default for individuals, HUFs, AOPs, BOIs, and artificial juridical persons. Those who wish to use the regular regime must actively opt out of the default and choose the regular regime during return filing. The option must be exercised within the prescribed time and manner, as specified in the relevant forms and notifications. Salaried taxpayers can switch between regimes year-on-year. However, those with income from business or profession can opt into the alternative regime only once and are restricted from switching back freely. Once such a taxpayer opts out of the alternative regime, they may not re-enter it again unless certain conditions are met. This restriction is intended to prevent opportunistic regime switching for tax arbitrage.
The tax regime selected by the taxpayer determines the availability of exemptions, deductions, and the applicable slab rates. It is important to evaluate both options based on individual financial circumstances and forecasted investments or expenses for the year. Employers may also allow salaried individuals to declare their preferred tax regime at the beginning of the financial year, which helps in calculating monthly tax deductions at source. However, the final decision rests with the individual and is exercised during return filing, regardless of what was declared to the employer earlier.
Examples Illustrating Tax Comparison Between Regimes
A salaried individual earning a certain gross annual income with no major investments or deductions may find the alternative regime more beneficial due to lower slab rates. On the other hand, an individual with the same income but who contributes significantly to provident fund, insurance, housing loan repayment,, and tuition fees for children may benefit more under the regular regime, as the total deductions may substantially lower the taxable income. Similarly, a senior citizen with moderate income and substantial medical insurance payments may save more under the regular regime, which allows deductions for medical expenses and insurance premiums, and also provides a higher exemption threshold. A business professional with high gross income but substantial business deductions must be careful about choosing the right regime since opting into the alternative regime might disallow all expense-based deductions. These examples highlight the need to calculate tax under both regimes before deciding which one to choose.
Surcharge and Health and Education Cess in Both Regimes
In both tax regimes, surcharge and health and education cess apply over and above the basic tax computed from the slabs. Surcharge is an additional tax on high-income individuals. The surcharge rate depends on the level of income and can rise progressively. For instance, a surcharge applies when total income exceeds a certain threshold and increases at higher thresholds. The rate of surcharge is generally lower under the alternative regime for very high incomes, as part of the government’s effort to make the new regime more attractive. Marginal relief is available in both regimes to ensure that the additional tax payable due to surcharge does not exceed the income that is over the threshold.
Health and education cess is levied on the total of income tax and surcharge. It is charged at a fixed percentage and is applicable uniformly under both regimes. The proceeds of this cess are intended to fund health and education initiatives and are not directly retained by the central government for general use.
Surcharge and Marginal Relief: How They Impact High-Income Taxpayers
In both tax regimes, income beyond a certain level attracts a surcharge, which is an additional charge over and above the slab rate. The purpose of the surcharge is to increase the effective tax rate for higher income groups. Under the regular regime, surcharge applies at different thresholds and rates. For instance, individuals with income exceeding a specified limit are charged a 10% surcharge, with subsequent levels attracting 15%, 25%, or 37% depending on total income. The new tax regime introduces some important changes regarding surcharge. From assessment year 2024–25 onwards, the maximum rate of surcharge under the new regime is capped at 25%, even for individuals earning more than a specified high income. This contrasts with the regular regime, where the maximum surcharge may go up to 37% for certain income levels. This cap on surcharge in the new regime is designed to make it more attractive for high-income individuals, particularly those in the top bracket. The effective tax rate under the regular regime for the highest earners can go above 42%, whereas the same may be restricted to a lower percentage under the new regime due to the 25% cap.
Marginal relief is a concept used to soften the burden of a surcharge when a taxpayer’s income slightly exceeds the surcharge threshold. The intent is to ensure that the additional tax payable due to the surcharge does not exceed the amount of income above the threshold. Without marginal relief, a taxpayer could be penalized for earning just a little more. For example, if income crosses a surcharge threshold by a small amount, the resulting tax increase from the surcharge could be disproportionately high. Marginal relief prevents this by limiting the additional tax to the exact excess income. It ensures fairness in the application of surcharge. This principle applies in both tax regimes. The calculation of marginal relief can be complex and may depend on whether the surcharge threshold is crossed by total income or specific types of income, such as dividends or capital gains. The rule differs depending on the type of income and regime.
Rebate under Section 87A and Its Treatment in Both Regimes
A tax rebate under section 87A is available to individual taxpayers with total income up to a certain limit. It effectively reduces the final tax liability to zero, provided total income does not exceed a prescribed level. This rebate is designed to offer relief to small taxpayers. The amount of rebate available depends on the regime and assessment year. Under the regular regime for assessment year 2024–25, a resident individual with income up to a specified limit qualifies for a full rebate up to a fixed amount, effectively nullifying any tax liability. In the new regime, however, this threshold is higher, and the rebate amount matches the tax computed on income up to the exempt limit. This means the new regime provides a higher threshold for full tax relief, making it particularly attractive for middle-income earners. The threshold in the new regime was raised to incentivize the adoption of the simplified structure. It ensures individuals earning modest incomes pay no tax under the new system, while maintaining a low rate for incomes just above the threshold.
If income exceeds the limit by even a small amount, the entire rebate may become unavailable. This cliff effect is significant. However, assessment year 2024–25 onwards, a marginal relief mechanism is introduced in the new regime to address this, ensuring that the additional tax payable does not exceed the excess income over the rebate threshold. This feature parallels the concept of marginal relief on surcharge. It improves fairness and avoids penalizing taxpayers for minor increases in income. For those at the edge of the rebate threshold, this can be an important consideration in regime selection.
Deductions and Exemptions: Allowed vs Disallowed in Both Regimes
One of the fundamental differences between the regular and new tax regimes lies in the treatment of deductions and exemptions. The regular regime permits a wide range of deductions under Chapter VI-A, including section 80C for investments in provident fund, life insurance, equity-linked savings schemes, and principal repayment on housing loan. Other popular deductions include section 80D for medical insurance premiums, 80G for donations, 80E for education loan interest, and others. Additionally, exemptions are allowed for house rent allowance, leave travel allowance, and certain perquisites and allowances.
The new tax regime, by contrast, disallows most of these deductions and exemptions. This is to simplify compliance and reduce the administrative burden of tax filing. By removing the need to track investments and expenses for deduction purposes, the regime provides predictability and transparency. However, this also means that individuals who rely heavily on deductions for reducing taxable income may find the regular regime more beneficial. Some deductions are still allowed under the new regime. For instance, employer contribution to the National Pension Scheme under section 80CCD(2) is permitted. Similarly, deductions under section 80JJAA for new employment and the Agniveer Corpus Fund are available. But popular sections like 80C and 80D are not.
Standard deduction, which provides a flat deduction from salary or pension income, was initially disallowed under the new regime. However, beginning with assessment year 2024–25, standard deduction is permitted in the new regime. This change brings a modest benefit to salaried and pensioned individuals choosing the simplified structure. It narrows the gap between the two regimes for such taxpayers. The inclusion of standard deduction may influence regime selection, especially when combined with the higher rebate threshold under the new system.
Taxation of Special Income Categories: Capital Gains and Dividends
The method of taxation for certain types of income remains consistent across regimes. Long-term capital gains arising from the sale of equity shares and equity mutual funds beyond a specified amount are taxed at a concessional rate. This rate applies regardless of the chosen tax regime. Similarly, short-term capital gains on listed equity shares and units under section 111A are taxed at a fixed percentage. These rates are not affected by the slab system. Interest income, however, is subject to slab rates, so the applicable regime influences the final tax payable.
Dividends received from domestic companies and mutual funds are also taxable in the hands of shareholders. These are included in total income and taxed at the slab rate applicable. This means the tax liability on dividends differs depending on the chosen regime. Under the regular regime, if a taxpayer is in a higher bracket due to deductions, the effective rate on dividends may be lower than under the new regime. This factor may influence investment decisions and tax planning. Furthermore, surcharge rates applicable to dividend income differ under the two regimes. The new regime offers a cap on surcharge for all types of income, while the regular regime may impose a higher surcharge on certain incomtypesspe, including dividends and capital gains. This makes the new regime more attractive for individuals with substantial dividend or capital gain income.
Opting In and Out of Regimes: Procedural Aspects and Time Limits
Taxpayers have the choice to opt into either regime each assessment year, but the rules for switching vary based on the type of taxpayer. Individuals with income from business or profession must file a specific form under section 115BAC(5) to choose the new regime. Once the option is exercised, they cannot switch back to the regular regime unless they withdraw the option permanently. This means only one switch is allowed. Such taxpayers must be cautious in selecting their regime since frequent changes are not permitted.
Individuals not having business income may opt between the regimes every assessment year while filing their tax return. This flexibility allows salaried individuals and pensioners to compute tax under both regimes each year and choose the one that results in the lower liability. This annual choice enables optimization depending on deductions claimed, income composition, and policy changes. However, the option must be exercised in the manner prescribed by the tax authorities. Failure to do so results in automatic application of the default regime, which is the new regime starting assessment year 2024–25. Therefore, understanding the procedural requirement and filing the return within the due date is critical.
Forms used for filing income tax returns include an option to select the preferred regime. The software auto-calculates tax under the selected regime and applies the slab structure accordingly. Taxpayers using offline or online utilities must verify their selection before finalizing the return. Corrections may not be possible after submission unless the return is revised within the permitted time frame.
Role of Advance Tax and TDS in Regime Selection
The advance tax liability and tax deducted at source mechanisms function differently depending on the regime chosen. For taxpayers who do not declare their regime choice in advance, TDS is computed based on default regime assumptions. From assessment year 2024–25, employers will compute TDS under the new tax regime unless the employee declares an intention to follow the old regime. This declaration is typically made at the start of the financial year and influences salary structuring and monthly deductions. However, the declaration made to the employer is not binding for the income tax return. Taxpayers can still opt for the other regime at the time of filing. This decoupling allows for tax planning adjustments during the year based on income changes, deductions, or new investments.
Advance tax payments must be made by the estimated total tax liability under the chosen regime. If the taxpayer miscalculates or fails to anticipate deductions allowed under the regular regime, or disallowed under the new regime, it may result in a shortfall or overpayment. Interest penalties apply if the advance tax liability is not met on time. Therefore, correct estimation and timely regime selection are critical for both salaried and non-salaried individuals.
The tax deducted by banks on interest income is also based on the default regime, unless the taxpayer declares otherwise. For fixed deposits or recurring deposits, this could lead to excess TDS under the new regime or insufficient deduction under the regular regime. Taxpayers should monitor TDS certificates and ensure that the correct regime is applied for each source of income. This prevents a mismatch and ensures proper credit at the time of return filing.
Minimum Alternate Tax and Alternate Minimum Tax Provisions
The concept of Minimum Alternate Tax is applicable primarily to companies, while Alternate Minimum Tax applies to non-company taxpayers who claim certain deductions. These provisions are designed to ensure that taxpayers who may otherwise reduce their total income to negligible levels through deductions and exemptions still pay a minimum amount of tax. Under the Income-tax Act, companies are subject to MAT if their normal tax liability falls below a prescribed percentage of book profits. MAT is calculated at a fixed rate on book profits after specified adjustments, and is payable if it exceeds normal tax liability. However, companies opting for the concessional tax regimes under sections 115BAA or 115BAB are exempt from MAT provisions, highlighting a policy shift toward reduced corporate taxation without complications of MAT.
For non-corporate taxpayers, particularly individuals, HUFs, AOPs, BOIs, and artificial juridical persons, the concept of Alternate Minimum Tax applies where the taxpayer claims deductions under Chapter VI-A (other than section 80P), or benefits under section 10AA. In such cases, the adjusted total income is subject to tax at a specified rate, if this is higher than the regular tax liability. However, taxpayers opting for the new concessional tax regime under section 115BAC are not subject to AMT provisions, further emphasizing the clean-slab, no-deduction approach of the new regime. Thus, individuals who do not claim deductions or who opt for the new regime generally need not concern themselves with MAT or AMT.
Rebate under Section 87A for Low-Income Individuals
One of the significant reliefs provided in both tax regimes is the rebate under section 87A. This provision allows a full or partial rebate of tax for individuals with total income below a certain threshold, effectively reducing their tax liability to zero. The exact threshold and rebate amount differ slightly between the regular and alternative tax regimes. Under the regular regime, individuals with income not exceeding a specified level are entitled to a full rebate, resulting in no tax liability. This income limit may differ slightly from year to year.
In the alternative regime, the government introduced enhanced rebate limits starting AY 2024-25. This means that a larger number of taxpayers can benefit from full tax exemption even under the alternative regime, despite not claiming deductions. For example, the threshold for full rebate has been increased under the new regime to support lower and middle-income taxpayers who may otherwise be affected by the loss of deductions. The availability of a rebate under section 87A provides significant relief and is particularly useful for salaried individuals with moderate incomes.
This rebate is available only to individuals who are residents and whose total income is within the specified limit. HUFs, firms, and companies are not eligible. Also, rebate under section 87A is granted before the addition of health and education cess, meaning the total tax, including cess, may not be zero unless income remains below the threshold. Taxpayers should carefully consider their eligibility and ensure proper claims during return filing.
Cess on Income-tax and Its Applicability
In addition to income tax and surcharge, the government levies a health and education cess on the amount of income tax payable. This cess is uniformly applicable at a fixed percentage on the total of tax and surcharge. Currently, the rate is four percent. This cess is applicable under both regular and alternative tax regimes. It does not vary with the income level or age of the taxpayer and is added after computing the income tax and surcharge.
The purpose of this cess is to fund government expenditures on health and education initiatives. Though seemingly a small component, this cess can impact effective tax rates, especially for higher-income taxpayers. It is important to note that rebates under section 87A do not extend to cess, and interest or penalties are computed on the total amount, including cess.
Understanding the exact method of cess calculation is essential for accurate tax estimation. In practice, cess is calculated after determining the basic tax and any applicable surcharge. For instance, if a taxpayer’s income falls in a slab with surcharge applicability, the surcharge is first added to the base tax, and the cess is then computed on this aggregate. This approach has implications for the final payable amount, particularly in cases of marginal relief.
Implications of Surcharge and Marginal Relief
Surcharge is an additional tax levied on high-income taxpayers when their income exceeds certain thresholds. The objective is to ensure that the very-high-income segment contributes proportionately more toward tax revenues. The rate of surcharge increases progressively with income and applies differently in the regular and alternative regimes. In the regular regime, surcharge rates begin at a lower income level and rise steeply. In contrast, the alternative regime offers relief by capping the surcharge at a lower maximum rate. This approach makes the alternative regime more attractive for high earners.
Surcharge is applied as a percentage of income tax, not total income. Once surcharge is added to the computed tax, the health and education cess is calculated on the aggregate of income tax plus surcharge. This layered structure can significantly increase the effective tax rate for very-high-income individuals.
However, to avoid undue hardship due to surcharge, the concept of marginal relief is introduced. Marginal relief ensures that the additional tax payable including surcharge,, is not more than the income exceeding the surcharge threshold. This prevents situations where earning slightly more income results in a disproportionately high tax liability. Marginal relief is calculated precisely to ensure this fairness. While this provision is beneficial, it adds to the complexity of computation.
Marginal relief is available under both regimes and must be calculated carefully during tax computation. Software and tax tools typically handle this automatically, but manual filing or estimation requires close attention. It is also important to remember that surcharge thresholds and rates are subject to change with each Finance Act, and taxpayers should review updated provisions for each assessment year.
Considerations for Choosing Between the Two Regimes
Choosing between the regular and alternative tax regimes requires careful analysis of income, available deductions, exemptions, and applicable surcharges. The regular regime is advantageous for those who have significant deductions under Chapter VI-A, such as life insurance premiums, provident fund contributions, health insurance premiums, interest on housing loans, and investments under specified schemes. Salaried individuals who claim standard deduction and house rent allowance may also benefit more under the regular regime.
On the other hand, the alternative regime benefits those with fewer deductions or simpler financial arrangements. Since it offers lower tax rates in exchange for foregoing deductions, it can result in lower overall tax liability for those not utilizing the full deduction limits. Moreover, with lower surcharge rates and enhanced rebate limits, the alternative regime may offer advantages to both low and high-income groups.
Taxpayers should perform a side-by-side comparison of tax liability under both regimes before filing their returns. Most online portals and tools allow such comparison based on income and deduction data. Once the comparison is done, the option must be exercised during the return filing. For salaried individuals, this choice can be made each year unless income is from a business or profession. For business income, once a taxpayer opts for a particular regime, it becomes binding for subsequent years unless rules for switching are followed.
Return Filing and Declaration Procedures
The Income-tax return forms have been updated to capture taxpayer’s’s choice of regime. Taxpayers must declare the chosen regime during return filing. For salaried taxpayers without business income, this choice can be made annually and does not require separate form filing outside the return. For taxpayers with business or professional income, however, an additional declaration in Form 10-IEA is required for switching regimes.
Form 10-IEA must be filed before the due date of return filing, and the choice becomes binding for future assessment years unless formally withdrawn under prescribed conditions. Failure to file this form on time means the taxpayer is deemed to have chosen the default regime, which from AY 2024-25 is the new concessional regime under section 115BAC.
Correct filing of the return and related forms is crucial. Errors in selecting the tax regime may result in the denial of deductions or incorrect tax computation. Therefore, it is important to plan early and ensure that the appropriate choice is reflected in the return. It is also advisable to preserve calculation sheets or software records supporting the choice made.
Changes Introduced in Finance Acts and Budget Announcements
Finance Acts and Union Budgets frequently introduce amendments that affect tax slabs, surcharge rates, deductions, and the applicability of regimes. For instance, Finance Act 2023 made the alternative regime the default starting AY 2024-25, increased rebate thresholds under section 87A, and capped surcharge rates in the new regime. These policy measures were intended to increase the attractiveness of the simplified tax regime.
Similarly, Finance Act 2024 brought additional clarifications and adjustments to the scope of deductions, rebate limits, and documentation for filing. Taxpayers and professionals need to review each year’s Finance Act to understand the applicable provisions for that year. Official budget documents and circulars issued by the Central Board of Direct Taxes provide detailed guidance on implementing these changes.
The shifting policy landscape underlines the importance of staying updated with current laws. Changes in exemption limits, surcharge thresholds, or allowed deductions can significantly impact the tax outcome and alter the comparative advantage of one regime over another. Therefore, a review of new provisions should form part of the annual tax planning process.
Strategic Tax Planning and Regime Optimization
Effective tax planning involves projecting income, estimating eligible deductions, and comparing tax liability under both regimes. Taxpayers can optimize their tax burden by structuring salary components, investing in eligible instruments, and availing deductions where possible. For example, making full use of the standard deduction, house rent allowance, and section 80C deductions may tilt the benefit toward the regular regime. However, taxpayers without such benefits or with non-salaried income may find the alternative regime more beneficial.
High-income individuals should assess the impact of surcharge and marginal relief under both regimes. Similarly, those nearing rebate thresholds must plan their income and deductions carefully to stay within the limit and claim full benefit under section 87A. Annual tax planning sessions with a financial advisor or tax consultant can help identify optimal strategies.
The regime choice is not permanent for all categories. Individuals with no business or professional income can reassess and change their regime annually. Therefore, planning should consider not only current-year implications but also long-term projections. Flexibility of regime choice should be leveraged to minimize tax burden over multiple years while complying with legal requirements.
Conclusion
The shift in default tax regime to the alternative structure from AY 2024-25 marks a major policy development in Indian income-tax administration. By offering simplified slabs and a capping surcharge, the government aims to encourage voluntary compliance and reduce litigation over deductions. At the same time, the option to choose the regular regime remains, supporting taxpayers with complex financial structures or higher deductions.
Awareness and proactive planning are essential in this new landscape. Individuals must understand their income composition, claimable deductions, and the implications of rebate, surcharge, and marginal relief. Timely filing of correct forms and returns ensures compliance and minimizes the risk of disputes. Given the evolving nature of tax laws, regular review of Finance Acts and professional advice is recommended.