The Indian income tax system is structured in a way that accommodates different categories of taxpayers, income levels, and applicable benefits. The tax rates, exemptions, and rules undergo revisions almost every year through the Union Budget, impacting both individual taxpayers and businesses. For the Assessment Years 2025-26 and 2026-27, changes in slab rates, regime defaults, and options to choose between old and new structures have shaped the way people should approach their financial planning. Understanding the structure of rates, regimes, and categories is critical for compliance as well as for efficient tax planning.
The Structure of Income Tax in India
Income tax in India is charged on the total income of a person for the relevant financial year, as computed under the provisions of the Income-tax Act, 1961. The system works on the basis of slab rates for individuals, Hindu Undivided Families, Associations of Persons, Bodies of Individuals, and other entities that are not taxed as companies. These slabs define progressive rates, meaning that higher income is charged at higher rates.
For the financial years relevant to AY 2025-26 and AY 2026-27, taxpayers have the option to choose between the old tax regime and the new tax regime. The new regime has been made the default, but individuals can opt for the old one if they find it more beneficial.
The Old Tax Regime
The old tax regime is based on a system of progressive tax slabs with a basic exemption limit and higher exemptions for senior and super senior citizens. It allows various deductions and exemptions under provisions like section 80C, section 80D, house rent allowance, and leave travel concession.
For most individuals, including non-residents, Hindu Undivided Families, Associations of Persons, Bodies of Individuals, and artificial juridical persons, the basic exemption limit remains at 2,50,000. Income up to this level is not taxed. The rates then increase progressively.
Slabs for Individuals Below 60 Years
- Up to 2,50,000: Nil
- 2,50,001 to 5,00,000: 5 percent
- 5,00,001 to 10,00,000: 20 percent
- Above 10,00,000: 30 percent
Slabs for Senior Citizens
For residents aged 60 years or more but below 80 years, the basic exemption limit is higher, at 3,00,000. The rates are:
- Up to 3,00,000: Nil
- 3,00,001 to 5,00,000: 5 percent
- 5,00,001 to 10,00,000: 20 percent
- Above 10,00,000: 30 percent
Slabs for Super Senior Citizens
For residents aged 80 years or more, the exemption limit increases further to 5,00,000. Their rates are:
- Up to 5,00,000: Nil
- 5,00,001 to 10,00,000: 20 percent
- Above 10,00,000: 30 percent
The benefit of higher exemption limits is intended to provide relief to older taxpayers who may have lower earning capacities or higher medical expenses.
The New Tax Regime Under Section 115BAC(1A)
The new tax regime is designed to simplify the rate structure by offering lower rates but removing most exemptions and deductions available under the old regime. From AY 2025-26, it is the default regime, meaning taxpayers will be assessed under it unless they specifically opt out. Under section 115BAC(6), a taxpayer can choose to be taxed under the old regime, but conditions apply.
The slabs for the new regime differ between AY 2025-26 and AY 2026-27, reflecting the government’s changes to make it more appealing.
Slabs for AY 2025-26
- Up to 3,00,000: Nil
- 3,00,001 to 7,00,000: 5 percent
- 7,00,001 to 10,00,000: 10 percent
- 10,00,001 to 12,00,000: 15 percent
- 12,00,001 to 15,00,000: 20 percent
- Above 15,00,000: 30 percent
A key feature in this regime is the rebate under section 87A, available to residents with income up to 7,00,000, which reduces their liability to zero.
Slabs for AY 2026-27
From AY 2026-27, the structure is slightly modified:
- Up to 4,00,000: Nil
- 4,00,001 to 8,00,000: 5 percent
- 8,00,001 to 12,00,000: 10 percent
- 12,00,001 to 16,00,000: 15 percent
- 16,00,001 to 20,00,000: 20 percent
- 20,00,001 to 24,00,000: 25 percent
- Above 24,00,000: 30 percent
This change increases the basic exemption limit and introduces more slabs to reduce the tax burden for middle-income taxpayers.
Comparison of Old and New Regimes
While the old regime allows deductions and exemptions, the new regime focuses on lower rates. The choice depends on the taxpayer’s profile. Those with significant investments in tax-saving instruments and eligible expenses might benefit from the old regime. Conversely, individuals with fewer deductions may find the new regime advantageous.
Consider a salaried individual with an income of 10,00,000 who invests heavily in section 80C instruments and pays health insurance premiums. Under the old regime, these deductions can reduce taxable income significantly, making it competitive with the new regime despite the lower rates there. For another person with minimal deductions, the new regime could offer a lower liability without the need for complex tax planning.
Tax Rates for Firms
Partnership firms, including Limited Liability Partnerships, are taxed at a flat rate of 30 percent of total income. This rate is applicable irrespective of turnover or income levels. Deductions under Chapter VI-A can be claimed, but the flat rate means there is no slab-based benefit. The rates for firms are not differentiated between AY 2025-26 and AY 2026-27.
Tax Rates for Companies
Corporate tax rates in India depend on whether the company is domestic or foreign, its turnover, and whether it opts for special provisions under sections 115BA, 115BAA, or 115BAB.
Domestic Companies
For AY 2025-26:
- General rate: 30 percent
- Reduced rate of 25 percent if turnover or gross receipts in FY 2022-23 did not exceed 400 crore
For AY 2026-27:
- General rate: 30 percent
- Reduced rate of 25 percent if turnover or gross receipts in FY 2023-24 did not exceed 400 crore
These rates apply before surcharge and cess, which will be discussed in the next part of the series.
Foreign Companies
Foreign companies are taxed at 35 percent of total income. However, special rates apply to certain incomes like royalties and technical services under double taxation avoidance agreements.
Co-operative Societies and Local Authorities
Co-operative societies are taxed at progressive rates under the standard structure, but they also have the option to choose the new regimes under sections 115BAD and 115BAE, which provide fixed rates in exchange for forgoing certain deductions. Local authorities are taxed at 30 percent on their income.
Practical Example: Choosing Between Regimes
Let us take two taxpayers with the same income but different deduction profiles to illustrate the impact of regime choice.
Ravi earns 12,00,000 annually and claims deductions under section 80C (1,50,000), section 80D (25,000), and interest on housing loan (2,00,000 under section 24). His taxable income under the old regime was reduced to 8,25,000, taxed at progressive rates with a substantial saving due to deductions.
Meera earns the same 12,00,000 but has no significant deductions. In her case, the new regime rate structure without exemptions might lead to a lower liability compared to the old regime, as she cannot reduce her income with deductions.
This example highlights that there is no single best choice for all taxpayers. The decision must be based on income structure, available deductions, and the future outlook for those deductions.
Implications for Financial Planning
The changes in slab structures for the new regime in AY 2026-27, particularly the higher basic exemption limit and additional slabs, will influence investment decisions. Taxpayers who previously invested primarily for tax saving under section 80C may reconsider their strategies, especially if they shift to the new regime where such deductions are not relevant.
Business owners operating as firms or companies must also keep in mind their flat rates and the impact of turnover on eligibility for lower corporate rates. Foreign companies will continue to face higher rates, but treaty benefits could help reduce effective taxation.
The Role of Residential Status
While discussing income tax rates, it is important to note that the applicability of certain exemptions and rebates depends on residential status. For example, the rebate under section 87A is available only to resident individuals. Similarly, the higher exemption limits for senior and super senior citizens apply only if they are resident in India for the relevant year.
Impact on Non-Resident Indians
Non-resident Indians are taxed only on income received or deemed to be received in India or accruing or deemed to accrue in India. They are not eligible for higher exemption limits for senior citizens or for certain deductions. For them, the choice between old and new regimes may depend largely on the type of income they earn and whether they can claim deductions available to non-residents.
Understanding Surcharge
Surcharge is an additional charge on the amount of income tax computed. It applies when a taxpayer’s total income exceeds certain thresholds. The purpose of the surcharge is to ensure that higher-income earners contribute proportionally more to the exchequer. Surcharge rates vary across categories such as individuals, firms, co-operative societies, and companies.
The income considered for surcharge calculation is total income as reduced by applicable deductions, and surcharge is calculated on the amount of income tax, not directly on income. This means you first calculate the tax payable as per the applicable slab or rate, and then apply the surcharge percentage on that tax.
Surcharge Rates for Individuals, HUF, AOP, BOI, and Artificial Juridical Persons
For these taxpayers, the surcharge rates are progressive:
- Up to 50 lakh: Nil
- 50 lakh to 1 crore: 10 percent of income tax
- 1 crore to 2 crore: 15 percent of income tax
- 2 crore to 5 crore: 25 percent of income tax
- Above 5 crore: 37 percent of income tax
These rates apply for both the old and new regimes. However, the effective maximum marginal rate differs between regimes due to differences in slab rates.
Surcharge for Firms and Local Authorities
- Up to 1 crore: Nil
- Above 1 crore: 12 percent of income tax
This applies uniformly to partnership firms, including limited liability partnerships, and local authorities.
Surcharge for Co-operative Societies
- Up to 1 crore: Nil
- 1 crore to 10 crore: 7 percent of income tax
- Above 10 crore: 12 percent of income tax
Co-operative societies also have the option to shift to special flat-rate regimes, which may have different surcharge implications.
Surcharge for Domestic Companies
- Up to 1 crore: Nil
- 1 crore to 10 crore: 7 percent of income tax
- Above 10 crore: 12 percent of income tax
These rates apply to domestic companies whether they are under the standard corporate tax regime or have opted for reduced rates under special provisions.
Surcharge for Foreign Companies
- Up to 1 crore: Nil
- 1 crore to 10 crore: 2 percent of income tax
- Above 10 crore: 5 percent of income tax
Foreign companies are often taxed at higher basic rates, but surcharge rates are lower compared to domestic high-income individuals or entities.
The Role of Marginal Relief
Surcharge can create situations where an additional rupee of income beyond a threshold leads to a disproportionately high tax increase. To address this, marginal relief ensures that the additional tax payable, including surcharge, does not exceed the amount of income that exceeds the threshold.
For example, if a taxpayer’s income is just above 50 lakh, marginal relief ensures that the total tax liability is not more than the tax payable on exactly 50 lakh plus the excess income. This calculation is important to prevent excessive burden and is applicable to all surcharge thresholds across different taxpayer categories.
Marginal relief is automatically applied during tax computation if applicable, but understanding it can help taxpayers assess whether their income level might trigger these adjustments.
Health and Education Cess
Once the tax and applicable surcharge have been calculated, a further levy called the health and education cess is imposed. This cess is uniform for all taxpayers and is meant to fund government initiatives in health and education.
The cess rate is 4 percent of the total tax plus surcharge. It applies to individuals, HUFs, firms, companies, and all other categories of taxpayers. Unlike surcharge, there are no thresholds; the cess applies as soon as there is a tax liability.
For instance, if the tax payable is 1,00,000 and surcharge is 10,000, the cess will be calculated as 4 percent of 1,10,000, amounting to 4,400. The final liability will therefore be 1,14,400.
Minimum Alternate Tax (MAT)
MAT is a mechanism to ensure that companies do not avoid paying taxes by using exemptions, deductions, or incentives to reduce their taxable income to very low levels or zero. Under MAT, if the normal tax liability of a company is less than a specified percentage of its book profit, the company must pay tax at that specified rate.
For AY 2025-26 and AY 2026-27, the MAT rate is 15 percent of book profit for most companies. However, for companies operating as International Financial Services Centre (IFSC) units and earning income solely in convertible foreign exchange, the MAT rate is 9 percent.
Book profit is calculated as per the Companies Act, 2013, subject to adjustments specified in section 115JB of the Income-tax Act. This adjusted figure forms the basis for determining the MAT liability.
The MAT provision applies to all companies except those that have opted for certain new regimes under sections 115BAA or 115BAB, where MAT is not applicable. Companies choosing these lower-rate regimes must meet the conditions set out in the law, including foregoing specified deductions and incentives.
Alternate Minimum Tax (AMT)
While MAT is designed for companies, AMT serves a similar purpose for non-corporate taxpayers such as individuals, HUFs, partnerships, LLPs, and others who claim certain deductions. If the tax liability computed under the normal provisions is less than 18.5 percent of adjusted total income, AMT becomes applicable.
For co-operative societies, the AMT rate is 15 percent. The adjusted total income for AMT purposes includes income after adding back deductions claimed under sections such as 80H to 80RRB, except section 80P.
Like MAT, AMT is not applicable to taxpayers who opt for specific new regimes such as section 115BAC for individuals, 115BAD for co-operative societies, or 115BAE for certain specified businesses. These regimes already have lower rates and fewer deductions.
Interplay of MAT, AMT, and Normal Tax
Taxpayers liable under MAT or AMT must compare their normal tax liability with the alternate liability. If the alternate liability is higher, they must pay the higher amount. However, the excess paid due to MAT or AMT can be carried forward as credit for up to 15 assessment years. This credit can be set off in a year when the normal tax liability exceeds the alternate liability.
For example, if a company’s normal tax liability is 8 lakh but MAT liability is 10 lakh, it must pay 10 lakh for that year. The excess 2 lakh paid can be carried forward and adjusted in a future year where the normal liability exceeds MAT liability.
Calculating the Maximum Marginal Rate
When considering surcharge and cess, the effective tax rates can exceed the nominal rates mentioned in the slabs or corporate schedules. The maximum marginal rates for different categories in AY 2025-26 and AY 2026-27 are as follows:
- Individual, HUF, AOP, BOI, or artificial juridical person under the new regime: 39 percent
- Individual, HUF, AOP, BOI, or artificial juridical person under the old regime: 42.744 percent
- Firms and LLPs: 34.944 percent
- Co-operative societies: 34.944 percent
- Domestic companies: 29.12 percent or 34.944 percent, depending on turnover and applicable surcharge
- Foreign companies: 38.22 percent
These figures take into account the base tax rate, the applicable surcharge, and the 4 percent cess.
Importance of Threshold Planning
For high-income earners and profitable businesses, careful planning around surcharge thresholds can make a significant difference. Since surcharge rates jump at defined income levels, taxpayers may consider strategies to defer income, accelerate deductions, or structure business operations in ways that keep income below certain limits.
For example, an individual expecting income slightly above 2 crore might structure certain receipts across two financial years to avoid moving from 15 percent to 25 percent surcharge. Similarly, a firm close to the 1 crore threshold for surcharge could explore allowable expense acceleration.
However, such strategies must be consistent with the law and substance of transactions to avoid disputes with tax authorities.
Impact on Non-Resident Taxpayers
Non-residents are also subject to surcharge and cess on their Indian income. The applicable surcharge rates for individuals are the same as for residents, and for companies, the foreign company rates apply. Non-residents must also account for these when estimating their effective tax rate on Indian income.
In the case of income subject to tax deduction at source, such as royalties, interest, or technical fees, surcharge and cess are added on top of the basic tax rate specified under the relevant section or treaty, unless otherwise restricted by treaty provisions.
Interaction with Tax Deduction at Source (TDS)
For certain payments, the payer must deduct tax at source, and in some cases, surcharge and cess are also deducted at this stage. For payments to residents under most domestic TDS provisions, surcharge and cess are not applied; the deduction is made at the base rate.
However, for salary payments and payments to non-residents or foreign companies, surcharge and cess are applied based on income levels. This means that employers and others making payments must assess the recipient’s total income to determine the applicable rates, especially for high-value transactions.
Marginal Relief in Depth
Marginal relief exists to prevent a situation where crossing an income threshold results in a tax liability that is disproportionately higher than the increase in income. This typically happens at surcharge thresholds. For example, if an individual earns just above 50 lakh, the surcharge of 10 percent on the total tax could lead to a higher additional tax than the income earned above 50 lakh. Marginal relief ensures that the increase in tax does not exceed the increase in income.
Marginal relief applies at every surcharge threshold, such as 50 lakh, 1 crore, 2 crore, and 5 crore for individuals, and at lower thresholds for other entities like firms and co-operative societies. The relief is calculated by comparing the total tax payable on the slightly higher income with the tax on income at the threshold plus the difference in income. If the excess is more than the difference in income, the excess is reduced.
This computation is automatic in most tax calculation software, but understanding its logic is important for taxpayers who want to assess how their income levels will affect final tax liability.
Maximum Marginal Rate
The maximum marginal rate is the highest rate at which tax is effectively charged, including base rate, surcharge, and cess. This is particularly important for certain provisions in the Income-tax Act that apply tax at the maximum marginal rate, such as specific income for trusts or certain withdrawals from provident funds.
For the assessment years in question, the maximum marginal rates are as follows:
- Old regime individuals: approximately 42.744 percent
- New regime individuals: approximately 39 percent
- Firms and LLPs: approximately 34.944 percent
- Co-operative societies: approximately 34.944 percent
- Domestic companies: around 29.12 percent or 34.944 percent, depending on turnover and surcharge rate
- Foreign companies: around 38.22 percent
These rates help in assessing the worst-case scenario for tax liability in special cases.
Tax Deduction at Source (TDS) Overview
TDS is a system where the payer of certain types of income is required to deduct tax before making payment to the recipient. This ensures a steady inflow of revenue to the government and a mechanism for tracking transactions.
TDS applies to a wide range of payments, including salary, interest, rent, professional fees, contract payments, commission, royalties, and winnings from lotteries or games. Each category of payment has a specific rate and threshold for deduction. In many cases, if the amount is below a specified threshold, TDS is not required.
For salary payments, TDS is calculated based on the employee’s estimated annual income and applicable slab rates, including surcharge and cess where relevant. For most other payments to residents, surcharge and cess are not applied at the deduction stage; they are considered at the time of filing the return. However, payments to non-residents usually attract surcharge and cess at the deduction stage.
TDS on Payments to Residents
Some common examples of TDS provisions for payments to residents in FY 2025-26 include:
- Salary: as per slab rates under section 192
- Interest from bank deposits: 10 percent under section 194A, with a threshold of 40,000 for most individuals and 50,000 for senior citizens
- Rent: 2 percent for plant and machinery, 10 percent for land or building under section 194I, with a threshold of 2,40,000 per year
- Professional or technical fees: 10 percent under section 194J, with a threshold of 30,000
- Payment to contractors: 1 percent for individuals/HUFs, 2 percent for others under section 194C, with a threshold of 30,000 per contract or 1,00,000 aggregate in a year
These rates apply to payments to residents and exclude surcharge and cess unless otherwise specified.
TDS on Payments to Non-Residents
Payments to non-residents and foreign companies are subject to TDS at rates specified under the Income-tax Act or the applicable Double Taxation Avoidance Agreement (DTAA), whichever is more beneficial to the taxpayer. In these cases, surcharge and cess are added to the base rate unless the treaty provides otherwise.
For example, royalty or fees for technical services paid to a non-resident is generally subject to TDS at 10 percent plus applicable surcharge and cess. Interest payments under section 194LC may be subject to a concessional rate of 5 percent plus surcharge and cess.
The payer is responsible for determining the residential status of the payee, the nature of payment, and the correct rate of deduction.
Tax Collection at Source (TCS) Overview
TCS is similar to TDS but applies in specific situations where the seller collects tax from the buyer at the time of sale. This applies to certain goods and transactions specified under the Income-tax Act.
Common examples of TCS provisions include:
- Sale of specified goods like scrap, timber, or tendu leaves
- Sale of motor vehicles above 10 lakh
- Sale of overseas tour packages
- Foreign remittances under the Liberalised Remittance Scheme above specified limits
The TCS rates vary by category and may be subject to surcharge and cess for certain non-resident buyers.
TCS on Foreign Remittances and Overseas Tour Packages
For foreign remittances under the Liberalised Remittance Scheme, TCS is collected at 5 percent for amounts exceeding 7 lakh in a financial year, with certain exceptions such as for education purposes where a lower rate applies.
For overseas tour packages, TCS applies at 5 percent on the entire amount, without a threshold. These provisions are part of the government’s effort to track and regulate high-value foreign spending.
Compliance Responsibilities for TDS and TCS
Both TDS and TCS require the person deducting or collecting the tax to deposit it with the government within prescribed timelines. Additionally, they must file quarterly statements in the required format and issue certificates to the payees or buyers.
Failure to deduct or collect tax, or to deposit it on time, can result in interest, penalties, and disallowance of certain expenses for tax purposes. For example, if TDS is not deducted on a payment to a contractor, the corresponding expense may be disallowed under section 40(a)(ia).
Timely compliance also ensures that the payee or buyer receives credit for the tax deducted or collected, which can be claimed while filing their return of income.
Strategic Tax Planning with TDS and TCS in Mind
Since TDS and TCS impact cash flows, taxpayers often plan their receipts and payments to optimize their position. For example, individuals receiving professional fees may spread the billing across two financial years to manage their TDS credits and avoid pushing themselves into higher surcharge brackets.
Businesses may also structure contracts and payment schedules to align with TDS thresholds and avoid unnecessary deduction or collection. However, all such planning must be within the legal framework and supported by documentation.
Integrating Marginal Relief with TDS and TCS
Marginal relief primarily impacts the final tax calculation, but it also indirectly affects TDS and TCS planning. If a taxpayer’s income is close to a surcharge threshold, the application of marginal relief could reduce the effective rate. In such cases, ensuring accurate advance tax and TDS credit estimation becomes important to avoid overpayment and large refund situations.
For instance, a professional whose annual income is projected to be just above 50 lakh should estimate the final tax with marginal relief factored in, so that TDS or advance tax payments can be aligned accordingly.
Non-Resident and Cross-Border Transactions
For cross-border transactions, the role of TDS and TCS becomes more complex due to the involvement of treaty provisions, foreign exchange considerations, and differing surcharge applications. Non-resident taxpayers may need to obtain a tax residency certificate to claim treaty benefits, which can lower the effective TDS rate.
Payers must also be aware of the need to obtain and quote the Permanent Account Number (PAN) of the non-resident; otherwise, higher rates under section 206AA may apply.
Conclusion
The structure of India’s direct tax system for the assessment years 2025-26 and 2026-27 presents a wide range of considerations for individuals, businesses, and other entities. Understanding the differences between the old and new regimes, the impact of surcharge and cess, and the specific slab rates applicable to each taxpayer category forms the foundation of effective tax planning. Beyond the basic rates, additional provisions such as minimum alternate tax, alternate minimum tax, and marginal relief ensure fairness and prevent undue burdens, especially when income hovers near surcharge thresholds.
For companies, firms, co-operative societies, and other organizational structures, the choice of regime and the awareness of turnover-based concessions can significantly influence effective tax rates. Similarly, the compliance framework around TDS and TCS plays an important role in cash flow management, while also serving as a mechanism for the government to collect revenue and track transactions in real time. These collection and deduction systems, when correctly understood and managed, can help taxpayers avoid penalties and improve liquidity.
Cross-border payments and transactions involving non-residents add another layer of complexity, often requiring careful consideration of treaty benefits, documentation requirements, and special rates under domestic law. For high-income taxpayers, understanding maximum marginal rates and the precise application of marginal relief is key to avoiding excess payments and ensuring a balanced approach to tax compliance.
In a system where rules evolve each year, staying informed and adopting a proactive approach is the most effective way to manage obligations while optimizing available benefits. With proper planning, clear knowledge of applicable provisions, and timely compliance, taxpayers can navigate these regulations with confidence, ensuring that their financial decisions align with both current legal requirements and long-term objectives.