For the assessment years 2025-26 and 2026-27, the structure of income tax in India continues under two regimes: the old tax regime and the new tax regime. Taxpayers have the option to choose between these two regimes, subject to certain conditions and declarations under relevant sections of the Income-tax Act. The new tax regime is the default regime for individuals, Hindu Undivided Families, Associations of Persons, Bodies of Individuals, and artificial juridical persons. However, such taxpayers may opt for the old regime by exercising their option under the provisions of section 115BAC(6).
Income Tax Rates for Individual, HUF, AOP, BOI, and Artificial Juridical Person
Old Tax Regime
Under the old regime, the exemption limit and tax slab rates varied depending on the age of the individual. For taxation, individuals are categorized as regular individuals, senior citizens, and super senior citizens.
Taxation for Senior Citizens
A senior citizen is a resident individual aged 60 years or more but less than 80 years during the previous year. For AY 2025-26, this includes individuals born on or after April 2, 1945, but before April 2, 1965. For AY 2026-27, it includes those born on or after April 2, 1946, but before April 2, 1966.
For senior citizens, the exemption limit is Rs. 3,00,000. Net income between Rs. 3,00,000 and Rs. 5,00,000 is taxed at 5 percent. Income from Rs. 5,00,000 to Rs. 10,00,000 is taxed at 20 percent. Any amount exceeding Rs. 10,00,000 is taxed at 30 percent. These tax rates are applicable only for resident senior citizens. In the case of non-resident senior citizens, the exemption limit remains Rs. 2,50,000.
Taxation for Super Senior Citizens
A super senior citizen is a resident individual who is 80 years of age or older during the previous year. For AY 2025-26, it applies to those born before April 2, 1945. For AY 2026-27, it includes individuals born before April 2, 1946.
The first Rs. 5,00,000 of income is exempt from tax for super senior citizens. Income between Rs. 5,00,000 and Rs. 10,00,000 is taxed at 20 percent. Any amount exceeding Rs. 10,00,000 is taxed at 30 percent. These rates are also applicable only for residents. Non-resident super senior citizens are entitled only to the standard exemption of Rs. 2,50,000.
Taxation for Other Individuals, HUF, AOP, BOI
This category includes all other resident individuals not falling under the senior or super senior category, non-resident individuals regardless of age, Hindu Undivided Families, Associations of Persons, Bodies of Individuals, and artificial juridical persons.
In these cases, income up to Rs. 2,50,000 is exempt. Income between Rs. 2,50,000 and Rs. 5,00,000 is taxed at 5 percent. Income between Rs. 5,00,000 and Rs. 10,00,000 is taxed at 20 percent, and income above Rs. 10,00,000 is taxed at 30 percent.
New Tax Regime for Individuals, HUF, AOP, BOI, and Artificial Juridical Persons
Under the new tax regime, which is now the default, taxpayers are given lower slab rates but are not allowed to claim most deductions and exemptions. One can switch to the old tax regime by exercising the option under section 115BAC(6). The tax rates differ between AY 2025-26 and AY 2026-27 under section 115BAC(1A).
New Tax Slabs for Assessment Year 2025-26
Income up to Rs. 3,00,000 is not taxed. Income from Rs. 3,00,001 to Rs. 7,00,000 is taxed at 5 percent. Income from Rs. 7,00,001 to Rs. 10,00,000 is taxed at 10 percent. Income from Rs. 10,00,001 to Rs. 12,00,000 is taxed at 15 percent. Income from Rs. 12,00,001 to Rs. 15,00,000 is taxed at 20 percent. Any income above Rs. 15,00,000 is taxed at 30 percent.
New Tax Slabs for Assessment Year 2026-27
Income up to Rs. 4,00,000 is not taxed. Income from Rs. 4,00,001 to Rs. 8,00,000 is taxed at 5 percent. Income from Rs. 8,00,001 to Rs. 12,00,000 is taxed at 10 percent. Income from Rs. 12,00,001 to Rs. 16,00,000 is taxed at 15 percent. Income from Rs. 16,00,001 to Rs. 20,00,000 is taxed at 20 percent. Income from Rs. 20,00,001 to Rs. 24,00,000 is taxed at 25 percent. Income above Rs. 24,00,000 is taxed at 30 percent.
Tax Rates for Firms
The tax rate for partnership firms, including limited liability partnerships, remains unchanged. They are taxed at 30 percent of their total income.
Tax Rates for Companies
Domestic Companies
A domestic company is generally taxed at 30 percent. However, a lower rate of 25 percent applies in the following cases:
If the total turnover or gross receipts during the previous financial year (2022-23 for AY 2025-26 or 2023-24 for AY 2026-27) do not exceed Rs. 400 crore, the company is taxed at 25 percent instead of 30 percent.
Foreign Companies
A foreign company is subject to tax at a flat rate of 35 percent.
Optional New Regimes for Companies
Domestic companies may choose to be taxed under section 115BA, 115BAA, or 115BAB, which offer concessional tax rates subject to specific conditions regarding deductions, exemptions, and incentives.
Tax Rates for Co-operative Societies and Local Authorities
There is no change in the income tax rates applicable to co-operative societies or local authorities under the standard provisions. However, resident co-operative societies can opt for concessional taxation under sections 115BAD or 115BAE, depending on eligibility and compliance with the relevant conditions.
Surcharge on Income Tax for AY 2025-26 and 2026-27
Surcharge is an additional tax on income tax and is applicable based on the level of net income. It varies across different entities and income slabs.
Surcharge for Individuals, HUF, AOP, BOI, and Artificial Juridical Persons
No surcharge is applicable on income up to Rs. 50 lakh. If income exceeds Rs. 50 lakh but does not exceed Rs. 1 crore, a surcharge of 10 percent is applied. Income between Rs. 1 crore and Rs. 2 crore attracts a 15 percent surcharge. If the income is between Rs. 2 crore and Rs. 5 crore, the surcharge increases to 25 percent. Income above Rs. 5 crore attracts a surcharge of 37 percent. If the individual opts for the new tax regime, the maximum surcharge applicable is capped at 25 percent.
Surcharge for Firms and Local Authorities
Firms and local authorities with income up to Rs. 1 crore do not attract surcharge. Income above Rs. 1 crore is subject to a 12 percent surcharge on the tax payable.
Surcharge for Co-operative Societies
There is no surcharge on income up to Rs. 1 crore. Income between Rs. 1 crore and Rs. 10 crore is subject to a 7 percent surcharge. Income above Rs. 10 crore attracts a 12 percent surcharge.
Surcharge for Domestic Companies
No surcharge is applicable if the income does not exceed Rs. 1 crore. Income between Rs. 1 crore and Rs. 10 crore attracts a 7 percent surcharge. Income above Rs. 10 crore attracts a 12 percent surcharge.
Surcharge for Foreign Companies
A foreign company is not liable to surcharge if income is up to Rs. 1 crore. Income between Rs. 1 crore and Rs. 10 crore attracts a 2 percent surcharge. Income exceeding Rs. 10 crore attracts a 5 percent surcharge.
The surcharge is subject to marginal relief to prevent taxpayers from bearing a disproportionate tax burden if their income slightly exceeds the threshold levels.
Health and Education Cess
In addition to income tax and surcharge, all taxpayers are liable to pay health and education cess. The rate of this cess is uniform across all taxpayers, including individuals, Hindu Undivided Families, firms, companies, co-operative societies, and others.
Health and education cess is charged at the rate of 4 percent on the total of income tax and surcharge, if applicable. This cess is intended to support government initiatives in the health and education sectors. It applies regardless of the tax regime chosen by the taxpayer.
For example, if the income tax liability of an individual is Rs. 1,00,000 and a surcharge of Rs. 10,000 is applicable, the cess will be calculated as 4 percent of Rs. 1,10,000, which amounts to Rs. 4,400. This increases the total tax liability to Rs. 1,14,400.
Marginal Relief
Marginal relief is a mechanism provided to ensure that the additional tax liability due to the surcharge does not exceed the actual income that is above the surcharge threshold. This relief applies to individuals, Hindu Undivided Families, firms, companies, co-operative societies, and others whose income marginally exceeds the prescribed threshold limits for surcharge.
Marginal relief is computed by comparing the actual additional income over the threshold with the additional tax payable due to the surcharge. If the surcharge payable is more than the additional income, then the excess amount is reduced from the total tax liability, thereby offering relief.
For instance, if the surcharge applies to income exceeding Rs. 50 lakh and the taxpayer’s income is just Rs. 50,10,000, the marginal increase in income is Rs. 10,000. If the additional tax due to the surcharge is more than Rs. 10,000, then the taxpayer is allowed marginal relief to the extent that the excess tax is reduced.
Alternate Tax Regimes for Companies and Co-operative Societies
In order to promote ease of doing business and to attract investment, the Income-tax Act provides alternative tax regimes under specific sections for domestic companies and co-operative societies.
Section 115BA
This section allows a manufacturing domestic company incorporated on or after March 1, 2016, to be taxed at 25 percent if it does not claim specified deductions or incentives. This option is available only if the company is engaged solely in manufacturing or production and does not avail benefits under section 10AA or investment-linked deductions under Chapter VI-A.
Section 115BAA
Under this section, domestic companies can opt to be taxed at 22 percent if they do not claim specified deductions or incentives. Unlike section 115BA, there is no restriction on the nature of business, and the benefit is available to both manufacturing and non-manufacturing companies. Once made, the choice is irreversible.
A company choosing this section is not entitled to claim deductions under section 10AA, additional depreciation under section 32, expenditure under section 35 for scientific research, or deductions under Chapter VI-A, other than section 80JJAA and section 80M.
Section 115BAB
This section offers an even lower tax rate of 15 percent for new domestic manufacturing companies incorporated on or after October 1, 2019, and commencing production before March 31, 2024. The concessional rate is available only if the company is not formed by splitting up or reconstructing an existing business and does not use old machinery exceeding a specified limit.
Such companies also cannot claim deductions under section 10AA or Chapter VI-A and must not avail investment allowance, accelerated depreciation, or weighted deduction under section 35. This benefit is subject to strict compliance, and any deviation may result in the withdrawal of the concessional rate.
Section 115BAD
Resident co-operative societies may opt to be taxed at a flat rate of 22 percent under this section, subject to the condition that they do not claim any deductions or exemptions under specified provisions, such as Chapter VI-A (except section 80JJAA) and section 10AA. Surcharge in such cases is levied at 10 percent.
This option must be exercised before the due date of filing the income tax return and is binding for subsequent years. Once exercised, the society cannot switch back to the regular regime.
Section 115BAE
A new section introduced for co-operative societies engaged in manufacturing or production, section 115BAE, offers a concessional tax rate of 15 percent if the society is formed on or after April 1, 2023, and begins production before March 31, 2024. Similar to section 115BAB for companies, the concessional rate is available only if no specified deductions or incentives are claimed.
Surcharge in this case is levied at 10 percent. The option must be exercised in the prescribed manner and timeframe. This tax regime is designed to boost co-operative sector investments in manufacturing.
Special Tax Rates for Dividends and Capital Gains
Certain types of income are taxed at special rates under both the old and new regimes. These rates apply to capital gains, dividend income, and winnings from lotteries or game shows, among others.
Short-Term Capital Gains under Section 111A
Short-term capital gains arising from the transfer of equity shares or equity-oriented mutual funds, where the transaction is subject to securities transaction tax, are taxed at 15 percent. This rate remains unchanged under both regimes.
Long-Term Capital Gains under Section 112A
Long-term capital gains exceeding Rs. 1,00,000 from the sale of equity shares or equity-oriented mutual funds, where securities transaction tax is applicable, are taxed at 10 percent without indexation. Gains up to Rs. 1,00,000 are exempt from tax.
Other Long-Term Capital Gains
Other long-term capital gains that do not fall under section 112A are generally taxed at 20 percent with indexation or 10 percent without indexation, depending on the type of asset.
Dividend Income
Dividend income is included in the total income and taxed at the applicable slab rate. However, surcharge on dividend income is capped at 15 percent to ensure that high-income individuals are not disproportionately taxed.
Rebate under Section 87A
Resident individuals with total income not exceeding a prescribed limit are entitled to a rebate under section 87A, which reduces their tax liability. The amount of rebate and the qualifying income threshold differ between the old and new tax regimes.
Under the old regime, the rebate is available if the total income does not exceed Rs. 5,00,000. The maximum rebate amount is Rs. 12,500, effectively making the tax liability nil for such taxpayers.
Under the new regime, for AY 2025-26, a rebate of Rs. 25,000 is available if income does not exceed Rs. 7,00,000. For AY 2026-27, this threshold increases to Rs. 8,00,000. This ensures that individuals earning within this limit pay zero tax under the new regime, making it more attractive for middle-income groups.
Taxation of Special Entities
India’s income tax framework includes provisions specific to certain special entities such as trusts, political parties, electoral trusts, institutions under Section 10(23C), educational institutions, hospitals, and charitable institutions registered under Section 12AB. These entities are taxed differently depending on their purpose and compliance with statutory conditions.
Charitable and Religious Trusts
Entities registered under Section 12AB are exempt from tax to the extent of income applied for charitable or religious purposes. Income accumulated or set apart for application in future years is also exempt, provided the specified conditions are fulfilled. Failure to apply the income or violations of prescribed rules may result in the income becoming taxable at the maximum marginal rate, which is 30 percent plus applicable surcharge and cess.
If such a trust or institution earns income from business, such business must be incidental to the attainment of its objectives, and separate books of account must be maintained. Otherwise, the entire income may be denied exemption.
Educational Institutions and Hospitals
Educational institutions and hospitals are eligible for full exemption if they are approved under Section 10(23C). The taxability of these institutions depends on whether they are government-funded or privately run, and the level of receipts during the financial year. Institutions with annual receipts up to Rs. 5 crore are typically exempt if they exist solely for educational or medical purposes and not for profit.
If receipts exceed Rs. 5 crore, exemption is granted only upon approval by the designated authority. Any income not applied by conditions or diverted for private benefit may be taxed at the maximum marginal rate.
Political Parties
Income of registered political parties is exempt from tax under Section 13A, provided certain conditions are met. These include maintaining books of account, recording voluntary contributions above Rs. 20,000, and filing the return of income within the prescribed time limit. Contributions received in cash above the permitted limit may lead to the denial of exemption and taxation at applicable rates.
Electoral Trusts
Electoral trusts approved under Section 13B are tax-exempt if they distribute at least 95 percent of the total contributions received to registered political parties in a financial year. The trust must follow all prescribed reporting and disclosure norms. Any failure to meet distribution conditions or non-compliance may attract tax on the total income.
Taxation of Partnership Firms and LLPs
A partnership firm or Limited Liability Partnership is taxed at a flat rate of 30 percent on total income. In addition, a surcharge of 12 percent is applicable if the total income exceeds Rs. 1 crore. A health and education cess of 4 percent is also levied on the total tax and surcharge.
Partners are taxed individually on the share of profit received from the firm, but such share is exempt from tax in their hands under Section 10(2A). However, interest on capital and remuneration received by partners are taxable in their hands, subject to limits under Section 40(b).
Taxation of Companies under Different Regimes
Domestic companies have the option to be taxed under various sections based on their structure, turnover, and whether they claim specified exemptions.
Standard Rate under Section 115BAA
Companies opting under Section 115BAA are taxed at 22 percent and are not allowed to claim most deductions under Chapter VI-A, additional depreciation, or exemptions under Section 10AA. Surcharge of 10 percent and health and education cess of 4 percent are applicable.
This option is available to all domestic companies regardless of their turnover or date of incorporation. Once exercised, the option is irrevocable.
Concessional Rate under Section 115BAB
Companies incorporated on or after October 1, 2019, and engaged in manufacturing or production can opt for the concessional tax rate of 15 percent under Section 115BAB, provided they commence production by March 31, 2024. They are not allowed to claim exemptions, incentives, or deductions, and must meet specified compliance conditions.
The applicable surcharge is 10 percent, and the cess is 4 percent. The effective tax rate under this section, including surcharge and cess, comes to approximately 17.16 percent.
Normal Provisions for Domestic Companies
Companies that do not opt for Section 115BA, 115BAA, or 115BAB are taxed at 30 percent. A reduced rate of 25 percent is applicable if the total turnover or gross receipts in the previous year does not exceed Rs. 400 crore. This benefit is available to companies engaged in any business or profession.
Surcharge is levied at 7 percent if income exceeds Rs. 1 crore but is up to Rs. 10 crore. If income exceeds Rs. 10 crore, the surcharge is 12 percent. The health and education cess of 4 percent is applicable in all cases.
Taxation of Non-Resident Individuals and Foreign Companies
Non-resident individuals are taxed at slab rates applicable to other individuals, but they do not enjoy the higher exemption limits applicable to resident senior or super senior citizens. Their surcharge and cess rules remain the same as for resident individuals.
Foreign companies are taxed at a flat rate of 40 percent. A surcharge of 2 percent applies if the total income exceeds Rs. 1 crore but is up to Rs. 10 crore. If income exceeds Rs. 10 crore, the surcharge increases to 5 percent. Additionally, a 4 percent health and education cess is levied on the total tax and surcharge.
Certain types of income, such as royalties, fees for technical services, interest from government or Indian concerns, and dividends, may be taxed at reduced rates under the Income-tax Act or applicable tax treaties.
Minimum Alternate Tax (MAT)
Minimum Alternate Tax applies to companies that claim various exemptions, deductions, or incentives and whose tax payable under normal provisions is less than a specified percentage of book profits. MAT is designed to ensure that such companies pay a minimum amount of tax.
The MAT rate is 15 percent of book profit for domestic companies. This is increased by applicable surcharge and health and education cess. MAT does not apply to companies opting for the concessional tax regimes under Sections 115BAA and 115BAB.
Foreign companies are subject to MAT only if they have a permanent establishment in India and their income is computed on book profits. However, several exceptions and judicial interpretations apply to the MAT provisions for foreign entities.
Alternate Minimum Tax (AMT)
AMT applies to non-corporate taxpayers such as individuals, Hindu Undivided Families, partnerships, LLPs, AOPs, BOIs, and artificial juridical persons who claim certain deductions under Chapter VI-A or Section 10AA. The AMT is levied at 18.5 percent of adjusted total income, plus applicable surcharge and cess.
A reduced AMT rate of 9 percent is applicable for units located in International Financial Services Centres (IFSCs) and earning income solely in foreign currency.
Taxpayers subject to AMT must obtain an AMT certificate from a chartered accountant and may carry forward the AMT credit for up to fifteen assessment years for set-off against future regular tax liability.
Taxation of Capital Gains
Capital gains are classified into short-term and long-term based on the period of holding of the asset. The tax treatment varies depending on the type of asset and the duration for which it is held.
Short-Term Capital Gains
Short-term capital gains on listed equity shares and equity-oriented mutual funds, where the transaction is subject to securities transaction tax, are taxed at 15 percent under section 111A. All other short-term capital gains are taxed at normal slab rates applicable to the taxpayer.
Short-term capital gains from the sale of unlisted shares, immovable property, or other assets are included in the total income and taxed at slab rates. No indexation benefit is allowed on short-term gains.
Long-Term Capital Gains
Long-term capital gains on listed equity shares and equity-oriented mutual funds exceeding Rs. 1,00,000 are taxed at 10 percent without indexation under section 112A. For other long-term capital assets, the gains are taxed at 20 percent with indexation, or at 10 percent without indexation in specified cases, such as certain bonds and debentures.
Gains from the sale of immovable property held for more than 24 months, or unlisted shares and other assets held for more than 36 months, qualify as long-term capital gains. Indexation adjusts the cost of acquisition for inflation, thereby reducing the taxable amount.
Taxpayers may claim exemptions from long-term capital gains under various sections, such as 54, 54EC, and 54F, by reinvesting the proceeds into specified assets like residential property or notified bonds.
Income from Lottery, Crossword Puzzles, and Game Shows
Income from winnings such as lotteries, crossword puzzles, game shows, and other similar sources is taxed at a flat rate of 30 percent under section 115BB. This rate applies without allowing any deduction for expenses incurred in earning such income.
Surcharge and cess are levied in addition to the base tax rate. The net effective tax rate becomes higher when surcharge and health and education cess are factored in. The taxpayer cannot claim any deduction or rebate under Chapter VI-A against such income.
Tax Deducted at Source (TDS) and Advance Tax
TDS is a mechanism by which tax is collected at the source of income by the payer on behalf of the payee. It applies to various types of payments such as salary, interest, rent, professional fees, contractual payments, and commissions. TDS rates vary based on the nature of payment and the status of the recipient.
Advance tax is payable by taxpayers whose tax liability exceeds Rs. 10,000 in a financial year. It is payable in four instalments during the year, and any failure to pay advance tax attracts interest under sections 234B and 234C.
Both TDS and advance tax payments are credited to the taxpayer’s account and reflected in Form 26AS. These credits can be adjusted against the final tax liability at the time of filing the income tax return.
Filing of Income Tax Return
The due date for filing income tax returns varies depending on the category of taxpayer. For individuals and non-audit cases, the due date is usually July 31st of the assessment year. For audit cases, the due date is generally October 31st. Companies and firms subject to transfer pricing provisions are required to file by November 30th.
Late filing of the income tax return attracts a penalty under section 234F. The penalty amount is Rs. 5,000 if the return is filed after the due date but before December 31st, and Rs. 10,000 if filed later. However, for taxpayers with total income not exceeding Rs. 5 lakh, the penalty is restricted to Rs. 1,000.
Interest and Penalty Provisions
Various interest and penalty provisions apply for defaults in payment of advance tax, non-filing or late filing of returns, and underreporting of income. These include:
Section 234A: Interest for late filing of return at the rate of 1 percent per month or part thereof on the unpaid tax amount.
Section 234B: Interest for default in payment of advance tax at the rate of 1 percent per month from April 1 of the assessment year until the date of payment.
Section 234C: Interest for deferment of instalments of advance tax.
Section 270A: Penalty for underreporting or misreporting of income. The penalty for underreporting is 50 percent of the tax payable on the underreported income, and for misreporting, it is 200 percent.
Section 271AAC: Income penalty found during search or survey operations which is not recorded in the books or disclosed in returns, at the rate of 10 percent of tax payable under section 115BBE.
Comparison Between Old and New Tax Regimes
Taxpayers are allowed to choose between the old and new regimes. The old regime offers higher exemption limits, standard deductions, and various exemptions such as house rent allowance, leave travel allowance, and deductions under Chapter VI-A, including sections 80C, 80D, and 80G.
The new regime offers lower tax rates but does not allow most exemptions and deductions. It may be beneficial for those who do not claim significant deductions or have simple financial structures.
The choice depends on individual circumstances, such as income level, nature of income, deductions eligible, housing loan interest, and other factors. Taxpayers are advised to perform a comparative calculation under both regimes to make an informed decision.
For salaried individuals and pensioners, the option to choose the regime can be exercised every year. For those having income from business or profession, the option can be exercised only once and is binding for future years unless withdrawn permanently.
Applicability of Tax Audit
Taxpayers engaged in business or profession are required to get their accounts audited if their turnover or gross receipts exceed the specified limits. The tax audit threshold is Rs. 1 crore for business and Rs. 50 lakh for professionals. However, if more than 95 percent of the business receipts and payments are through banking channels, the threshold for business increases to Rs. 10 crore.
The audit report must be filed in Form 3CA or 3CB along with Form 3CD before the specified due date. Non-compliance with audit requirements attracts a penalty under section 271B, which may be up to 0.5 percent of the turnover or Rs. 1,50,000, whichever is less.
Conclusion
The tax structure for assessment years 2025-26 and 2026-27 provides flexibility through dual regimes, each designed to suit different categories of taxpayers. While the old regime continues to offer benefits through exemptions and deductions, the new regime simplifies compliance and provides reduced tax rates. Understanding the applicable tax rates, surcharges, and cesses, along with the associated conditions and limitations, is essential for accurate tax planning and compliance. Taxpayers must evaluate their income composition, available deductions, and financial goals before selecting the appropriate tax regime. Accurate reporting and timely compliance will not only reduce the risk of penalties but also help in optimizing tax liabilities legally and efficiently.