For the assessment years 2025-26 and 2026-27, understanding the structure of income tax, surcharge, and cess is critical for individuals and business entities alike. The income tax framework in the country has evolved into two clear regimes — the old regime with deductions and exemptions, and the new regime that offers lower tax rates with no or minimal exemptions. With specific provisions under different sections of the Income-tax Act, 1961, choosing between the two systems requires careful evaluation of income levels, deduction eligibility, and investment planning.
Apart from tax rates, taxpayers must also consider the effect of surcharge, which is an additional charge on high-income earners, and the health and education cess, which is imposed on all taxpayers. These charges significantly affect the overall tax liability and must be factored into every taxpayer’s financial strategy. We focus on the income tax rates applicable to different categories of taxpayers under both the old and new regimes, and the surcharge and cess provisions that supplement the tax rates.
Overview of Income Tax Regimes
The income tax system is divided into two regimes. The old regime allows for a wide range of exemptions and deductions such as those available under section 80C, 80D, HRA, LTA, and interest on housing loans. The new regime, introduced to simplify tax compliance, offers concessional tax rates to taxpayers willing to forgo most deductions and exemptions.
Old Tax Regime
Under the old regime, taxpayers can continue to claim all eligible deductions and exemptions, making it beneficial for those with significant investments in tax-saving instruments. The rates under this regime remain unchanged for the assessment years 2025-26 and 2026-27.
New Tax Regime
The new tax regime is governed by various sections, namely 115BAC for individuals, HUFs, AOPs, BOIs, and artificial juridical persons, and 115BA, 115BAA, 115BAB, 115BAD, and 115BAE for companies and co-operative societies. The new regime has been made the default system for individuals and similar entities. To avail the benefit of the old regime, such taxpayers must actively opt out by filing the necessary declarations under section 115BAC(6).
Companies and firms, on the other hand, are required to opt into the new regime by exercising their option under the relevant section applicable to their structure. Once exercised, in many cases, the choice is irrevocable for subsequent years.
Taxpayer Categories and Their Taxation Structure
The tax structure is defined based on the nature of the taxpayer. The principal categories include:
- Individuals, Hindu Undivided Families (HUFs), Association of Persons (AOPs), Body of Individuals (BOIs), and artificial juridical persons
- Firms, including limited liability partnerships
- Domestic companies and foreign companies
- Co-operative societies and local authorities
Each of these categories is subject to a different tax rate, and the rates also vary depending on whether the taxpayer chooses the old or new regime.
Income Tax Rates for Individuals and Similar Entities
For individuals and similar entities, the tax liability depends on the regime opted for. The old regime follows the traditional slab system with progressive tax rates and allows a wide array of deductions. In contrast, the new regime has lower rates but does not allow most exemptions.
Old Regime Slab Rates for Individuals (Below 60 years)
- Income up to ₹2,50,000: Nil
- ₹2,50,001 – ₹5,00,000: 5 percent
- ₹5,00,001 – ₹10,00,000: 20 percent
- Above ₹10,00,000: 30 percent
For senior citizens (60 to 80 years), the exemption limit is ₹3,00,000, and for very senior citizens (above 80 years), it is ₹5,00,000.
New Regime Slab Rates for Individuals
The new tax regime has uniform slabs for all individuals:
- Income up to ₹3,00,000: Nil
- ₹3,00,001 – ₹6,00,000: 5 percent
- ₹6,00,001 – ₹9,00,000: 10 percent
- ₹9,00,001 – ₹12,00,000: 15 percent
- ₹12,00,001 – ₹15,00,000: 20 percent
- Above ₹15,00,000: 30 percent
No deductions under sections like 80C, 80D, HRA, or LTA are permitted under the new regime, except for a few specified ones.
Income Tax Rates for Firms
Firms, including LLPs, are taxed at a flat rate of 30 percent. No slab system is applicable. Firms cannot opt for any special regime with lower rates, but they can claim deduction for remuneration and interest paid to partners as allowed under the law.
Income Tax Rates for Co-operative Societies
Under the regular tax provisions, co-operative societies are taxed as follows:
- Income up to ₹10,000: 10 percent
- ₹10,001 – ₹20,000: 20 percent
- Above ₹20,000: 30 percent
Alternatively, co-operative societies can opt for taxation under section 115BAD at 22 percent or section 115BAE at 15 percent, subject to compliance with specified conditions.
Income Tax Rates for Domestic Companies
Domestic companies can be taxed under different regimes depending on their turnover and the nature of business.
- Companies with turnover up to ₹400 crore in the previous year: 25 percent
- Other domestic companies: 30 percent
- Under section 115BAA: 22 percent (no exemption/deductions)
- Under section 115BAB (for new manufacturing companies): 15 percent
Companies opting for lower tax rates under the special provisions must adhere to conditions like no additional deductions and certain compliance criteria.
Income Tax Rates for Foreign Companies
Foreign companies are taxed at a flat rate of 40 percent. The nature of income such as royalty or fees for technical services may attract a concessional rate as per treaty or the Income-tax Act, whichever is beneficial.
Surcharge on Income Tax
Surcharge is an additional charge levied on the amount of income tax payable when the total income exceeds specified thresholds. It applies to high-income taxpayers and varies by the taxpayer category.
Surcharge for Individuals, HUFs, AOPs, BOIs, and Artificial Juridical Persons
- Income up to ₹50 lakh: No surcharge
- ₹50 lakh to ₹1 crore: 10 percent
- ₹1 crore to ₹2 crore: 15 percent
- ₹2 crore to ₹5 crore: 25 percent
- Above ₹5 crore: 37 percent
However, for income comprising dividends or capital gains taxable under section 111A, 112, or 112A, the maximum surcharge rate is restricted to 15 percent.
Surcharge for Firms and Local Authorities
- Income up to ₹1 crore: Nil
- Income exceeding ₹1 crore: 12 percent
This applies uniformly across all firms and local authorities.
Surcharge for Co-operative Societies
- Income up to ₹1 crore: Nil
- ₹1 crore to ₹10 crore: 7 percent
- Income exceeding ₹10 crore: 12 percent
Special surcharge provisions apply if co-operative societies opt for taxation under section 115BAD or 115BAE.
Surcharge for Domestic Companies
- Income up to ₹1 crore: Nil
- ₹1 crore to ₹10 crore: 7 percent
- Income exceeding ₹10 crore: 12 percent
Companies opting for concessional tax under section 115BAA or 115BAB have fixed surcharge rates of 10 percent, irrespective of income.
Surcharge for Foreign Companies
- Income up to ₹1 crore: Nil
- ₹1 crore to ₹10 crore: 2 percent
- Income exceeding ₹10 crore: 5 percent
Foreign companies are not eligible to opt for the concessional tax regimes available to domestic companies.
Marginal Relief for Surcharge
To prevent excessive tax liability due to surcharge, the concept of marginal relief has been introduced. It ensures that the additional tax payable on account of surcharge does not exceed the actual income that exceeds the threshold limit.
Marginal relief is available at all critical income levels where surcharge becomes applicable, such as ₹50 lakh, ₹1 crore, ₹2 crore, and ₹5 crore. This ensures fairness in tax liability when income only slightly exceeds the surcharge limit.
Health and Education Cess
All taxpayers are subject to a health and education cess at the rate of 4 percent. This is calculated on the amount of income tax plus surcharge, if any. The cess applies uniformly across all categories of taxpayers and for both tax regimes.
The funds collected through this cess are meant for government spending on education and healthcare initiatives. This charge has become a permanent fixture in the tax structure and is not subject to any threshold or exemption.
Surcharge on Certain Types of Income
Dividend Income and Capital Gains
There are special scenarios where the surcharge on income tax is restricted even if the taxpayer’s total income exceeds the threshold levels that attract a higher surcharge rate.
When the total income includes income from dividends or capital gains taxable under section 111A (short-term capital gains on listed equity shares), section 112 (long-term capital gains on unlisted securities or other capital assets), or section 112A (long-term capital gains on listed equity shares and equity-oriented mutual funds), the surcharge on the tax payable for such income is capped at 15 percent.
This cap prevents the surcharge from rising to 25 or 37 percent, which could otherwise apply to other forms of income when total income crosses ₹2 crore or ₹5 crore. The cap ensures that income from capital market transactions and dividend earnings does not face an excessive tax burden, thereby encouraging participation in the equity markets.
Illustration
Suppose an individual’s total income is ₹3 crore, of which ₹2 crore comprises long-term capital gains from equity investments under section 112A. While the rest of the income may be subject to a higher surcharge of 25 percent, the surcharge on the tax computed on the ₹2 crore capital gain will be capped at 15 percent.
This provision ensures equitable treatment of financial income and limits the tax impact for high-income earners deriving a substantial portion of income from dividends or capital gains.
Surcharge for Domestic Companies under Concessional Provisions
Companies that opt to be taxed under section 115BAA or 115BAB are offered concessional tax rates. These provisions come with a simplified tax structure and the withdrawal of most exemptions and deductions. However, they are also subject to specific surcharge rates which differ from the general corporate surcharge structure.
Section 115BAA
Domestic companies opting for this section are taxed at a base rate of 22 percent. The surcharge applicable is fixed at 10 percent, regardless of the total income. There are no variable surcharge rates based on income slabs in this case. This predictability in the surcharge rate helps companies better manage their tax liabilities.
Section 115BAB
New manufacturing companies established on or after 1st October 2019 and commencing operations before 31st March 2024 can opt for taxation under section 115BAB. The base rate under this section is 15 percent, and like section 115BAA, the surcharge is fixed at 10 percent, providing certainty to taxpayers and encouraging industrial development.
Surcharge for Co-operative Societies under Special Sections
Co-operative societies are also given the option to be taxed under concessional regimes by sections 115BAD and 115BAE. The surcharge under these sections is structured to provide a flat and reduced rate.
Section 115BAD
Co-operative societies that opt for this section are taxed at 22 percent, with a fixed surcharge rate of 10 percent. The provision is aimed at simplifying tax compliance and is available only if the co-operative society meets specific criteria, including the withdrawal of certain exemptions.
Section 115BAE
This section allows new co-operative manufacturing societies to be taxed at 15 percent, similar to new manufacturing companies under section 115BAB. The surcharge under this provision is also 10 percent, regardless of the level of income.
These provisions demonstrate the government’s effort to rationalize tax rates for co-operative institutions while providing them the opportunity to operate under a simpler tax system.
Health and Education Cess
A health and education cess is levied on the total of income tax and surcharge, and it applies to all taxpayers without exception. The rate of this cess is 4 percent.
Applicability
This cess is imposed on:
- Individuals
- Hindu Undivided Families
- Firms
- Companies (domestic and foreign)
- Co-operative societies
- Local authorities
It applies uniformly whether the taxpayer chooses the old or new regime. The proceeds from this cess are earmarked for financing education and healthcare programs run by the central government.
Calculation Example
If a domestic company has an income tax liability of ₹1,00,000 and a surcharge of ₹10,000, then the health and education cess would be 4 percent of ₹1,10,000, which is ₹4,400. Therefore, the total tax liability would be ₹1,14,400.
Understanding how this cess compounds the overall tax burden is important for accurate tax planning.
Minimum Alternate Tax (MAT)
Applicability
Minimum Alternate Tax is applicable to companies, particularly those that claim substantial deductions or incentives and end up showing very low taxable income despite high book profits. MAT ensures that such companies pay a minimum level of tax to the government.
MAT is calculated under section 115JB, and it is applicable when the normal income tax payable by the company is less than a specified percentage of its book profit.
Rate
The rate of MAT is 15 percent of book profit (plus applicable surcharge and cess). This rate applies to domestic companies not covered under the concessional tax regime of section 115BAA or section 115BAB.
Exemption from MAT
Companies that have opted for taxation under section 115BAA or 115BAB are not subject to MAT. This is a key benefit and acts as an incentive for companies to shift to the new concessional tax regime, as it removes the compliance requirement of calculating book profits for MAT purposes.
Book Profit
Book profit is determined by adjusting the net profit as shown in the profit and loss account for specified additions and deductions. These include provisions for tax, reserves, deferred tax, and more.
Alternate Minimum Tax (AMT)
Applicability
Alternate Minimum Tax is similar in concept to MAT, but it applies to non-corporate taxpayers such as individuals, HUFs, partnership firms (other than LLPs), AOPs, BOIs, and others who claim certain deductions under Chapter VI-A or under section 10AA.
The objective is to ensure that these taxpayers pay at least a minimum amount of tax, even if their regular tax liability is reduced to zero by claiming deductions and exemptions.
Rate
AMT is charged at the rate of 18.5 percent of adjusted total income (plus applicable surcharge and cess). The adjusted total income is the total income before deductions claimed under Chapter VI-A or section 10AA.
In the case of units located in an International Financial Services Centre (IFSC), the AMT rate is 9 percent.
Exemption from AMT
Taxpayers who have opted for the new tax regime under section 115BAC, section 115BAD, or section 115BAE are exempt from AMT. This makes the new regime attractive to non-corporate entities, as it simplifies tax compliance by eliminating the requirement to calculate adjusted total income and pay AMT.
Marginal Relief
Marginal relief is a critical concept that ensures fairness in taxation, especially when income crosses the threshold that attracts a higher rate of surcharge.
Purpose
Marginal relief ensures that the additional tax payable due to surcharge does not exceed the amount of income that surpasses the threshold limit.
Without marginal relief, a taxpayer whose income marginally exceeds ₹50 lakh, ₹1 crore, ₹2 crore, or ₹5 crore would end up paying disproportionately higher tax because of the increased surcharge rate.
Illustration
Assume an individual has a taxable income of ₹50,10,000. Without marginal relief, this individual would be subject to a 10 percent surcharge on the income tax payable, resulting in significantly more tax than what would have been paid on ₹50,00,000. Marginal relief ensures that the excess tax does not exceed the additional income of ₹10,000.
This relief is applicable for all surcharge thresholds — at ₹50 lakh, ₹1 crore, ₹2 crore, and ₹5 crore. It is available to individuals, HUFs, AOPs, BOIs, and artificial juridical persons, as well as companies and firms, wherever applicable.
Marginal Relief for Companies and Firms
Marginal relief is also available to domestic companies and firms when their income exceeds ₹1 crore or ₹10 crore, the points at which surcharge rates increase. The computation follows the same principle — additional tax should not exceed the income above the surcharge threshold.
Maximum Effective Tax Rates
The combination of tax rates, surcharge, and cess leads to a maximum marginal rate of tax that can be imposed on a taxpayer. These highest rates are:
- Individuals under the new regime: 39 percent
- Individuals 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 provisions applicable
- Foreign companies: 38.22 percent
These rates apply at the highest income levels and assume that surcharge and cess are imposed at their maximum rates.
Overview of TDS and TCS Provisions
TDS and TCS are not standalone taxes but prepayments of income tax. Tax is deducted at the time of payment or credit of certain types of income, such as salary, interest, professional fees, commission, rent, and others. TCS is collected by sellers on receipt of sale consideration for specified transactions such as sale of scrap, alcohol, tendu leaves, and certain high-value goods and services.
For the financial year 2025-26, the TDS and TCS provisions continue to follow the structure laid down in Chapter XVII of the Income-tax Act, with some changes in rates, thresholds, and surcharge applicability depending on the category of recipient.
TDS on Salary and Specified Payments
Section 192 – Salary
TDS on salary is deducted by the employer based on the estimated income of the employee during the financial year. It takes into account the deductions and exemptions claimed by the employee, as well as the tax regime opted for. The rate of deduction is not fixed, but computed using an average rate based on total tax liability.
Section 194P – Senior Citizens Exempted from Filing ITR
Under section 194P, banks are required to compute tax liability and deduct tax for senior citizens aged 75 years or above, provided they have only pension and interest income. This provision aims to ease compliance for elderly taxpayers.
In both these cases, surcharge and health and education cess are applicable and must be factored into the TDS computation.
Application of Surcharge and Cess
If the salary or total payment covered under section 194P exceeds certain income thresholds, surcharge is levied as per applicable slab. Further, a 4 percent health and education cess is applied on the combined amount of income tax and surcharge.
This makes it important for employers and banks to perform accurate tax calculations while deducting TDS.
TDS on Other Payments
For Resident Recipients
For most other TDS provisions such as section 194A (interest), section 194C (contract payments), section 194H (commission), and section 194J (professional fees), when the recipient is a resident, neither surcharge nor health and education cess is applicable on the TDS amount.
The tax is deducted at the prescribed base rate. This simplifies the deduction process and avoids multiple components in tax withholding for resident recipients, unless otherwise notified.
For Non-resident Recipients
Where the payment is made to a non-resident, surcharge and cess are applicable on the base TDS amount. This increases the effective rate of deduction, especially in high-value transactions. It is essential for payers to be aware of these additional components to ensure proper withholding and avoid short deduction consequences.
Surcharge on TDS Payments for Non-residents
The surcharge rates for non-residents, as applicable to TDS, are aligned with the income tax surcharge rates discussed earlier, but calculated on the amount being subjected to deduction.
For Non-resident Individuals, HUFs, AOPs, BOIs
- ₹50 lakh to ₹1 crore: 10 percent surcharge on TDS
- ₹1 crore to ₹2 crore: 15 percent
- ₹2 crore to ₹5 crore: 25 percent
- Above ₹5 crore: 37 percent (capped at 25 percent for new regime income)
For Non-resident Firms
- Above ₹1 crore: 12 percent surcharge on TDS
For Non-resident Co-operative Societies
- ₹1 crore to ₹10 crore: 7 percent surcharge on TDS
- Above ₹10 crore: 12 percent
For Foreign Companies
- ₹1 crore to ₹10 crore: 2 percent surcharge
- Above ₹10 crore: 5 percent
Special Cap for Non-resident AOPs
In cases where the non-resident AOP has only companies as its members, the surcharge rate is capped at 15 percent, regardless of income level.
This structure ensures consistency and prevents excessive TDS deduction in international payments, subject to applicable Double Taxation Avoidance Agreements.
TCS Applicability and Rates
Tax collection at source is another important provision that requires sellers to collect tax from buyers at the point of sale for specified goods and services. The TCS provisions are applicable to both resident and non-resident purchasers or lessees, with different surcharge implications.
Some of the major items covered under TCS include:
- Sale of alcohol, forest produce, scrap
- Sale of motor vehicles above ₹10 lakh
- Remittance under Liberalised Remittance Scheme
- Sale of overseas tour packages
- Sale of goods exceeding ₹50 lakh (for specified sellers)
The base TCS rates range from 0.1 percent to 5 percent depending on the nature of the transaction. While surcharge and cess are not applicable on TCS for resident purchasers, they are applicable for non-resident buyers.
TCS Surcharge and Cess for Non-residents
- ₹50 lakh to ₹1 crore: 10 percent surcharge on TCS
- ₹1 crore to ₹2 crore: 15 percent
- ₹2 crore to ₹5 crore: 25 percent
- Above ₹5 crore: 37 percent (25 percent under new regime)
For non-resident firms, co-operative societies, and foreign companies, the same surcharge slabs apply as they do for TDS.
Differences in TDS and TCS Treatment
While both mechanisms serve similar purposes in tax collection, there are important distinctions between TDS and TCS in how surcharge and cess are applied:
- TDS applies at the time of making payments to service providers, professionals, employees, or others.
- TCS applies at the time of sale of goods or services specified under the law.
- For residents, surcharge and cess do not apply on TDS or TCS except for payments like salary or those to non-residents.
- For non-residents, surcharge and cess apply to both TDS and TCS, increasing the effective rate of deduction or collection.
Effective Rates and Computation
When surcharge and cess are applicable, the effective TDS or TCS rate is higher than the base rate. These calculations are critical for accurate deduction and compliance.
Example for TDS on Royalty Payment to Non-resident
- Base rate: 10 percent
- Income exceeds ₹1 crore: Surcharge at 2 percent
- Subtotal: 10.2 percent
- Cess at 4 percent on 10.2 percent = 0.408 percent
- Effective TDS rate = 10.2 + 0.408 = 10.608 percent
This kind of calculation is necessary for all transactions involving non-resident recipients to ensure full compliance and to avoid short deduction interest or penalties.
TDS Credit and Reconciliation
All tax deducted at source and collected at source is required to be reported through periodic filings such as Form 26Q, 27Q, 24Q, or 27EQ. The credit of TDS/TCS is reflected in Form 26AS and the Annual Information Statement of the taxpayer.
During return filing, taxpayers must reconcile TDS and TCS reported in their records with the credit reflected in Form 26AS. Any mismatch can delay processing of returns or refunds. It is also important to ensure that PAN is quoted correctly and that the deductor or collector has deposited the amount with the government within the prescribed timeline.
Advance Tax and Self-Assessment Tax Impact
TDS and TCS are components of advance tax. Taxpayers are expected to estimate their total liability after reducing TDS/TCS and pay the balance in installments or as self-assessment tax. Inaccurate withholding due to wrong surcharge or cess application may lead to interest under section 234B or 234C.
Hence, understanding TDS and TCS computation becomes vital not just for deductors but also for recipients who rely on such credit to discharge their final liability.
Compliance Requirements
Entities responsible for deducting or collecting tax are required to:
- Obtain TAN (Tax Deduction and Collection Account Number)
- Deduct or collect tax at applicable rates with correct surcharge and cess
- Deposit the amount with the central government within the due date
- File TDS/TCS returns on time
- Issue TDS certificates (Form 16/16A) or TCS certificates (Form 27D)
Non-compliance leads to penalties, interest, and disallowance of expenditure for deductors. Therefore, correct interpretation of surcharge and cess provisions is essential.
Conclusion
Navigating the framework of income taxation requires a clear understanding of not just the core tax rates, but also the accompanying provisions like surcharge, health and education cess, minimum alternate tax, alternate minimum tax, and TDS/TCS rules. For assessment years 2025-26 and 2026-27, these elements play a critical role in determining the final tax liability for individuals, firms, companies, and co-operative societies.
Taxpayers must evaluate the suitability of the old versus new tax regimes based on their income profile, exemptions, and deductions. While the new regime offers lower rates with fewer deductions, the old regime continues to benefit those with significant tax-saving investments and claims. The default applicability of the new regime for individuals and the option to switch to the old one through prescribed methods also underscores the importance of timely planning and declaration.
Surcharge and marginal relief provisions ensure progressive taxation but can lead to complexity, especially when incomes cross key thresholds. Understanding how these surcharges affect high-net-worth individuals and corporate taxpayers is essential for accurate forecasting and compliance. Additionally, the uniform health and education cess of 4 percent on tax and surcharge further enhances the effective tax rates, impacting total outflows.
The application of TDS and TCS brings early-stage tax collection into the system and is subject to its own rules regarding surcharge and cess. Differences in treatment between residents and non-residents, the impact of thresholds, and varying rates of deduction necessitate careful handling by both payers and recipients of income. Mistakes in TDS/TCS deduction or deposit can attract penalties and interest, and may affect the availability of credit for the recipient.
Minimum alternate tax and alternate minimum tax serve as backstops to ensure that taxpayers who reduce taxable income through exemptions and incentives still contribute a minimum tax to the exchequer. However, opting for the new concessional regimes offers relief from these alternate tax provisions, making them an attractive proposition for eligible taxpayers.
In an evolving tax environment, staying informed and compliant is key. Regular updates to rates, procedural changes, and regime-specific provisions demand active engagement from both taxpayers and professionals. By understanding the tax structure holistically, including how tax rates, surcharge, cess, and compliance obligations interconnect, taxpayers can make informed decisions and avoid unnecessary financial and legal risks.