The Indian income tax system offers taxpayers the choice between two tax regimes: the regular or old tax regime and the alternative or new tax regime. The option between these regimes affects applicable tax rates, exemptions, and deductions. The tax rates under the regular tax regime for the assessment years 2024-25 and 2025-26 can be found in the standard reference tables. The alternative tax regime, provided under various sections such as 115BA, 115BAA, 115BAB, 115BAC, 115BAD, and 115BAE, is optional and must be chosen through specific provisions mentioned in the respective subsections. For individual taxpayers, Hindu Undivided Families (HUFs), Associations of Persons (AOPs), Bodies of Individuals (BOIs), and artificial juridical persons, the alternative tax regime becomes the default from the assessment year 2024-25 onward. However, these taxpayers can still opt into the regular regime by applying section 115BAC(6).
Tax Rates for Individuals, HUFs, AOPs, BOIs, and Artificial Juridical Persons
Under the regular tax regime, the exemption limit for individuals is Rs. 2,50,000. Senior and super senior citizens are eligible for higher exemption limits based on their age and residential status. A senior citizen is a resident individual aged 60 years or more but less than 80 years at any time during the previous year. For the assessment year 2024-25, this includes individuals born on or after April 2, 1944, but before April 2, 1964. For assessment year 2025-26, the date range is on or after April 2, 1945, but before April 2, 1965. In the case of senior citizens, the exemption limit is Rs. 3,00,000. Income from Rs. 3,00,000 to Rs. 5,00,000 is taxed at 5 percent, income between Rs. 5,00,000 and Rs. 10,00,000 at 20 percent, and income exceeding Rs. 10,00,000 at 30 percent. These rates apply only to resident senior citizens; non-residents are not eligible for the higher exemption limit.
A super senior citizen is defined as a resident individual aged 80 years or above at any time during the previous year. For assessment year 2024-25, this includes those born before April 2, 1944, and for assessment year 2025-26, those born before April 2, 1945. Super senior citizens are exempt from tax on income up to Rs. 5,00,000. Income from Rs. 5,00,000 to Rs. 10,00,000 is taxed at 20 percent, and income above Rs. 10,00,000 is taxed at 30 percent. These rates apply only to resident super senior citizens; non-residents are not eligible for this exemption.
All other individuals, including non-resident individuals regardless of age, as well as HUFs, AOPs, BOIs, and artificial juridical persons, are taxed under the regular regime with an exemption limit of Rs. 2,50,000. Income from Rs. 2,50,000 to Rs. 5,00,000 is taxed at 5 percent, from Rs. 5,00,000 to Rs. 10,00,000 at 20 percent, and income above Rs. 10,00,000 at 30 percent.
Tax Rates Under the Alternative Tax Regime
The alternative tax regime, under section 115BAC(1A), becomes the default for individuals, HUFs, AOPs, BOIs, and artificial juridical persons starting from the assessment year 2024-25. Taxpayers can opt for the regular tax regime under section 115BAC(6) if desired. The tax slabs for the assessment year 2024-25 under the alternative regime are as follows: income up to Rs. 3,00,000 is exempt from tax; income between Rs. 3,00,001 and Rs. 6,00,000 is taxed at 5 percent; Rs. 6,00,001 to Rs. 9,00,000 at 10 percent; Rs. 9,00,001 to Rs. 12,00,000 at 15 percent; Rs. 12,00,001 to Rs. 15,00,000 at 20 percent; and income above Rs. 15,00,000 is taxed at 30 percent. For the assessment year 2025-26, the tax rates are slightly adjusted: the 5 percent tax rate extends from Rs. 3,00,001 to Rs. 7,00,000, followed by 10 percent from Rs. 7,00,001 to Rs. 10,00,000, and the remaining slabs stay the same as the previous year.
Tax Rates for Firms
The tax rate for partnership firms, including limited liability partnership firms, remains unchanged. These entities are taxed at a flat rate of 30 percent for both assessment years.
Tax Rates for Companies
Domestic companies are taxed at 30 percent; however, a reduced rate of 25 percent applies if their total turnover or gross receipts in the previous financial year do not exceed Rs. 400 crore. For the assessment year 2024-25, this turnover limit refers to the financial year 2021-22, and for assessment year 2025-26, it refers to the financial year 2022-23. Non-domestic companies are taxed at 40 percent for the assessment year 2024-25 and 35 percent for the assessment year 2025-26. Domestic companies may opt for the alternative tax regime under sections 115BA, 115BAA, or 115BAB to avail themselves of reduced tax rates, provided they meet the specified conditions.
Tax Rates for Co-operative Societies and Local Authorities
There are no changes in the tax rates applicable to co-operative societies and local authorities. Resident co-operative societies may choose to be taxed under the alternative tax regime specified in section 115BAD or section 115BAE. These sections offer concessional tax rates, subject to fulfillment of prescribed conditions.
Surcharge on Income-Tax for Various Assessees
Surcharge is levied as a percentage of the income tax payable and varies based on the level of income and type of taxpayer. For individuals, HUFs, AOPs, BOIs, and artificial juridical persons, the surcharge structure for both assessment years is as follows: no surcharge is applicable if the net income is up to Rs. 50 lakh; a 10 percent surcharge applies if income is between Rs. 50 lakh and Rs. 1 crore; 15 percent for income between Rs. 1 crore and Rs. 2 crore; 25 percent for income between Rs. 2 crore and Rs. 5 crore; and 37 percent for income exceeding Rs. 5 crore.
For firms and local authorities, the surcharge is nil up to Rs. 1 crore and 12 percent for income above Rs. 1 crore. In the case of co-operative societies, surcharge is nil up to Rs. 1 crore, 7 percent between Rs. 1 crore and Rs. 10 crore, and 12 percent for income exceeding Rs. 10 crore.
Domestic companies pay no surcharge up to Rs. 1 crore, 7 percent on income between Rs. 1 crore and Rs. 10 crore, and 12 percent on income above Rs. 10 crore. Foreign companies are subject to a 2 percent surcharge for income between Rs. 1 crore and Rs. 10 crore and a 5 percent surcharge for income exceeding Rs. 10 crore. These surcharge rates are subject to marginal relief provisions to avoid a sudden increase in tax liability due to a slightly higher income.
Surcharge on Income Tax for Dividend and Capital Gains
In certain cases, surcharge on income tax varies depending on the nature of the income. For individuals, HUFs, AOPs, BOIs, and artificial juridical persons, when their income includes dividends or gains taxed under sections 111A, 112, or 112A, a specific surcharge structure is followed. If the total income, including dividend income or income chargeable under the mentioned sections, does not exceed Rs. 50 lakh, no surcharge is applicable. If the total income exceeds Rs. 50 lakh but does not exceed Rs. 1 crore, a surcharge of 10 percent is levied. For income above Rs. 1 crore and up to Rs. 2 crore, the surcharge rate is 15 percent.
If the total income exceeds Rs. 2 crore and includes dividend income or income under the specified sections but is not covered by other situations where higher surcharges apply, the surcharge on such dividend or capital gains income is capped at 15 percent. When total income, excluding these types of income, exceeds Rs. 2 crore but does not exceed Rs. 5 crore, the surcharge on the balance of the income is 25 percent. If the income, excluding dividends and specific capital gains,, exceeds Rs. 5 crore, a 37 percent surcharge is levied on the balance portion.
However, if the total income exceeds Rs. 2 crore and includes dividend income or specified capital gains, but is not fully covered under the previously mentioned situations, then a surcharge of 15 percent will still apply only to that portion of the income. Furthermore, if the assessee is an AOP consisting only of companies as its members, the surcharge on total income will not exceed 15 percent. Also, when income is taxed under the alternative tax regime, the maximum applicable surcharge for individuals, HUFs, AOPs, BOIs, and artificial juridical persons is restricted to 25 percent.
Surcharge Treatment of Derivatives and Special Income Cases
It has been clarified by the central board that derivative contracts such as futures and options are not treated as capital assets in the hands of regular taxpayers, and the income from their transfer is taxed under the head “Profits and Gains of Business or Profession.” As such, these are taxed at regular rates and fall into the category where a higher surcharge may be applied if the income crosses the relevant threshold. However, for Foreign Portfolio Investors, derivatives are considered capital assets. Gains arising from such transactions are taxed as capital gains under the special provisions of section 115AD, which applies specific tax rates. Consequently, for FPIs, the surcharge on income arising from the transfer of derivatives under section 115AD is restricted to a maximum of 15 percent.
Surcharge for Domestic Companies Under Alternative Tax Regime
For a domestic company opting for the concessional tax rates under section 115BAA or 115BAB, a uniform surcharge of 10 percent of the income tax is applicable, irrespective of the level of income. These concessional regimes provide an option for companies to be taxed at lower rates if they forego certain deductions and incentives. The consistency of surcharge at 10 percent removes the stepped increase otherwise applicable in the general surcharge structure.
Surcharge for Resident Co-operative Societies Under Concessional Regime
Resident co-operative societies that opt for taxation under section 115BAD or 115BAE are subject to a uniform surcharge of 10 percent of the income tax, regardless of the quantum of income. This mirrors the treatment available to companies under concessional regimes and ensures a simplified and predictable surcharge structure for such entities.
Health and Education Cess on Income Tax
For both assessment years 2024-25 and 2025-26, health and education cess is levied at 4 percent on the total of income-tax and surcharge, if applicable. This cess applies uniformly across all taxpayers, including individuals, firms, companies, and co-operative societies. The purpose of this cess is to fund health and educational initiatives of the government.
Minimum Alternate Tax and Alternate Minimum Tax
To ensure that companies and other taxpayers with substantial income do not avoid tax through excessive use of exemptions and deductions, provisions for Minimum Alternate Tax and Alternate Minimum Tax are in place. Corporate assessees are liable to pay Minimum Alternate Tax under section 115JB, while non-corporate assessees are liable to Alternate Minimum Tax under section 115JC. However, these provisions do not apply to assessees who are taxed under the alternative regimes of sections 115BAA, 115BAB, 115BAC, 115BAD, or 115BAE.
The basic rate for Minimum Alternate Tax is 15 percent. For Alternative Minimum Tax, the basic rate is 18.5 percent. In the case of co-operative societies, the Alternate Minimum Tax rate is 15 percent. If a unit is located in an International Financial Services Centre and its income is derived solely in convertible foreign exchange, the applicable rate is 9 percent of book profit.
Surcharge on Minimum Alternate Tax and Alternate Minimum Tax
Surcharge on Minimum Alternate Tax or Alternate Minimum Tax is levied based on the level of adjusted total income or book profit. For individuals, HUFs, AOPs, BOIs, and artificial juridical persons, the surcharge is nil up to Rs. 50 lakh, 10 percent for income between Rs. 50 lakh and Rs. 1 crore, 15 percent for income between Rs. 1 crore and Rs. 2 crore, 25 percent for income between Rs. 2 crore and Rs. 5 crore, and 37 percent for income between Rs. 5 crore and Rs. 10 crore. Income exceeding Rs. 10 crore is subject to a 37 percent surcharge.
For firms and local authorities, surcharge is nil up to Rs. 1 crore and 12 percent beyond that. For co-operative societies, surcharge is nil up to Rs. 1 crore, 7 percent between Rs. 1 crore and Rs. 10 crore, and 12 percent beyond Rs. 10 crore. For domestic companies, surcharge on Minimum Alternate Tax is nil up to Rs. 1 crore, 7 percent between Rs. 1 crore and Rs. 10 crore, and 12 percent above Rs. 10 crore. For foreign companies, surcharge is 2 percent on income between Rs. 1 crore and Rs. 10 crore and 5 percent on income exceeding Rs. 10 crore. The health and education cess of 4 percent is also applicable on Minimum Alternate Tax and Alternate Minimum Tax and their respective surcharge components.
Provisions Relating to Marginal Relief
Marginal relief is a mechanism provided to avoid excessive tax burdens in cases where income slightly exceeds the threshold that triggers a higher rate of surcharge. For individuals, HUFs, AOPs, and artificial juridical persons with income just over Rs. 50 lakh, marginal relief ensures that the additional tax payable does not exceed the amount by which income exceeds Rs. 50 lakh.
Similarly, when income crosses Rs. 1 crore but does not exceed Rs. 2 crore, marginal relief is available to ensure the additional tax and surcharge do not exceed the increase in income above Rs. 1 crore. This relief also applies when income is between Rs. 2 crore and Rs. 5 crore, and again when it exceeds Rs. 5 crore, where the surcharge increases to 25 percent and 37 percent respectively. Marginal relief is structured in a way to limit the combined burden of tax and surcharge to a reasonable level relative to the incremental income.
Marginal Relief for Firms and Local Authorities
For firms and local authorities, surcharge is applicable only when income exceeds Rs. 1 crore. Marginal relief is provided in cases where income just exceeds Rs. 1 crore so that the excess tax liability due to surcharge does not surpass the excess of income above Rs. 1 crore.
Marginal Relief for Companies and Co-operative Societies
Domestic and foreign companies, as well as co-operative societies, are eligible for marginal relief in cases where income marginally exceeds Rs. 1 crore. The relief ensures that the total tax and surcharge do not exceed the total tax on exactly Rs. 1 crore by more than the amount of income that exceeds Rs. 1 crore. This prevents sudden jumps in effective tax burden due to the surcharge threshold being crossed.
Applicability of the New Tax Regime by Default
From the assessment year 2024–25 onward, the alternative tax regime has become the default regime for individuals, HUFs, AOPs, BOIs, and artificial juridical persons. Taxpayers under these categories will be taxed under the new regime automatically unless they actively choose to opt out by filing their return under section 115BAC(6). This change marks a shift in the government’s approach, promoting a simplified tax structure with reduced rates and fewer deductions.
This new system is designed to streamline compliance and reduce reliance on various deductions and exemptions. However, the flexibility to choose between regimes allows taxpayers to conduct benefit analyses and select the more favorable structure. Salaried individuals and pensioners can make this choice annually when filing their income tax return. In contrast, those with business or professional income must stick with the chosen regime for subsequent years unless the income from business or profession ceases.
Comparison Between Old and New Tax Regimes
The old regime offers multiple exemptions and deductions, such as standard deduction, house rent allowance, leave travel allowance, deduction under section 80C for investment in provident fund, life insurance premium, and home loan principal repayment. Deductions are also allowed for interest on education loans, savings account interest, and medical insurance premiums under sections 80E, 80TTA, and 80D, among others.
On the other hand, the new regime under section 115BAC(1A) lowers tax rates across slabs but removes around seventy deductions and exemptions. For instance, exemptions like house rent allowance and deductions under section 80C are not available under the new regime. The benefit of lower rates is therefore counterbalanced by the absence of these deductions. Taxpayers must weigh the tax liability in both regimes before making a decision.
In certain income scenarios, particularly for those without significant tax-saving investments or expenditures, the new regime may lead to a lower tax burden. Conversely, those who heavily invest in tax-saving instruments may continue to benefit under the old regime.
Standard Deduction and Rebate in the New Tax Regime
One of the recent developments in the new tax regime is the inclusion of a standard deduction of Rs. 50,000 for salaried individuals and pensioners. This aligns it more closely with the regular regime and makes it more attractive to those with fixed income.
Additionally, a rebate under section 87A is available in both regimes, though with different thresholds. Under the old regime, individuals with net income not exceeding Rs. 5,00,000 are eligible for a rebate of up to Rs. 12,500. Under the new regime, for the assessment year 2024-25, the rebate applies if total income does not exceed Rs. 7,00,000. This extended rebate makes the new regime beneficial for middle-income salaried individuals.
This structure creates an effective zero-tax liability for those earning up to Rs. 7,00,000 under the new regime, assuming no other income or deductions. The rebate directly reduces tax payable to zero, making this a major advantage for eligible taxpayers.
Benefits for Senior and Super Senior Citizens
The old regime provides enhanced exemption limits for senior and super senior citizens. For senior citizens aged 60 or above, the exemption limit is Rs. 3,00,000. For super senior citizens aged 80 or above, the exemption limit is Rs. 5,00,000. This benefits older taxpayers by reducing their taxable income threshold.
However, under the new regime, the basic exemption limit is uniformly set at Rs. 3,00,000, regardless of age. This means that senior and super senior citizens do not get any additional exemption advantage in the new regime. This can lead to a higher tax liability under the new regime if they do not benefit significantly from the lower rates.
Therefore, older taxpayers must carefully evaluate both regimes, taking into account their income levels and eligible deductions. For those with high medical expenses or deductions under section 80D and 80TTB, the old regime might continue to be more favorable.
Impact on Tax Planning and Investment Decisions
The introduction of the new tax regime shifts the focus away from investment-linked deductions. Under the old system, taxpayers were encouraged to save and invest in government-backed instruments like public provident fund, equity-linked savings schemes, life insurance premiums, and national savings certificates, as these qualified for deductions under section 80C.
The removal of such deductions under the new regime may discourage taxpayers from investing in these instruments solely for tax-saving purposes. While the aim is to simplify the tax structure, it also changes traditional financial planning habits.
Taxpayers who prefer flexibility in managing their income without being bound to mandatory investments may find the new regime attractive. Those who have long-term financial goals supported by structured savings will likely continue under the old regime.
Impact on Rental Income and House Property Deductions
The treatment of income from house property varies between the two regimes. Under the old regime, a deduction of 30 percent on the net annual value of rented property is allowed under section 24(a), along with interest deduction on borrowed capital under section 24(b), which can go up to Rs. 2,00,000 for self-occupied properties.
In the new regime, these deductions are not available. As a result, individuals with home loans and significant interest payments may find the new regime less beneficial. This is particularly important for middle-class homeowners whose tax planning includes the deduction of interest on housing loans. A loss from house property, which could be set off against other income in the old regime, is also disallowed under the new system.
Hence, taxpayers with home loans and rental income must assess the impact of losing these benefits when considering the alternative regime.
Treatment of Business Income and Professional Earnings
Taxpayers with income from business or profession are allowed to choose between the two regimes, but the switch is more restrictive. Once a person with business income opts for the new regime and files tax under section 115BAC, they can revert to the old regime only once. Thereafter, they are required to follow the new regime in subsequent years.
This rule restricts frequent shifting and ensures consistency in reporting and compliance. It is important for such taxpayers to project their income, deductions, and investments in advance before choosing a tax regime, as the opportunity to shift back is limited.
Professionals must also consider whether they claim deductions under section 80JJAA for additional employee cost, presumptive taxation under section 44ADA, or depreciation benefits, as these deductions are not allowed under the new regime. The long-term tax benefit of these claims must be balanced against the advantage of lower tax rates.
Tax Filing and Administrative Implications
Filing tax under the alternative regime requires the selection of the appropriate option in the income tax return. Salaried and pensioned individuals can make this choice annually without any additional formality. However, those with business or professional income must file Form 10-IEA before the due date of filing the return to opt into the new regime or to revert to the old regime.
Failure to file the form on time will result in automatic application of the default regime, which may increase tax liability if the old regime had been more beneficial. Therefore, compliance with procedural requirements is critical.
Taxation of Firms and Limited Liability Partnerships
Firms, including limited liability partnerships, are taxed at a flat rate of 30 percent under both regimes. There is no differentiation based on income slabs or specific deductions. Surcharge is applicable at 12 percent if the net income exceeds Rs. 1 crore. For income up to Rs. 1 crore, no surcharge applies. In both regimes, the 4 percent health and education cess is applicable on the tax and surcharge amount.
The simplicity of tax treatment for firms is one of the key features of the Indian tax system. It ensures that partnerships are not overburdened with complex compliance or shifting policies. However, deductions available to firms are still governed by general provisions, and decisions about opting for presumptive taxation under sections like 44AD and 44ADA remain applicable outside the scope of the alternative tax regime.
Taxation of Domestic Companies
Domestic companies are generally taxed at 30 percent. However, if a company’s total turnover or gross receipts during the financial year 2021–22 does not exceed Rs. 400 crore, then for assessment year 2024–25, the tax rate is reduced to 25 percent. Similarly, for assessment year 2025–26, the turnover threshold is based on the financial year 2022–23.
Under the alternative regime, companies can opt for concessional tax rates by forgoing deductions and incentives. Under section 115BAA, companies can be taxed at 22 percent, and under section 115BAB, newly established manufacturing companies can be taxed at 15 percent. These options require the taxpayer to relinquish deductions such as additional depreciation, investment allowance, and deductions under Chapter VI-A (other than section 80JJAA).
Surcharge for companies is based on income levels. For companies under the normal provisions, surcharge is 7 percent on income between Rs. 1 crore and Rs. 10 crore, and 12 percent for income above Rs. 10 crore. For companies opting under sections 115BAA or 115BAB, a flat surcharge of 10 percent is applicable, regardless of income. This simplification under the new regime benefits companies with a steady income stream and fewer deductions.
Taxation of Foreign Companies
Foreign companies are taxed at a flat rate of 40 percent for the assessment year 2024–25 and 35 percent for the assessment year 2025–26. Surcharge applies at 2 percent for income between Rs. 1 crore and Rs. 10 crore and 5 percent for income exceeding Rs. 10 crore. A health and education cess of 4 percent is added to the total of tax and surcharge.
Foreign companies are not eligible for the concessional tax regimes available to domestic companies. Their tax liabilities are determined based on their source of income in India and the applicable provisions under tax treaties, if any.
Taxation of Co-operative Societies and Local Authorities
Co-operative societies are taxed at a slab-based structure under the old regime, with rates of 10 percent, 20 percent, and 30 percent, depending on the income level. Under the alternative tax regime available under section 115BAD, a flat rate of 22 percent is available. An even lower rate of 15 percent is provided under section 115BAE for new co-operative societies engaged in manufacturing or production activities.
Surcharge for co-operative societies under the normal regime is 7 percent for income between Rs. 1 crore and Rs. 10 crore and 12 percent above Rs. 10 crore. Under sections 115BAD and 115BAE, surcharge is fixed at 10 percent. These options give flexibility to co-operative societies to select a tax regime based on their financial profile and investment behavior.
Local authorities are taxed at a flat rate of 30 percent. Surcharge applies at 12 percent if their income exceeds Rs. 1 crore. These entities are generally involved in public utility functions,, and their income is subject to tax based on specific exemptions provided by law.
Impact of Tax Regime Choice on Advance Tax and TDS
The choice of tax regime affects the computation of advance tax liability and tax deducted at source. Taxpayers opting for the new regime must compute their tax liability without including deductions that are otherwise available under the old regime. This affects both the estimate of advance tax payable and the actual deduction of TDS by employers and other payers.
For example, in the case of salaried employees, the employer will deduct tax at source based on the tax regime selected by the employee. This selection must be communicated in advance. In case no communication is made, tax is deducted under the new regime by default.
Advance tax is payable in four installments during the financial year. Failure to pay advance tax or a shortfall in payment may attract interest under sections 234B and 234C. Therefore, an accurate projection of tax liability based on the selected regime is crucial for timely and correct tax compliance.
Importance of Filing Form 10-IEA
Form 10-IEA is required to be filed by individuals and HUFs who have business or professional income and wish to opt in or opt out of the new regime. The form must be filed before the due date of the return filing. If it is not submitted on time, the taxpayer is deemed to have chosen the default regime.
For salaried and pensioned individuals, this form is not required. They can choose the regime directly in the return of income each year. However, it is advisable to review tax implications annually and make a conscious decision on the most beneficial regime.
Strategic Tax Planning Tips
To choose the appropriate tax regime, taxpayers must evaluate their income profile and the deductions they usually claim. For instance, if an individual invests Rs. 1,50,000 in a provident fund, pays Rs. 25,000 in medical insurance premiums, and pays interest on a housing loan of Rs. 1,80,000, the old regime may result in significant tax savings. On the other hand, if a person has no investments or deductions, the new regime might be simpler and more beneficial due to lower rates.
Use of tax calculators or professional advice may help in comparing the tax liability under both regimes. Taxpayers should also remember that some exemptions like gratuity, leave encashment, and retirement benefits continue to remain available under both regimes.
Final Thoughts
The new tax regime represents a shift towards a simplified tax structure, aiming to eliminate the need for complicated deductions and documentation. Reducing tax rates and eliminating many exemptions promotes transparency and eases compliance.
However, the old regime remains relevant and beneficial for individuals who rely on tax-saving instruments and structured financial planning. It continues to support traditional saving habits through exemptions and deductions.
Both regimes coexist, offering taxpayers the flexibility to choose based on their financial behavior, age, income level, and goals. The key is to review income sources, deductions, exemptions, and rebates annually before making a decision.