India’s income tax framework for individuals and entities is a dynamic system that frequently undergoes changes to reflect economic needs and policy objectives. The assessment years 2025‑26 and 2026‑27 are particularly important because they represent a period of transition where the old regime coexists with a newly structured default regime under section 115BAC. Taxpayers are presented with choices that can significantly impact their annual liabilities, and understanding the rate slabs and exemptions becomes critical. We explain the rates and regimes applicable to different categories of taxpayers.
Individual, HUF, AOP, BOI, and Artificial Juridical Person under the Old Tax Regime
The old tax regime remains available as an option for individual taxpayers, Hindu Undivided Families, Associations of Persons, Bodies of Individuals, and artificial juridical persons. Its distinguishing feature is the availability of deductions under provisions such as section 80C for savings and investments, section 80D for medical insurance premiums, and exemptions for allowances such as house rent allowance and leave travel allowance. These benefits are absent in the new regime.
The basic exemption limit is not uniform but depends on the age and residential status of the individual. General taxpayers and non-resident Indians enjoy a threshold of ₹2.5 lakh. Resident senior citizens aged between 60 and 79 years receive a higher exemption of ₹3 lakh, while resident super senior citizens aged 80 years and above are exempt up to ₹5 lakh.
Once the exemption limit is crossed, income is taxed according to slab rates. For the general taxpayer and non-resident, the following apply:
- Up to ₹2.5 lakh: no tax
- From ₹2.5 lakh to ₹5 lakh: 5 percent
- From ₹5 lakh to ₹10 lakh: 20 percent
- Above ₹10 lakh: 30 percent
The old regime has been in place for several years without changes to the slab thresholds, but the benefit of section 87A rebate ensures that a resident individual with total income not exceeding ₹5 lakh has no tax payable even though slab rates technically apply.
New Tax Regime as Default under Section 115BAC(1A)
The government has progressively moved toward a simplified structure where deductions and exemptions are minimized but rates are lower. To strengthen this system, the new regime under section 115BAC(1A) has been made the default option starting from assessment year 2025‑26.
Taxpayers under this regime do not have to claim deductions such as section 80C, 80D, or housing loan interest. Instead, their income is taxed directly under a series of concessional slabs. For assessment year 2025‑26, the following rates apply:
- Up to ₹3 lakh: no tax
- From ₹3,00,001 to ₹7 lakh: 5 percent
- From ₹7,00,001 to ₹10 lakh: 10 percent
- From ₹10,00,001 to ₹12 lakh: 15 percent
- From ₹12,00,001 to ₹15 lakh: 20 percent
- Above ₹15 lakh: 30 percent
This design offers relief to a wide range of middle-income earners. In addition, a rebate under section 87A is extended to individuals with total income up to ₹7 lakh, ensuring they do not pay tax under this regime.
Restructured Slabs for Assessment Year 2026‑27
In the subsequent year, the slabs are further rationalised to widen the zero-tax bracket and provide smoother progression across income levels. The revised structure for AY 2026‑27 is:
- Up to ₹4 lakh: no tax
- From ₹4,00,001 to ₹8 lakh: 5 percent
- From ₹8,00,001 to ₹12 lakh: 10 percent
- From ₹12,00,001 to ₹16 lakh: 15 percent
- From ₹16,00,001 to ₹20 lakh: 20 percent
- From ₹20,00,001 to ₹24 lakh: 25 percent
- Above ₹24 lakh: 30 percent
By introducing these bands, the government has sought to remove abrupt jumps in liability and distribute the burden more evenly. For instance, a taxpayer with ₹18 lakh of income faces smoother incremental tax compared to the previous system where higher marginal rates applied sooner.
Practical Comparison between Old and New Regimes
Choosing between the old and new regimes has become an annual exercise for many individuals. The decision depends on the availability of deductions and exemptions, as well as the taxpayer’s income level.
A salaried professional with significant investments in provident fund, insurance, tuition fees, or home loan repayments might benefit from the old regime. For such individuals, deductions under section 80C, additional deductions under section 80CCD(1B), and housing loan interest under section 24 can reduce taxable income substantially.
On the other hand, younger earners who may not have large investments or housing loans generally find the new regime more beneficial. The structure of AY 2026‑27 particularly enhances its appeal by allowing larger income segments to be taxed at 5 or 10 percent before moving into higher bands.
The default nature of the new regime also simplifies compliance, as taxpayers who do not make an active choice are automatically assessed under this framework. However, those wanting the old system must explicitly opt out.
Tax Rates for Firms and Limited Liability Partnerships
Partnership firms and limited liability partnerships are not subject to slab rates but instead face a flat tax of 30 percent on their total income. There are no concessions or threshold exemptions available. This makes their tax treatment straightforward but relatively heavy when compared to concessional options available for certain companies.
Although firms and LLPs can claim deductions for expenses incurred in the course of business, they cannot benefit from alternative tax regimes like individuals or companies. For such entities, planning revolves more around allowable expenses and profit distribution rather than slab choices.
Tax Rates for Domestic and Foreign Companies
Companies are treated separately in the tax framework, with domestic companies having a general rate of 30 percent. However, if their turnover in the relevant previous year does not exceed ₹400 crore, they are entitled to a reduced rate of 25 percent. For assessment year 2025‑26, turnover of financial year 2022‑23 is considered, and for assessment year 2026‑27, turnover of financial year 2023‑24 is relevant.
Foreign companies are taxed at a higher rate of 35 percent. These entities are also subject to surcharge and cess in the same manner as domestic companies, though their basic rate starts higher.
In addition to the normal structure, there are optional concessional regimes available under sections 115BA, 115BAA, and 115BAB. These provide reduced tax rates to domestic companies subject to conditions such as not availing certain exemptions and deductions. They represent an effort by the government to provide globally competitive rates for manufacturing and certain other sectors.
Cooperative Societies and Local Authorities
Cooperative societies and local authorities have their own rate structures that continue under the normal provisions. At the same time, the law offers them optional concessional regimes under sections 115BAD and 115BAE, which allow them to pay lower rates if they forego specific exemptions.
For cooperatives, this flexibility is especially significant because many societies operate in sectors such as agriculture, rural credit, or housing, where the income profile can vary. Local authorities too have the option to examine whether the concessional structure under these provisions better aligns with their financial operations.
The Role of Section 87A Rebate
While slab rates define the overall framework, the impact of section 87A rebate cannot be overlooked. For individuals opting for the old regime, a rebate up to ₹12,500 ensures no tax liability if total income does not exceed ₹5 lakh. Under the new regime, the rebate is enhanced to ₹25,000, ensuring individuals with income up to ₹7 lakh pay no tax.
This rebate directly influences how many people fall within the taxable net. It also demonstrates the government’s focus on easing burden for lower and middle‑income taxpayers while simultaneously broadening the base through limited deductions.
Preparing for Assessment Years 2025‑26 and 2026‑27
The dual structures in force during these years create both opportunities and complexities. Taxpayers need to project their income, identify eligible deductions, and compute liabilities under both regimes before making a choice. For those in business or profession, the decision carries more weight because once they opt for the new regime, switching back is restricted.
Salaried employees enjoy more flexibility as they can change the regime every year when filing their return. However, employers need to know which option has been chosen at the beginning of the year for purposes of tax deduction at source.
Firms and companies, meanwhile, must pay attention to turnover levels and evaluate whether optional provisions like section 115BAA or 115BAB provide better outcomes. Cooperative societies and local authorities also face the choice of whether to stay with normal provisions or adopt concessional regimes.
Understanding the Concept of Surcharge
Surcharge is an additional charge levied on the amount of income tax when taxable income exceeds specified thresholds. Its purpose is to ensure that high-income earners and large entities contribute a higher share to public revenue. The structure of surcharge is progressive, with multiple slabs based on levels of income.
For individuals, Hindu Undivided Families, Associations of Persons, Bodies of Individuals, and artificial juridical persons, the surcharge framework is as follows:
- Nil if income is up to ₹50 lakh
- 10 percent of tax if income is between ₹50 lakh and ₹1 crore
- 15 percent of tax if income is between ₹1 crore and ₹2 crore
- 25 percent of tax if income is between ₹2 crore and ₹5 crore
- 37 percent of tax if income exceeds ₹5 crore
However, the new tax regime under section 115BAC imposes a cap of 25 percent even at the highest income levels. This effectively reduces the burden on very high earners who shift to the new regime, making it a more attractive option for such taxpayers.
In addition, surcharge on certain categories of income such as dividend income and long-term capital gains under sections 111A, 112, and 112A is capped at 15 percent. This provides relief to investors by preventing disproportionately high tax on investment income.
Surcharge for Firms and Local Authorities
Partnership firms and local authorities are subject to surcharge at a much simpler level. If total income does not exceed ₹1 crore, there is no surcharge. If it exceeds ₹1 crore, surcharge is levied at 12 percent on the amount of income tax.
This structure creates a significant jump in liability once income crosses the ₹1 crore threshold, which is why marginal relief provisions, discussed later, become critical for such entities.
Surcharge for Cooperative Societies
Cooperative societies face a three-tier surcharge structure:
- Nil if income does not exceed ₹1 crore
- 7 percent if income is between ₹1 crore and ₹10 crore
- 12 percent if income exceeds ₹10 crore
These rates are comparatively moderate when seen against individuals or companies, reflecting the government’s approach to support cooperatives which often function in rural credit, housing, or agriculture.
Surcharge for Domestic and Foreign Companies
Domestic companies also face a tiered structure:
- Nil if income is up to ₹1 crore
- 7 percent if income is between ₹1 crore and ₹10 crore
- 12 percent if income exceeds ₹10 crore
However, companies that opt for concessional regimes under sections 115BAA or 115BAB face a flat surcharge of 10 percent, irrespective of income levels. This simplified treatment is part of the government’s effort to encourage companies to move toward concessional structures and maintain ease of compliance.
Foreign companies, on the other hand, are taxed differently. Their surcharge structure is:
- Nil if income is up to ₹1 crore
- 2 percent if income is between ₹1 crore and ₹10 crore
- 5 percent if income exceeds ₹10 crore
This lower surcharge compared to domestic companies reflects the higher basic tax rate of 35 percent applicable to foreign companies.
Health and Education Cess
Over and above income tax and surcharge, all categories of taxpayers are required to pay health and education cess. This cess is levied at a uniform rate of 4 percent on the total of income tax plus surcharge.
The objective of this cess is to earmark revenue for funding health and education programs. Unlike surcharge, which varies by income level, cess is flat across all taxpayers. Its simplicity makes calculation straightforward but ensures that the contribution applies universally.
Minimum Alternate Tax (MAT) for Companies
Companies often make use of various exemptions, deductions, and incentives provided under the Income Tax Act. In some cases, these benefits reduce their tax liability to a level much lower than expected given their book profits. To counter this, the concept of minimum alternate tax (MAT) was introduced.
Under section 115JB, a company must pay at least 15 percent of its book profit as tax, regardless of deductions available under normal provisions. Book profit is determined according to accounting standards with certain adjustments specified in the law.
For companies operating from International Financial Services Centre units and earning income in foreign exchange, a concessional MAT rate of 9 percent is applied. This special provision is aimed at promoting financial services and offshore business activities in India.
It is important to note that MAT does not apply if a company has opted for the concessional regimes under sections 115BAA or 115BAB. This exemption further enhances the attractiveness of those provisions for eligible companies.
Alternate Minimum Tax (AMT) for Non-Corporates
Similar to MAT for companies, the concept of alternate minimum tax (AMT) ensures that non-corporate taxpayers such as individuals, partnership firms, and cooperative societies who claim significant deductions still pay a minimum level of tax.
Under section 115JC, AMT is levied at 18.5 percent of adjusted total income. For cooperative societies, the rate is reduced to 15 percent. Adjusted total income is calculated after adding back various deductions claimed under provisions like section 80H to 80RRB, as well as deductions under section 10AA for special economic zones.
As in the case of MAT, AMT does not apply to taxpayers who opt for new concessional regimes under sections 115BAC, 115BAD, or 115BAE. Thus, moving to the new system can provide certainty and exemption from this additional compliance burden.
Surcharge and Cess on MAT and AMT
When companies or non-corporate taxpayers fall within the scope of MAT or AMT, surcharge and health and education cess are levied in the same way as under normal income tax liability. For example, a domestic company subject to MAT will still apply surcharge at 7 percent or 12 percent depending on income, followed by cess at 4 percent on the total.
This ensures uniformity in tax administration and prevents MAT or AMT payers from being placed in a preferential position compared to those under normal provisions.
Marginal Relief Provisions
While surcharge introduces higher liability at certain income thresholds, it can also create situations where an individual or entity pays more tax on a slightly higher income than someone earning just below the threshold. To correct this anomaly, the law provides for marginal relief.
For individuals, Hindu Undivided Families, Associations of Persons, Bodies of Individuals, and artificial juridical persons, marginal relief applies at thresholds of ₹50 lakh, ₹1 crore, ₹2 crore, and ₹5 crore. The principle is that the total tax plus surcharge on a slightly higher income should not exceed the tax on the threshold income plus the amount of income that exceeds the threshold.
For firms and local authorities, marginal relief applies at the ₹1 crore threshold. For companies and cooperative societies, it applies at both ₹1 crore and ₹10 crore thresholds. This mechanism ensures fairness by preventing taxpayers from suffering a disproportionate burden due to the sudden jump in surcharge.
The Practical Impact of Surcharge and Relief
Consider an individual with income of ₹52 lakh under the old regime. Without marginal relief, the surcharge at 10 percent would significantly increase the tax liability compared to someone at ₹50 lakh. With relief, the liability is adjusted so that the excess tax over ₹50 lakh is not greater than the excess income itself.
Similarly, for a company with income of ₹1.05 crore, surcharge at 7 percent would otherwise result in a jump in tax liability. Marginal relief ensures that the increase in tax compared to ₹1 crore does not exceed the actual increase in income. Such provisions make the tax system more equitable while preserving the progressive structure.
Why MAT and AMT Remain Relevant
Even though new concessional regimes exempt taxpayers from MAT and AMT, these provisions remain relevant for those who continue under normal systems and claim deductions or exemptions. For example, companies with significant benefits from section 10AA or deductions for exports may still fall under MAT. Similarly, partnership firms claiming large deductions may face AMT.
The continued existence of MAT and AMT ensures that the tax base is not eroded excessively by incentives, and that minimum revenue flows are protected. At the same time, by offering exemptions for those choosing new regimes, the government is nudging taxpayers toward a simplified structure.
Preparing for Compliance with Surcharge, Cess, and Minimum Tax Provisions
Taxpayers need to factor surcharge and cess into their advance tax computations and tax deducted at source obligations. High-income earners must also evaluate whether marginal relief applies to their case.
Companies and firms need to prepare book profit or adjusted total income calculations in advance to check whether MAT or AMT provisions apply. For those considering the concessional regimes, the exemption from MAT and AMT may be a decisive factor. The health and education cess, while straightforward, should not be overlooked, as it increases the final liability by a uniform 4 percent.
Tax Planning Strategies and Practical Implications for AY 2025-26 and 2026-27
The introduction of revised slabs under the new tax regime from the assessment year 2026‑27, along with the continuation of surcharge, health and education cess, and minimum alternate tax provisions, makes tax planning more dynamic than ever.
Both individuals and businesses must carefully examine their income composition, deductions, and available options before deciding between the old and new systems. Strategic planning ensures that liability is optimized while also remaining fully compliant with statutory rules.
Evaluating the Old Regime versus the New Regime
The biggest decision for individuals and Hindu Undivided Families continues to be whether to remain under the old regime or shift to the new one. Under the old regime, taxpayers benefited from a wide range of deductions and exemptions such as house rent allowance, leave travel allowance, interest on housing loan, deductions under Chapter VI‑A, and several others. However, the slabs start at lower levels, and the highest rate applies sooner.
The new regime, which is now the default, simplifies the structure by eliminating most exemptions and deductions but offering broader slabs and lower rates. For assessment year 2025‑26, the exemption threshold is ₹3 lakh, while for assessment year 2026‑27 it increases further to ₹4 lakh, with seven progressive slabs up to income exceeding ₹24 lakh.
For salaried taxpayers who have significant deductions available through provident fund contributions, insurance premiums, home loan interest, or investments under section 80C, the old regime may still be beneficial. Conversely, those without large deductions, or with higher income levels where surcharge relief under the new system applies, may find the new regime more efficient.
The Role of Surcharge in Regime Selection
The surcharge cap under the new regime significantly influences decision-making for high-income individuals. Under the old system, surcharge can go as high as 37 percent for income above ₹5 crore. In the new system, the maximum is capped at 25 percent. This difference can translate into substantial savings for those with income in the top brackets.
Additionally, for dividend and long-term capital gains, the surcharge is capped at 15 percent regardless of regime, which makes investment income planning relatively consistent. The critical choice arises when overall income crosses thresholds where surcharge spikes, and marginal relief must be evaluated carefully to avoid unexpected liability.
Planning with Marginal Relief Provisions
Taxpayers with income close to surcharge thresholds should calculate liability with marginal relief provisions in mind. For example, an individual with income of ₹1.02 crore may assume that surcharge at 15 percent would drastically increase the tax bill compared to income of ₹99 lakh. However, with marginal relief, the excess tax cannot exceed the additional income earned above ₹1 crore.
Similarly, firms and companies with income around ₹1 crore or ₹10 crore need to assess whether marginal relief reduces their liability. Proper calculation ensures that tax outflow is aligned with net earnings and avoids the misconception of penal taxation for slightly higher income.
Impact of Health and Education Cess
While cess is only 4 percent, its universal application means that it affects all taxpayers regardless of slab or regime. For individuals at higher income levels, the cess amount itself becomes significant. Businesses also need to account for cess in their advance tax and deferred tax calculations. Because it is levied on both tax and surcharge, its effect compounds as income levels increase.
Implications of MAT for Corporate Planning
Companies must carefully assess whether they are subject to minimum alternate tax. This is especially important for businesses with large deductions, export incentives, or book profits that exceed taxable profits under normal provisions. At 15 percent of book profits, MAT can be substantial, and it overrides normal provisions if liability is otherwise lower.
Companies that qualify for concessional regimes under sections 115BAA or 115BAB can avoid MAT entirely. This creates a strong incentive to opt for these sections, especially for entities with consistent profits and fewer requirements for deductions. The exemption from MAT provides certainty in liability, which is valuable for long-term planning and foreign investment decisions.
AMT for Non-Corporate Taxpayers
Partnership firms, limited liability partnerships, and individuals claiming large deductions must also check for applicability of alternate minimum tax. At 18.5 percent of adjusted total income (15 percent for cooperative societies), AMT ensures that the tax base is preserved.
This particularly impacts taxpayers making claims under section 10AA or Chapter VI‑A deductions. As with companies, opting into concessional regimes exempts them from AMT, reducing compliance complexity. The choice, however, depends on whether long-term deductions exceed the benefit of reduced rates in the new system.
Sector-Specific Considerations
Salaried Employees
Salaried employees face relatively straightforward choices but must weigh the value of deductions against slab rates. For instance, someone with income of ₹15 lakh and deductions of ₹3 lakh under section 80C, 80D, and home loan interest may still benefit from the old regime in assessment year 2025‑26. By assessment year 2026‑27, the expanded slabs in the new regime may make switching worthwhile.
Business Professionals
Professionals with variable income often prefer simplified regimes to avoid compliance with deduction tracking. The new system provides predictability, and exemption from AMT makes it attractive. However, professionals with significant eligible deductions need to compare net liability before deciding.
Corporates
For corporations, the decision revolves around whether to adopt concessional regimes under 115BAA or 115BAB. Companies with stable profits and fewer deductions gain from lower headline rates and exemption from MAT. Companies with large carry-forward losses or sector-specific deductions may still benefit from the old framework.
Cooperative Societies
For cooperative societies, the balance lies between normal tax rates with available deductions and the option under section 115BAD or 115BAE. With surcharge capped at moderate levels and reduced AMT at 15 percent, cooperatives must carefully simulate both options.
Advance Tax and TDS Planning
One practical implication of surcharge, cess, and alternate tax provisions is the impact on advance tax and tax deducted at source obligations. Underpayment of advance tax due to miscalculation of surcharge or marginal relief can result in interest liability under sections 234B and 234C.
Employers responsible for TDS on salaries must also incorporate the correct regime and surcharge rates into payroll systems. Employees need to declare their choice of regime in advance so that TDS is aligned with actual liability.
Investment Planning under the New Framework
With the new regime eliminating most exemptions, traditional tax-saving investments under section 80C lose their tax efficiency for those who opt in. Instead, investment decisions can be based purely on financial returns rather than tax benefits.
However, for those under the old regime, tax-saving avenues remain critical. Life insurance premiums, provident fund contributions, tuition fees, and national savings certificates still reduce taxable income. For assessment year 2026‑27, taxpayers will need to revisit whether retaining these investments for tax purposes remains worthwhile.
Long-Term Capital Gains and Dividend Income
The surcharge cap of 15 percent on long-term capital gains and dividend income creates a stable environment for investors. Regardless of whether they are in the old or new regime, this cap ensures that investment income is not disproportionately taxed.
This stability encourages long-term equity investment and dividend distribution policies among companies. High-income investors, however, must still factor these into their overall planning to ensure that they maximize benefits while staying within compliance boundaries.
International Taxation and Foreign Companies
Foreign companies are taxed at 35 percent with surcharge ranging from 2 to 5 percent depending on income. For multinational corporations, this creates a relatively higher base rate but a lighter surcharge structure compared to domestic firms.
Entities operating through International Financial Services Centres enjoy special concessions such as a reduced MAT of 9 percent, making them attractive vehicles for cross-border operations. Tax planning for such entities must consider global effective tax rates and treaty implications.
The Changing Landscape in Assessment Year 2026-27
The shift in slab structure for the new regime from assessment year 2026‑27 represents a major reform. By increasing the nil threshold to ₹4 lakh and introducing progressive slabs up to ₹24 lakh, the government is broadening the tax base while reducing rates. This is expected to encourage more taxpayers to adopt the new regime.
Taxpayers need to simulate scenarios under both years to decide on their approach. For example, someone who benefits from the old regime in assessment year 2025‑26 may find that by assessment year 2026‑27, the new structure provides greater savings even without deductions.
Practical Compliance and Record-Keeping
Even though the new regime reduces reliance on deductions, record-keeping remains vital. Taxpayers must retain proof of income, TDS certificates, and capital gain statements. Companies must maintain book profit calculations for MAT unless exempt. Firms and individuals must compute adjusted total income for AMT.
Advance disclosure of regime choice is also necessary in many cases, particularly for salaried employees. Those wishing to remain in the old system must opt out of the new default regime within prescribed timelines.
Conclusion
The income tax framework for assessment years 2025‑26 and 2026‑27 marks a turning point in India’s fiscal landscape. With the new regime now the default, the government is signaling a shift toward simplicity, transparency, and wider compliance. The revised slabs from assessment year 2026‑27 extend relief to middle‑income earners, while the surcharge cap in the new system offers significant advantages to high‑income taxpayers. At the same time, the old regime continues to serve those with substantial deductions, making the choice of regime highly personalized.
For businesses, minimum alternate tax and alternate minimum tax provisions ensure that tax liability aligns with profitability, but optional concessional regimes provide a clear route to reduced compliance and predictable rates. Firms, companies, and cooperatives must evaluate these choices carefully, as they directly influence financial planning, investment strategy, and long‑term growth.
Surcharge, health and education cess, and marginal relief remain key considerations across categories. While surcharge introduces steep increases at defined thresholds, marginal relief protects taxpayers from disproportionate burdens, and cess applies uniformly to all. These features demand accurate calculation and timely compliance, particularly in advance tax and tax deduction scenarios.
Investment planning is also evolving under the new structure. For those in the new regime, decisions can now be made based purely on returns rather than tax incentives, while the old regime continues to reward tax‑saving instruments. Long‑term capital gains and dividend income benefit from surcharge caps, giving stability to investors and encouraging equity participation.
International businesses and foreign companies face their own considerations, balancing higher base rates with moderate surcharge, while International Financial Services Centres gain from concessional treatment to attract global capital.
Ultimately, tax planning in the coming years will be about clarity of choice, scenario analysis, and adaptability. Taxpayers who carefully evaluate their position under both regimes, stay updated with compliance requirements, and align investments with financial goals will be able to optimize liability and secure long‑term benefits. As the framework evolves, the ability to adapt and plan proactively will be the defining factor in achieving sustainable and efficient tax outcomes.