New Income Tax Act 2025 — what actually changed for salaried Indians from April 2026
The Income Tax Act 1961 was replaced on April 1, 2026. What changed: Tax Year replaces FY/AY, ₹12.75L zero-tax for salaried, HRA 50% in 8 cities now. What's noise, what matters.
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New Income Tax Act 2025 — what actually changed for salaried Indians
The Income Tax Act 1961 ran for 64 years. It accumulated provisions over time until it became a document that made even accountants charge extra just for reading it. The New Income Tax Act 2025 replaced it on April 1, 2026.
The announcements around this were overblown. Finance podcasts talked like salaried Indians were about to see their lives transformed. The reality: most of the changes are structural. Same rules in cleaner language, reorganised sections. But a few things changed in ways that affect your actual tax bill, and one change quietly matters if you rent in Bengaluru, Pune, Hyderabad, or Ahmedabad.
For a full planning framework — deductions, regime choice, worked examples — see the income tax planning guide for 2026-27. This article covers just the Act 2025 changes: what shifted, what stayed, and what to do about it.
Tax Year replaces Financial Year and Assessment Year
This is the one change that fixes a genuine 64-year-old confusion.
Under the old act, "Financial Year" was the year you earned income and "Assessment Year" was the year you filed the return. FY 2025-26 income got assessed in AY 2026-27. Two different year labels for the same earnings. Accountants understood this. Their clients regularly didn't, and the confusion around forms, notices, and deadlines caused real errors.
The new act introduces a single "Tax Year." Tax Year 2025-26 means income earned between April 1, 2025 and March 31, 2026. You file your return for Tax Year 2025-26 by July 31, 2026. No AY to track separately.
This is mostly cosmetic but will save a surprising number of people from filing under the wrong year label.
₹12.75 lakh effective zero-tax under the new regime
Under the new regime (Budget 2025 slabs, now codified in the new act):
- ₹75,000 standard deduction brings a ₹12.75L gross salary down to ₹12L taxable
- Tax on ₹12L under the new slabs works out to ₹60,000
- Section 87A rebate under new regime is up to ₹60,000
Net tax: zero.
The Budget 2025 announced these slabs effective April 1, 2025. What the new act does is consolidate it cleanly rather than scattering it across three provisions. But the practical impact is real: if you earn up to ₹12.75 lakh gross and haven't checked whether you owe tax this year, you almost certainly don't.
Worked example: ₹10 lakh salary on new regime
Gross salary: ₹10,00,000
Less standard deduction: ₹75,000
Taxable income: ₹9,25,000
Tax on ₹9.25L (new regime slabs):
- ₹4L at 0% = ₹0
- ₹4L–₹8L (₹4L) at 5% = ₹20,000
- ₹8L–₹9.25L (₹1.25L) at 10% = ₹12,500
- Subtotal: ₹32,500
- Section 87A rebate: ₹32,500 (taxable income ≤ ₹12L, so full tax is waived)
- 4% cess on ₹0 = ₹0
Total tax: ₹0
At ₹10 lakh, the new regime costs nothing. You keep the full take-home without claiming any deductions. Use the tax calculator to run your own salary — the zero-tax threshold is ₹12.75L, not ₹7L or ₹10L as some older articles still claim.
HRA 50% rate now covers 8 cities, not 4
This is the most practical change for anyone renting in a tech hub.
The original act allowed 50% HRA exemption only in Delhi, Mumbai, Kolkata, and Chennai. Every other city got 40%.
The new act adds Bengaluru, Pune, Hyderabad, and Ahmedabad to the 50% list.
The HRA exemption is calculated as the minimum of: actual HRA received, 50%/40% of basic salary depending on city, or rent paid minus 10% of basic salary. Moving from 40% to 50% in city classification can meaningfully increase the ceiling on the second or third value in that calculation.
Worked example: Bengaluru employee
Kiran works in Bengaluru. Basic salary: ₹60,000/month. HRA received: ₹24,000/month (40% of basic). Monthly rent: ₹20,000.
Under old 40% rule (pre-April 2026):
- Value 1: ₹24,000 × 12 = ₹2,88,000
- Value 2: (₹20,000 × 12) − 10% of (₹60,000 × 12) = ₹2,40,000 − ₹72,000 = ₹1,68,000
- Value 3: 40% × ₹7,20,000 = ₹2,88,000
- Exemption = min of three = ₹1,68,000
Under new 50% rule (from April 2026):
- Value 1: ₹2,88,000
- Value 2: ₹1,68,000 (unchanged)
- Value 3: 50% × ₹7,20,000 = ₹3,60,000
- Exemption = min of three = ₹1,68,000 (same, because Value 2 is still the binding constraint)
In Kiran's case, the city reclassification doesn't change the outcome because rent paid relative to basic is the binding limit. But for someone paying higher rent relative to their basic salary — say ₹30,000 rent on ₹60,000 basic — the outcome shifts:
- Value 2: ₹3,60,000 − ₹72,000 = ₹2,88,000
- Under old 40% rule, Value 3 = ₹2,88,000; exemption = ₹2,88,000
- Under new 50% rule, Value 3 = ₹3,60,000; exemption = ₹2,88,000 (same, now limited by Value 2 = Value 1)
The rule change matters most when your HRA received is around 40–50% of basic, you pay substantial rent, and the city-cap (Value 3) was previously the binding constraint. If your payslip still shows the old 40% city classification for Bengaluru, Pune, Hyderabad, or Ahmedabad, ask your payroll team to update it.
New regime is the default
The new act formalises what was already the case for salaried employees since FY 2023-24: new regime is the default. If you do nothing, you're on new regime.
To claim old regime deductions (80C, HRA, home loan interest), you need to actively opt in. For salaried employees, that means submitting Form 12BB to your employer before the financial year starts. Otherwise TDS gets deducted under new regime slabs.
If you've been in old regime because you have a home loan or are maximising 80C and HRA, opt in again for Tax Year 2026-27. Don't assume HR carried it forward.
What didn't change
The noise around the new act made it sound like a complete overhaul. It wasn't.
Tax slabs under both regimes are unchanged from FY 2025-26. Capital gains rates are unchanged (LTCG on equity 12.5% above ₹1.25L, STCG 20%). Crypto/VDA taxation remains 30% flat. Section 80C limit stays at ₹1.5L. The additional NPS deduction under 80CCD(1B) stays at ₹50,000. TDS rates are largely unchanged.
The old regime also remains available. Nobody is being forced onto new regime.
Comparison: Act 1961 vs Act 2025 — what actually shifted
| Item | Act 1961 | Act 2025 |
|---|---|---|
| Terminology | FY + AY (two labels) | Tax Year (one label) |
| New regime default | Yes (since FY 2023-24) | Yes (formalised) |
| HRA 50% cities | 4 (Delhi, Mumbai, Chennai, Kolkata) | 8 (+ Bengaluru, Pune, Hyderabad, Ahmedabad) |
| 80C limit | ₹1.5 lakh | ₹1.5 lakh (unchanged) |
| Standard deduction | ₹75,000 | ₹75,000 (unchanged) |
| 87A rebate (new regime) | Up to ₹60,000 for taxable income ≤ ₹12L | Same |
| 80CCD(1B) NPS | ₹50,000 extra | ₹50,000 (unchanged) |
| LTCG on equity | 12.5% above ₹1.25L | Same |
| Crypto / VDA tax | 30% flat | Same |
The structural reorganisation is real — the new act uses cleaner numbered sections, removes redundant provisions, and consolidates scattered rules. But for a salaried individual's tax bill, the list above is all that materially changed.
Common mistakes people are making with the new act
Assuming the new act changed their tax obligation significantly. For most salaried employees under ₹12.75L on new regime, the answer is unchanged: zero tax. The act change didn't alter slabs.
Not checking the HRA city update. Payroll software in many companies updates automatically, but it doesn't always. If you're in Bengaluru, Pune, Hyderabad, or Ahmedabad, confirm with your payslip that the city classification shows 50%, not 40%. An error here reduces your exemption every month.
Not re-opting into old regime for Tax Year 2026-27. If you changed employers after March 2026, your new employer defaults to new regime from day one. Submit Form 12BB before your April payroll runs.
Applying AY-year terminology to the new Tax Year system. Tax Year 2026-27 = income April 2026 to March 2027, return filed by July 31, 2027. The return is not "for AY 2027-28" anymore — it's just "for Tax Year 2026-27."
Thinking ₹12L is the zero-tax threshold. The threshold is ₹12.75L gross, not ₹12L, because the ₹75,000 standard deduction brings the taxable income down to ₹12L before applying the 87A rebate.
The one thing to do this month
If you're in Bengaluru, Pune, Hyderabad, or Ahmedabad: check your payslip that the HRA city category shows 50%. Most payroll software updated this from April 1, 2026, but it's worth a 30-second check.
If you're earning under ₹12.75L: confirm you're on new regime. You likely owe zero tax and have no reason to deal with the deduction tracking old regime requires.
If you're earning above ₹15L: the comparison between old and new still depends on your deductions. The tax calculator works out the exact number for your situation in about two minutes.
For the full planning picture — regime choice, 80C toolkit, worked examples at ₹10L and ₹15L — see the income tax planning guide.
Tax rules based on the Income Tax Act 2025 effective April 1, 2026. For personalised advice, consult a CA or SEBI-registered financial advisor.
Frequently asked questions
Does the Income Tax Act 2025 change the amount of tax I pay?
For most salaried individuals, no. The Act 2025 reorganised and consolidated the old Act 1961, but the tax slabs, deduction limits, and regime rules remain the same as what was announced in Budget 2025. The practical changes are the Tax Year terminology, the HRA city expansion to 8 cities, and cleaner consolidation of scattered provisions.
What is Tax Year 2026-27 in old FY/AY terms?
Tax Year 2026-27 = income earned April 1, 2026 to March 31, 2027. Under the old system, this would have been called FY 2026-27 / AY 2027-28. The return for Tax Year 2026-27 is due by July 31, 2027 for salaried individuals using ITR-1 or ITR-2.
Which cities now get 50% HRA exemption under the new act?
Eight cities: Delhi, Mumbai, Kolkata, Chennai, Bengaluru, Pune, Hyderabad, and Ahmedabad. The first four were in the old list; the latter four were added by the Income Tax Act 2025, effective April 1, 2026. All other cities remain at 40%.
Do I need to file anything differently under the new act?
No. The ITR forms and filing process remain unchanged. The Act 2025 reorganised sections internally but the return forms, deadlines, and e-filing portal work the same way. The main filing-side change is the Tax Year label replacing FY/AY.
Does the ₹1.5 lakh 80C limit change under the new act?
No. Section 80C (now renumbered in the new act but functionally identical) still covers the same instruments — EPF, PPF, ELSS, NPS Tier-I, life insurance premiums, home loan principal, children's tuition fees — with the same ₹1.5 lakh annual cap. The limit was not revised.
I'm in Pune. My payslip still shows 40% HRA. What should I do?
Talk to your payroll or HR team and ask them to update the city classification for HRA to 50%, effective April 1, 2026. If April payroll has already been processed with 40%, the shortfall in HRA exemption can be corrected cumulatively in subsequent months, or you can claim the correct exemption directly when filing your ITR.