India’s income tax system is undergoing a significant transformation with the introduction of the Income Tax Act, 2025, which will come into effect from April 1, 2026. Alongside this legislative shift, the new income tax regime has gradually evolved from an optional alternative to the default tax structure for individual taxpayers. These changes signal the government’s long-term intent to simplify taxation, improve compliance, and make the tax system more transparent and taxpayer-friendly.
As Budget 2026 approaches, individuals, professionals, and businesses want to understand how the Income Tax Act 2025 is reshaping the existing framework, how the default regime decision taken two years ago has affected taxpayers, and what further changes the government may announce. This article explores these developments in detail, offering clarity on the present structure and insights into what lies ahead.
1. Major Changes in the Income Tax Act 2025
The Income Tax Act, 2025 represents one of the most comprehensive reforms of India’s direct tax laws in decades. Designed to replace an aging and complex tax code, the new Act focuses on simplification, clarity, and efficiency while aligning taxation with modern income patterns and compliance practices.
a. Higher Tax-Free Income Limits
One of the most notable outcomes of recent tax reforms is the increase in the effective tax-free income threshold. Under the revised new tax regime, individuals earning up to ₹12 lakh annually may pay zero income tax due to enhanced rebates. For salaried taxpayers, when standard deductions are included, the tax-free income threshold can go even higher.
This change provides meaningful relief to middle-income earners and improves disposable income, helping households manage rising living costs while encouraging consumption and savings.
b. Simplified and Rationalised Tax Slabs
The Income Tax Act 2025 strengthens the structure of the new tax regime by offering fewer, wider slabs with clearly defined rates. The revised slabs reduce the frequency of rate changes across income levels, ensuring smoother progression and predictability.
Compared to the earlier system, where narrow slabs often pushed taxpayers into higher brackets quickly, the new structure provides stability and makes tax calculations easier for individuals without professional assistance.
c. Reduced Dependence on Exemptions and Deductions
A core philosophy of the new Act is to move away from complex deductions and exemptions. While the old regime encouraged tax planning through multiple sections and allowances, it also added compliance complexity and frequent disputes.
The new regime, reinforced by the 2025 Act, prioritises lower tax rates over deductions, allowing taxpayers to focus on straightforward income reporting rather than detailed tax structuring.
d. Simplified Compliance and Administration
The Income Tax Act 2025 also introduces procedural improvements aimed at reducing litigation and compliance stress. These include clearer rules for revised returns, rationalised timelines, and a more structured approach to assessments.
Digital systems and faceless assessment mechanisms continue to play a key role in enhancing transparency and minimising human intervention, ensuring fair and consistent treatment across cases.
2. The Default Tax Regime: A Shift Made Two Years Ago
A major policy decision taken two years ago was making the new tax regime the default option for individual taxpayers. This shift changed the behavioural dynamics of tax filing and marked a decisive move toward long-term adoption of the simplified system.
a. What Does Default Regime Mean?
Under the default regime framework, taxpayers are automatically assessed under the new tax regime unless they actively choose the old regime while filing their returns. If a taxpayer fails to file within the prescribed timelines, the new regime applies by default.
This approach significantly reduced ambiguity and nudged taxpayers toward experiencing the new regime’s benefits firsthand.
b. Rationale Behind the Shift
The government’s decision to make the new regime default was driven by several factors:
- Ease of compliance for the majority of taxpayers
- Reduced dependency on tax consultants for routine filings
- Lower administrative burden for tax authorities
- Encouraging transparency and reducing misuse of deductions
By simplifying the process, the government aimed to create a tax system that is accessible and easy to understand for salaried individuals and small taxpayers.
c. Taxpayer Adoption and Response
Since becoming the default option, the new regime has seen a steady increase in adoption. A majority of individual taxpayers now file returns under the new structure, primarily due to its simplicity and competitive tax rates.
However, the old regime continues to be relevant for taxpayers with substantial investments in tax-saving instruments, housing loans, or insurance policies. This coexistence ensures flexibility while gradually transitioning the system toward simplification.
3. Expected Changes in Budget 2026
With major reforms already implemented, expectations from Budget 2026 are centred around fine-tuning rather than major restructuring. Policymakers are expected to focus on stability, predictability, and incremental improvements.
a. Stability in Tax Slabs
Experts anticipate that the government may avoid frequent slab changes, allowing taxpayers to plan finances with confidence. Maintaining consistency in slab structures reinforces trust and supports long-term financial planning.
b. Possible Enhancements to the New Regime
While drastic changes are unlikely, certain refinements may be considered:
- Increase in standard deduction for salaried taxpayers to offset inflationary pressures
- Limited, selective deductions under the new regime without increasing complexity
- Further simplification of TDS provisions to reduce compliance friction
Such measures could make the new regime even more attractive while preserving its core philosophy.
c. The Future of the Old Tax Regime
There is ongoing discussion about whether the old tax regime should continue indefinitely. While an immediate discontinuation appears unlikely, its relevance is gradually declining as the new regime gains acceptance.
Any future transition will need to be gradual to avoid disrupting long-term financial commitments made under the old system.
Conclusion
The Income Tax Act, 2025 marks a pivotal moment in India’s taxation journey, signalling a shift toward simplicity, transparency, and efficiency. By strengthening the new tax regime, increasing tax-free thresholds, and making the simplified system the default option, the government has reshaped how individuals interact with the tax framework.
As Budget 2026 approaches, the emphasis is expected to remain on refinement rather than reform, enhancing ease of compliance while maintaining fiscal balance. For taxpayers, understanding these changes and aligning financial planning accordingly will be essential to making informed decisions in an evolving tax environment.
