5 Major Income Tax Changes Shaping Your 2026 Finances

The Union Budget 2025 introduced transformative changes to India’s income tax structure, focused on providing more disposable income to the middle class and simplifying the tax-deduction process. These changes are officially in effect for the Financial Year 2025–26 (Assessment Year 2026–27).

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1. Zero Tax for Income up to ₹12.75 Lakh

Under the New Tax Regime, the tax-free threshold has seen a massive jump due to the enhanced rebate under Section 87A.

• Tax-Free Limit: The income limit for full tax rebate has been increased to ₹12 Lakh.

• Standard Deduction: For salaried employees, the standard deduction has been raised to ₹75,000 (up from ₹50,000).

• The Result: If your total salary is ₹12,75,000 or less, your net tax liability will be Zero.

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2. Relief for Senior Citizens: TDS Limit Doubled

To help retirees manage their cash flow better, the government has significantly increased the threshold for Tax Deducted at Source (TDS) on interest income.

• New Threshold: Banks will now only deduct TDS if a senior citizen’s total interest income (from FDs, RDs, etc.) exceeds ₹1,00,000 in a year (up from ₹50,000).

• For General Citizens: The threshold has also been marginally increased from ₹40,000 to ₹50,000.

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3. Investor Friendly: Higher Dividend TDS Limits

Small investors in the stock market or mutual funds will now receive more of their earnings upfront without tax cuts at the source.

• Dividend TDS: The limit for deducting tax on dividend income has been increased from ₹5,000 to ₹10,000.

• Impact: If your annual dividend from a single company or mutual fund house is under ₹10,000, you will receive the full amount without a 10% TDS deduction.

4. Clarity on ULIP Taxation

Unit Linked Insurance Plans (ULIPs) now have a clearer taxation roadmap.

• High-Premium ULIPs: For policies with an annual premium exceeding ₹2.5 Lakh, the maturity proceeds (profits) are no longer taxed as regular income.

• Capital Gains: Instead, they are now treated as Capital Gains, bringing them in line with the tax treatment of Mutual Funds.

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5. Extended Window to Correct Errors

The “Updated ITR” (ITR-U) facility has become more flexible, allowing taxpayers to fix past mistakes without the immediate fear of heavy litigation.

• Time Limit: Taxpayers now have a 4-year window (increased from 2 years) to file an updated return to correct omissions or errors.

• Benefit: This provides a longer “peace of mind” window to ensure compliance and avoid penalties from mismatch notices.

Revised New Tax Regime Slabs (FY 2025–26)

If your income exceeds the ₹12 Lakh rebate threshold, the following slabs apply:

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