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Tax Planning

New Income Tax Act 2025 — What Actually Changes from April 1, 2026

April 6, 2026•8 min read•By PlanivestFin Team

TL;DR

  • India's Income Tax Act 1961 replaced by Income Tax Act 2025 from April 1, 2026
  • "Tax Year" replaces the confusing FY/AY dual system
  • Salaried individuals effectively pay zero tax up to ₹12.75 lakh under the new regime
  • HRA metro classification expanded to include Bengaluru, Pune, Hyderabad, Ahmedabad
  • Form 16 replaced by Form 130 with more detailed disclosures

Introduction

For most salaried professionals, tax changes usually feel like background noise until something directly affects take-home salary. April 2026 is different.

India is replacing the decades-old Income Tax Act, 1961 with a new framework. While the government positions this as simplification, the real question is: what actually changes for you in practical terms?

This article breaks down the changes without jargon and focuses on what matters in your day-to-day finances.

A Shift from Financial Year to "Tax Year"

One of the first noticeable changes is the terminology.

The familiar "Financial Year (FY)" and "Assessment Year (AY)" structure is being replaced with a single concept: Tax Year.

At first glance, this seems cosmetic. But the intent is to simplify confusion, especially for salaried individuals who often struggle to differentiate between FY and AY while filing returns.

In practice:

  • You will deal with one consistent timeline
  • Filing and reporting become easier to understand
  • Documentation aligns more cleanly with income periods

For employers and payroll teams, this also means updated software and filing templates — so expect some transition noise in the first year.

₹12.75 Lakh Tax-Free Income — What It Really Means

This is the headline everyone is talking about.

Under the new regime, salaried individuals can effectively pay zero tax up to ₹12.75 lakh, depending on deductions and rebates.

However, this is not a blanket exemption.

What is actually happening:

  • The Section 87A rebate applies on income up to ₹12 lakh, making tax effectively zero
  • A standard deduction of ₹75,000 on top of this pushes the effective threshold to ₹12.75 lakh for salaried employees
  • The structure favours those who do not rely heavily on itemised deductions like HRA, 80C, or 80D

So while the number sounds large, the benefit depends significantly on how your salary is structured and whether you have significant deductions to claim.

For someone earning ₹12.5 lakh with no major deductions, the new regime is clearly better. For someone earning ₹15 lakh with substantial HRA and PPF/ELSS claims, the old regime may still win.

Form 16 Replaced by Form 130

This is a structural change that will affect how salaried employees interact with their employers.

Form 16, which has been the standard TDS certificate for years, is being replaced by a new format: Form 130.

The goal is to:

  • Simplify reporting across different income sources
  • Standardise income disclosure with more granular detail
  • Reduce inconsistencies between employer-issued certificates and Form 26AS

For most employees, this will not require any action on your part. Your employer's payroll system will generate Form 130 automatically. But it will change how your salary details are presented, and you should review it carefully when filing your ITR.

HRA Rules Expanded to More Cities

One practical and important update relates to HRA classification.

Cities like Bengaluru, Pune, Hyderabad, and Ahmedabad are now treated on par with traditional metro cities for HRA calculation purposes.

Previously, only Mumbai, Delhi, Kolkata, and Chennai qualified for the 50% HRA exemption under the old tax regime. The remaining cities received a 40% exemption.

This directly impacts:

  • Salaried professionals in IT hubs paying high urban rents
  • People living in Bengaluru or Hyderabad who were receiving a lower exemption
  • Those still using the old tax regime (the new regime does not allow HRA exemption)

If you are in the old regime and live in one of these newly added metros, recalculate your HRA exemption — you may be leaving money on the table.

Stricter HRA Documentation Requirements

Along with the expansion, there is a tightening of HRA claim documentation.

From April 2026:

  • You must submit your landlord's PAN if annual rent exceeds ₹1 lakh
  • Rent receipts must be submitted regularly, not just at year-end
  • Tax authorities will use data analytics to cross-check rent claims against property records

This is aimed at reducing fraudulent HRA claims, which the department has identified as a significant compliance gap. If you have been claiming HRA without proper documentation, it is time to get your paperwork in order.

Old vs New Regime — The Real Decision in 2026

Even with all these updates, the core decision remains unchanged: should you choose the old tax regime or the new one?

Choose the new regime if:

  • Your annual income is below ₹15 lakh
  • You do not have significant HRA, PPF, ELSS, or home loan interest deductions
  • You prefer simplicity over optimisation

Stick with the old regime if:

  • You claim HRA in a high-rent city
  • You max out 80C (PPF, ELSS, insurance premiums)
  • You have a home loan with significant interest deductions (Section 24b)
  • You pay health insurance premiums (Section 80D)

The default shift towards the new regime means many employees will move into it without actively evaluating the impact. That is where most people make costly mistakes.

Use a salary calculator to compare both regimes before April to make an informed decision. The difference can easily run into ₹20,000–₹60,000 annually for someone earning ₹15–₹25 lakh.

What Salaried Employees Should Actually Do Right Now

Instead of reacting to headlines, the smarter approach is:

  1. Calculate tax under both regimes using your current salary structure and deductions
  2. Evaluate your existing deductions — are they large enough to justify the old regime?
  3. Check if salary restructuring is possible — NPS employer contribution (80CCD(2)), meal vouchers, and car lease can be tax-efficient components under the new regime too
  4. Inform your employer of your choice at the start of the financial year, as TDS will be deducted based on your selected regime
  5. Review annually — this is not a one-time decision. Your income, deductions, and life circumstances change every year

Final Thoughts

The new Income Tax Act aims to simplify taxation, but simplification does not automatically mean better outcomes for everyone.

For salaried individuals, the real impact depends on your income level, current deductions, and salary structure. The difference between making the right choice and the wrong one can easily run into tens of thousands of rupees annually.

Do the maths before assuming the new regime is automatically better for you.

Frequently Asked Questions

Is ₹12.75 lakh completely tax-free for everyone?

No. The ₹12 lakh threshold applies via the Section 87A rebate under the new tax regime. The additional ₹75,000 comes from the standard deduction available only to salaried individuals and pensioners. If your income exceeds ₹12 lakh (before standard deduction), the rebate does not apply and you pay tax on the full amount under the applicable slabs.

Do I need to switch to the new tax regime?

The new regime is now the default, but you are not forced to stay with it. If you have significant deductions — HRA, 80C investments, home loan interest, health insurance — evaluate both options and inform your employer which regime you wish to opt for at the beginning of the financial year.

What should I do first after these changes?

Start by calculating your tax liability under both regimes using your actual salary and deductions. Use the Salary Calculator on PlanivestFin to estimate your in-hand salary under both options. Then review whether restructuring your CTC to include NPS employer contribution or other tax-efficient components makes sense for your situation.