The financial year 2025-26 brings significant updates to India’s tax policies, aimed at simplifying compliance, reducing tax burdens, and addressing non-compliance issues. These changes impact individual taxpayers across income brackets, with revised tax slabs under the new regime and stricter rules surrounding House Rent Allowance (HRA) exemptions.

Revised Income Tax Slabs Under the New Regime

The Union Budget 2025 introduced substantial reforms to the new tax regime, effective April 1, 2025. Key changes include:

• Increased Basic Exemption Limit: The exemption threshold has been raised from ₹3 lakh to ₹4 lakh, providing relief to low-income earners.
• Expanded Tax Slabs: The new slabs simplify taxation and reduce liabilities for middle-income taxpayers:
  • ₹0–₹4 lakh: Nil tax
  • ₹4–₹8 lakh: 5%
  • ₹8–₹12 lakh: 10%
  • ₹12–₹16 lakh: 15%
  • ₹16–₹20 lakh: 20%
  • ₹20–₹24 lakh: 25%
  • Above ₹24 lakh: 30%

Additionally, the tax rebate under Section 87A has been increased to ₹60,000, ensuring zero tax liability for individuals with net taxable incomes up to ₹12 lakh. This marks a significant increase from the previous rebate limit of ₹25,000 for incomes up to ₹7 lakh.

House Rent Allowance (HRA) Compliance Updates

Taxpayers claiming HRA exemptions must now adhere to stricter compliance requirements under Section 194-I of the Income Tax Act. Key provisions include:

• TDS Obligations: Tenants paying monthly rent exceeding ₹50,000 must deduct Tax Deducted at Source (TDS) at 2% on the rent amount and deposit it with the government. Non-compliance renders HRA claims invalid and attracts penalties.
• Penalties for Non-Compliance:
  • Interest of 1% per month for failure to deduct TDS.
  • Interest of 1.5% per month for delayed payment of deducted TDS.
  • Late fees of ₹200 per day under Section 234E for failing to submit Form 26QC, capped at the TDS amount.

Taxpayers who have previously claimed HRA exemptions without fulfilling TDS obligations are receiving notices from the Income Tax Department. They must rectify discrepancies by filing updated returns or paying applicable penalties. Relief is available under Section 201 if landlords have declared rental income and paid taxes on it.

Other Key Updates

1. Extended Deadline for Filing Updated Returns
   Taxpayers now have up to 48 months from the end of the assessment year to file updated returns, compared to the previous limit of 24 months. This provides additional time for rectifying errors but comes with steeper penalties—up to 70% of incremental tax liability for returns filed after three years but before four years from the assessment year’s end.
2. Exemption from Prosecution for Delayed TCS Payments
   Prosecution will not be initiated if Tax Collected at Source (TCS) payments are credited before filing quarterly statements within prescribed timelines.
3. Standard Deduction Continuity
   Salaried individuals can continue claiming a standard deduction of ₹75,000 under the new regime, along with an employer’s contribution of up to 14% of basic salary toward NPS Tier-I accounts.

Implications for Taxpayers

Benefits

• Lower Tax Burden: Revised slabs and rebates significantly reduce liabilities for middle-income taxpayers, boosting disposable income and savings potential.
• Simplified Compliance: Higher exemption limits reduce the number of taxpayers required to file returns, easing administrative burdens.

Challenges

• Stricter Enforcement: Non-compliance with HRA-related TDS obligations could result in penalties and invalid claims, requiring taxpayers to be vigilant about documentation and timely payments.
• Limited Deductions in New Regime: While salaried individuals retain some benefits like standard deductions, most traditional exemptions (e.g., Section 80C) are unavailable under the new regime.

Conclusion

The tax updates for FY2025-26 reflect a dual focus on simplifying compliance while tightening enforcement against non-compliance. Revised tax slabs under the new regime offer substantial relief to middle-income earners and incentivize adoption of the streamlined system. However, stricter rules surrounding HRA exemptions highlight the importance of adhering to regulatory requirements.

Taxpayers must stay informed about these changes and ensure compliance to avoid penalties while maximizing their benefits under India’s evolving taxation framework.