Income Tax Rules 2026: 5 Major Changes Including Tax Free Limit of 12.75 Lakhs

Income Tax Rules 2026: The changes announced in the Union Budget 2025 regarding the income tax structure are set to play a pivotal role in tax planning for the year 2026. From middle-class salaried individuals to senior citizens and small investors, these new rules carry significant implications for everyone. The government’s primary objective has been to simplify the tax system, enhance transparency, and increase liquidity in the hands of taxpayers. To prepare effectively for the upcoming financial year, it is crucial to have a clear understanding of these modifications.

Here is a detailed breakdown of the 5 major income tax changes that will impact your financial planning:

1. Zero Tax on Income Up to ₹12.75 Lakh

The most significant highlight of Budget 2025 was the increase in the rebate limit under Section 87A. Under the New Tax Regime, individuals with a net taxable income of up to ₹12 lakh are now exempt from paying any tax. Additionally, salaried employees benefit from a Standard Deduction of ₹75,000.

In simple terms, if a salaried individual’s gross annual income is up to ₹12.75 lakh (₹12 lakh + ₹75,000), their tax liability will be zero. However, it is important to note that if the taxable income exceeds the ₹12 lakh threshold, tax will be applicable as per the relevant income tax slabs.

2. Major TDS Relief for Senior Citizens and Investors

The government has introduced significant relaxations in the Tax Deducted at Source (TDS) rules, aiming to reduce compliance burdens for common taxpayers.

• For Senior Citizens: The limit for TDS deduction on interest income from Bank Fixed Deposits (FDs) or other sources has been raised from ₹50,000 to ₹1 lakh. This means no TDS will be deducted on interest income up to ₹1 lakh per annum. This move is designed to maintain cash flow for senior citizens and reduce the hassle of claiming refunds.
• For Dividend Income: Keeping small shareholders in mind, the TDS threshold on dividend income has been increased from ₹5,000 to ₹10,000. Consequently, individuals receiving dividends up to ₹10,000 annually will not face any TDS deduction.

3. Long-Awaited Reforms in Medical Perks

Another relief for salaried employees comes in the form of revised limits for medical expenses incurred abroad. The tax-exemption limit on ‘perquisites’ for overseas medical treatment provided by employers had remained unchanged for decades. Considering the rising cost of living and inflation, the government decided to increase this limit. This update will allow a larger number of employees to avail of tax exemptions on genuine medical needs.

4. Clarity on ULIP Taxation Rules

Budget 2025 cleared the confusion surrounding Unit Linked Insurance Plans (ULIPs). It has been clarified that ULIP policies which do not qualify for exemption under Section 10(10D) will now be treated as ‘Capital Assets’. This implies that profits earned from such policies will be subject to Capital Gains Tax. This clarification addresses the ambiguity that arose regarding the taxation of ULIPs with premiums exceeding ₹2.5 lakh in 2021.

These changes clearly indicate the government’s intent to modernize the tax system and make it more taxpayer-friendly. With proper information and timely planning, you can take full advantage of these new rules in 2026.