5 Key Income Tax Rule Changes in 2025 Every Indian Taxpayer Must Know

The year 2025 has been transformative for personal finance in India, marked by several major shifts in Income Tax rules. The most significant change is the effective tax-free income limit being raised to ₹12 lakh for certain taxpayers. As the year draws to a close, it is essential for every taxpayer to understand how these five pivotal changes impact their finances and future planning.

The government introduced these amendments to simplify compliance, provide relief to the middle class, and modernize the tax framework, directly affecting the annual tax liability and investment decisions of crores of Indians.

1. Elevated Tax-Free Income Limit to ₹12 Lakh

In a major announcement during the Union Budget 2025, the government effectively raised the tax-free income threshold. This monumental benefit is exclusively available to taxpayers who opt for the New Tax Regime.

For salaried individuals, the tax-free limit has been further enhanced to ₹12.75 lakh annually. This is achieved by combining the statutory rebate on income up to ₹12 lakh with the introduction of a Standard Deduction of ₹75,000 under the New Tax Regime for salaried employees. This deduction, previously available only in the Old Regime, significantly reduces the taxable income for jobholders.

2. Overhauled Tax Slabs in the New Regime

The government restructured the tax slabs within the New Tax Regime to make it more appealing and progressive. The revised structure applies to individuals and Hindu Undivided Families (HUFs) and is as follows:

This revised and simplified slab structure is a key initiative to encourage more taxpayers to switch to the New Tax Regime, which offers lower tax rates but requires giving up most common deductions and exemptions (like Section 80C, HRA, etc.).

3. Extended Time Limit for Filing Updated Returns

In a significant relief to taxpayers needing to correct errors or declare omitted income after the initial filing deadline, the government has extended the period for filing an Updated Income Tax Return (ITR-U).

• Old Rule: Taxpayers had a period of 12 months (1 year) from the end of the relevant assessment year to file an updated return.

• New Rule: This period has been substantially increased to 48 months (4 years) from the end of the relevant assessment year.

This extended window provides immense flexibility, giving taxpayers more time to ensure full compliance and rectify discrepancies, thereby reducing the chances of attracting penalties from the tax department.

4. Enactment of the Income Tax Act, 2025

Perhaps the most structural change of the year is the legislative overhaul of the core tax framework. The Income Tax Act, 2025 has been successfully passed by the Parliament and received the President’s assent.

• Effective Date: This new Act is scheduled to come into force from April 1, 2026 (Assessment Year 2026-27).

• Decades-Old Law Replaced: It will replace the decades-old Income Tax Act, 1961.

• Simplification: The new legislation is drafted with a focus on simplicity and clarity. The language and provisions have been simplified to make the compliance process less cumbersome and easier for the average taxpayer to understand, marking a major effort towards modernizing tax governance.

5. New Taxation Rules for High-Premium ULIPs

The tax treatment of Unit-Linked Insurance Plans (ULIPs) has been amended, primarily targeting plans with very high annual premiums. These new rules came into effect from the Financial Year 2025-26.

Under the revised norms, ULIPs will lose their tax-exempt status (under Section 10(10D)) if:

• The annual premium exceeds ₹2.5 lakh.

• OR, the annual premium is more than 10% of the Sum Assured.

For such high-premium ULIPs, the returns (gains) upon maturity will now be treated like Capital Gains and taxed accordingly:

• Short-Term Capital Gains (STCG): Taxed at 20%.

• Long-Term Capital Gains (LTCG): Taxed at 12.5%.

This change aims to prevent the misuse of ULIPs as high-value, tax-free investment vehicles and brings their tax treatment closer to that of other market-linked investment products. Taxpayers should review their existing and planned ULIP investments to align with these new rules.