Over the past decade, India’s personal income tax structure has undergone significant changes, with successive budgets focusing on easing the tax burden on middle-class taxpayers. Since Prime Minister Narendra Modi-led government first took charge in 2014, income tax relief has steadily expanded, particularly through higher exemption limits, revised tax slabs, and rebates.
In 2014, before the Modi government first presented its budget, taxpayers faced a 10 percent tax rate on incomes above Rs 2 lakh, a 20 percent rate above Rs 5 lakh, and the highest 30 percent bracket kicked in at Rs 10 lakh. A relief came in the form of a Rs 2,000 rebate for incomes up to Rs 5 lakh.
Fast forward to Budget 2025-26, and the tax landscape looks starkly different.
The new income tax regime, which was introduced in 2020 and overhauled in 2023, has significantly widened the scope of tax relief, with zero tax for incomes up to Rs 12 lakh due to rebates. It also introduced lower tax slabs ranging from 5 percent to 30 percent, with intermediate rates of 10, 15, 20, and 25 percent—a major departure from the earlier three-slab system.
From Rs 2 lakh to Rs 12 lakh: The shifting threshold for tax-free income
One of the most striking changes over the past decade has been the steady increase in the tax-free income threshold. In 2014, no tax was levied up to Rs 2 lakh. By 2019, this threshold effectively rose to Rs 5 lakh under Section 87A rebates.
However, in the latest Budget 2025-26, this figure has been more than doubled to Rs 12 lakh in the new regime, ensuring a far larger segment of middle-class taxpayers pay no income tax at all.
Comparing tax liability: A decline across income levels
To illustrate how tax relief has expanded, a general comparison of tax liability across different income brackets is useful. However, these are indicative figures only, as actual tax liability varies based on cess, exemptions, allowances, claims and individual eligibility criteria.
More slabs, lower rates
The shift from a three-slab system (10-20-30 percent) to a six-slab structure (5-10-15-20-25-30 percent) under the new tax regime has provided relief for those in the Rs 8 lakh to Rs 24 lakh range, who earlier faced a flat 30 percent tax above Rs 10 lakh.
At the same time, the old regime remains intact for those who prefer traditional deductions such as 80C (investments), HRA (house rent), and home loan interest. Under this system, the highest 30 percent tax slab still starts at Rs 10 lakh, but deductions can significantly lower taxable income.
Balancing tax relief and revenue collection
While the government has significantly increased tax relief, it has maintained fiscal discipline by expanding the tax base and increasing compliance through measures such as faceless assessments, higher digital transactions, and mandatory PAN-Aadhaar linking. The introduction of the new tax regime was aimed at simplifying the system and reducing dependence on deductions, while the old regime continues to cater to those benefiting from exemptions.
Looking ahead
The steady increase in tax-free thresholds, combined with simplified slabs and lower rates, marks one of the biggest shifts in India’s income tax structure since liberalisation. However, the government now faces the challenge of balancing further tax relief with revenue needs as it prepares for its next fiscal roadmap. Whether the trend of rising exemption limits and lower tax rates continues will likely depend on economic growth and fiscal targets in the years ahead.
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