India Payroll & The New Tax Regime: Updates for the 2025-2026 Fiscal Year
The Union Budget 2025-2026 introduced significant changes to India's tax structure, impacting payroll management for both employers and employees. Understanding these updates is crucial for accurate salary processing and compliance.
1. Revised Income Tax Slabs for FY 2025-2026
The new tax regime offers revised income tax slabs with adjusted rates:
| Annual Income (INR) | 0% |
| Up to 1,20,000 | 5% |
| 1,20,001 - 4,00,000 | 10% |
| 4,00,001 - 8,00,000 | 15% |
| 8,00,001 - 12,00,000 | 20% |
| 12,00,001 - 16,00,000 | 25% |
| 16,00,001 - 20,00,000 | 30% |
| 20,00,001 - 24,00,000 | 35% |
| Above 24,00,000 |
Note: The basic exemption limit has been raised to INR 1,20,000.
2. Enhanced Standard Deduction
To provide relief to salaried individuals and pensioners, the standard deduction under the new tax regime has been increased:
- Standard Deduction: INR 75,000
This enhancement aims to increase disposable income and simplify tax calculations.
3. Implications for Payroll Management
A. For Employers
- Payroll System Updates: Ensure payroll software reflects the new tax slabs and standard deductions.
- Employee Communication: Inform employees about the changes and how they affect net salaries.
- TDS Adjustments: Calculate Tax Deducted at Source (TDS) based on the revised tax rates.
B. For Employees
- Increased Take-Home Pay: The higher standard deduction may result in increased net salaries.
- Tax Planning: Reevaluate tax-saving investments in light of the new regime's benefits.
4. Comparing Old vs. New Tax Regime
Employees can choose between the old and new tax regimes based on which is more beneficial:
- Old Tax Regime: Allows various exemptions and deductions (e.g., HRA, 80C).
- New Tax Regime: This offers lower tax rates with limited exemptions.
It's advisable to calculate tax liabilities under both regimes to determine the optimal choice.
5. Steps for Employers to Implement Changes
- Update Payroll Systems: Integrate the new tax slabs and standard deduction.
- Employee Declarations: Collect declarations from employees regarding their preferred tax regime.
- Recalculate TDS: Adjust TDS computations based on the selected tax regime.
- Issue Revised Payslips: Reflect the changes in monthly payslips for transparency.
By staying informed and adapting to these changes, both employers and employees can ensure compliance and optimize tax benefits in the 2025-2026 fiscal year.
