Starting with the 2025-26 assessment year, the Indian tax system has a new default setting. The New Tax Regime, governed by Section 115BAC of the Income Tax Act, is now the automatic choice for most individual taxpayers. This doesn't mean the old system is gone forever, but you now have to actively choose it if you want to use it.

This shift aims to simplify tax filings by offering lower tax rates in exchange for forgoing most common deductions and exemptions. For many, especially those with fewer investments that qualify for deductions, this new default can lead to a lower tax bill and less paperwork.

The core of the New Tax Regime is its updated slab structure. These rates are more granular than the old regime, offering a smoother progression as your income increases.

A key enhancement for 2025 is the introduction of a standard deduction specifically for salaried individuals and pensioners under the new regime. You can now reduce your taxable income by a flat 75,000 INR. This makes the new regime more attractive, as the original version offered no such deduction.

At first glance, the tax slabs suggest you start paying tax on income above 3 lakh. However, a powerful feature called a tax rebate changes the story. Under Section 87A of the Income Tax Act, if your net taxable income is 7,00,000 INR or less, you receive a rebate that cancels out your entire tax liability. This effectively makes income up to 7 lakh tax-free.

But what happens if your income is just a little over that threshold? A sudden jump in tax seems unfair. This is where marginal relief comes in.

Let’s see how this works with an example. Suppose your taxable income is 7,00,100 INR. Without marginal relief, your tax calculation would be:

Your income is only 100 INR over the tax-free limit, but you're hit with a 20,010 INR tax bill. This is exactly the problem marginal relief solves. The relief is calculated to cap your tax. The formula is:

Relief = Tax Payable - (Total Income - 7,00,000)

Your final tax payable is your initial tax liability minus the relief. In this case, it's 20,010 - 19,910 = 100 INR. Your tax liability is now equal to your extra income, which is a much fairer outcome.