India’s shift toward a simplified personal taxation framework under Section 115BAC marks a decisive policy transition—from deduction-led tax planning to rate-based taxation. While the new tax regime is often portrayed as taxpayer-friendly, its effectiveness for higher-income salaried individuals has come under scrutiny, particularly after the introduction of a 25% tax slab for income between ₹20 lakh and ₹24 lakh. This article examines whether the new regime genuinely benefits higher-income taxpayers or merely reshapes the tax burden. By analysing statutory design, marginal taxation principles, practical salary scenarios, and evolving judicial interpretation, the article evaluates whether the perception of a “tax-heavy” regime is legally and economically justified.
Income tax policy functions not only as a revenue mechanism but also as an instrument of economic governance and behavioural influence. India’s progressive tax structure has historically balanced redistribution with incentives for savings, housing, and insurance through deductions and exemptions.
The introduction of the optional new tax regime under Section 115BAC signalled a philosophical shift—away from incentivised deductions and toward computational simplicity. While initial discussions focused on middle-income groups, recent amendments—especially the insertion of a 25% slab before the highest marginal rate—have reignited debate among senior professionals and high-earning salaried taxpayers.
A recurring concern is whether salary increments at higher income levels are meaningfully retained or largely absorbed by increased taxation.
Section 115BAC of the Income-tax Act, 1961 offers individuals and HUFs an alternative slab-based taxation system, subject to the surrender of most exemptions and deductions.
Key features of the regime include:
A wider slab structure with gradually increasing rates
Minimal reliance on Chapter VI-A deductions
Optional adoption, preserving taxpayer choice
For Assessment Year 2026–27, the slab structure broadly operates as follows:
Nil tax up to ₹4 lakh
Progressive slabs ranging from 5% to 20% up to ₹20 lakh
25% on income between ₹20 lakh and ₹24 lakh
30% on income exceeding ₹24 lakh
The legislative intent is clear: reduce complexity, limit aggressive tax planning, and create a predictable tax environment. However, intent alone is insufficient—the practical tax incidence must justify the policy.
The old tax regime relies on a relatively compressed slab system combined with extensive deductions under provisions such as Sections 80C, 80D, and 24(b). Courts have consistently recognised these deductions as statutory entitlements, not discretionary benefits.
In contrast, the new regime operates on a voluntary trade-off model. Taxpayers elect to abandon deductions in exchange for moderated slab rates and simplified computation. This fundamentally transforms tax planning—from documentation-heavy compliance to numerical optimisation.
Legally, both regimes coexist without hierarchy. CBDT clarifications allow salaried taxpayers to switch regimes annually, reinforcing autonomy and flexibility. The choice, therefore, hinges on individual financial profiles rather than statutory compulsion.
The introduction of a 25% slab has generated disproportionate concern, largely due to confusion between marginal tax rates and effective tax burden.
Under India’s progressive taxation system, higher rates apply only to income falling within that slab. A taxpayer earning ₹22 lakh, for instance, pays 25% tax only on ₹2 lakh—not on the entire income.
When viewed holistically, the effective tax rate under the new regime often remains lower than the old regime’s flat 30% rate applicable beyond ₹10 lakh. In fact, the additional slab smoothens tax progression and reduces the abrupt rate escalation that characterised the earlier structure.
Thus, what appears punitive at first glance is, in practice, a more graduated and economically rational approach.
A common grievance among senior professionals is that annual increments are “neutralised” by higher tax rates. Empirical computation, however, demonstrates that net income continues to increase post-hike, albeit with diminishing marginal gains.
This phenomenon is not unique to India’s new regime—it is an inherent feature of progressive taxation globally. The issue lies less in excessive taxation and more in expectations of linear post-tax income growth.
Employees with substantial housing loans, insurance premiums, or long-term investments may still find the old regime financially superior. The new regime deliberately deprioritises such tax incentives, reflecting a conscious policy choice rather than a structural flaw.
The continued availability of both regimes acknowledges this diversity and avoids a one-size-fits-all outcome.
Although Section 115BAC has not faced direct constitutional scrutiny, appellate jurisprudence offers meaningful insight into its interpretation.
Income Tax Appellate Tribunal decisions have emphasised substance over procedure, holding that minor procedural lapses—such as delayed regime selection—should not defeat substantive taxpayer rights when intent is evident.
Further, judicial trends surrounding rebates under Section 87A reflect a protective stance toward taxpayers where computational or administrative errors result in excess tax demands. These decisions reinforce the principle that simplification should not come at the cost of fairness.
From a policy standpoint, the new tax regime prioritises certainty, ease of administration, and reduced litigation. These objectives inevitably limit the redistributive function traditionally achieved through targeted deductions.
For higher-income taxpayers without significant exemptions, the regime offers clarity and predictability. For others, the parallel existence of the old regime preserves equity and choice. The dual-regime model, therefore, represents a calibrated compromise rather than an incomplete reform.
The introduction of the 25% slab for income between ₹20 lakh and ₹24 lakh does not fundamentally undermine the viability of the new tax regime for higher-income earners. When evaluated through marginal taxation principles, legislative intent, and judicial interpretation, the regime remains legally robust and economically coherent.
For tax professionals, lawyers, and policy analysts, the new regime provides a compelling illustration of how tax law balances efficiency, autonomy, and equity. Ultimately, whether a salary hike translates into meaningful income growth depends not on headline tax rates but on informed regime selection and personalised tax planning.
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