Income Tax Rules for Salaried Employees: Key Changes in August 2025

In August 2025, salaried employees saw significant income tax revisions. These updates, introduced by CBDT and through the Income Tax Act, 2025, directly impact how various allowances, deductions, and perquisites are taxed. Here’s a complete breakdown.

Increased Limit for Tax-Free Non-Monetary Perquisites

The income threshold for "specified employees" has been revised from ₹50,000 to ₹4,00,000. This means employees earning below ₹4,00,000 annually will no longer be categorised as "specified" and won’t be taxed on certain non-monetary perquisites like car use, domestic staff, utilities, and education facilities. However, directors or those holding 20% or more voting power will still be taxed irrespective of income.

Higher Income Threshold for Tax-Free Overseas Medical Treatment

Employees earning up to ₹8,00,000 are now eligible for tax exemption on employer-paid overseas medical treatment. Previously, this exemption was capped at ₹2,00,000. Salaries exceeding ₹8,00,000 will see this benefit counted as a taxable perquisite.

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Clarification on ₹75,000 Standard Deduction Under the New Tax Regime

The government amended the law to ensure clarity on the standard deduction of ₹75,000 for individuals under the new tax regime. This offers greater certainty for salaried taxpayers planning to shift from the old to the new regime starting AY 2026-27.

Section 87A Rebate Now Applicable on STCG

The ITAT ruled that taxpayers with income up to ₹7,00,000 in the new regime (or ₹5,00,000 in the old) can use the Section 87A rebate even if the income includes Short-Term Capital Gains. This opens a window for salaried taxpayers earning modest investment returns.

New Income Tax Act 2025 to Replace the Old Law

The Income Tax Act, 2025, has officially replaced the 1961 version. Effective from April 1, 2026, this modern law is expected to simplify tax compliance and align with India’s economic structure. Salaried individuals should stay informed on future implementation guidelines and tools.

Conclusion

The August 2025 income tax reforms bring relief for lower-income salaried employees and provide important clarifications. From increased perquisite limits to a clearer tax deduction structure, these changes will influence how individuals plan and manage their taxes for the upcoming financial year.

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