Five Key Income Tax Changes for Salaried Employees: August 2025 Edition

The Income Tax Bill, 2025 officially became law in August, replacing the six-decade-old Income Tax Act of 1961, effective from April 1, 2026. This landmark change introduces fresh provisions that directly impact salaried employees, especially regarding exemptions, deductions, and compliance requirements.

In August 2025, the Central Board of Direct Taxes (CBDT) rolled out significant updates to perquisite taxation, overseas medical treatment, standard deductions, and rebates. Here’s a breakdown of the five major income tax changes every salaried employee should know.

1. Higher Threshold for Taxable Perquisites

Earlier, employees with salaries above ₹50,000 were treated as “specified employees,” meaning non-monetary perks like company-provided cars, domestic help, or utilities were taxable.

From April 1, 2025, under Rule 3C, the salary threshold has been raised to ₹4 lakh. Now, employees earning up to ₹4 lakh will not face tax on such perquisites.

👉 Important: This relief does not apply to company directors, employees holding 20% or more voting power, or benefits such as ESOPs, concessional loans, gifts, or club memberships.

2. Increased Exemption for Overseas Medical Treatment

Previously, overseas medical treatment was tax-exempt only for employees with income up to ₹2 lakh.

With the new Rule 3D, the exemption limit has been raised to ₹8 lakh. Employees earning below this threshold will no longer pay tax on perquisites related to overseas medical treatment.

This change is applicable from Assessment Year (AY) 2026-27.

3. Clarity on Standard Deduction in the New Regime

The new Income Tax Act, 2025 finally clarified the standard deduction under the new regime. Salaried employees will now be entitled to a flat deduction of ₹75,000, providing much-needed clarity and uniformity.

This resolves earlier ambiguities and ensures tax relief for all salaried individuals under the new system.

4. Section 87A Rebate Extended to Short-Term Capital Gains

A crucial judicial update came from the Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT).

The tribunal ruled that small taxpayers can claim the Section 87A rebate on short-term capital gains (STCG), provided their income falls within the rebate limit:

• ₹7 lakh under the new tax regime

• ₹5 lakh under the old regime

This ruling is expected to significantly benefit small investors and reduce tax liabilities.

5. New Income Tax Bill, 2025 Takes Over

Finally, the Income Tax Bill, 2025 became law in August, bringing sweeping reforms and officially replacing the 1961 Act from April 1, 2026.

The Income Tax Department will soon issue FAQs, transition guidelines, and tools to help taxpayers adapt smoothly to the new framework.

Frequently Asked Questions (FAQs)

Q1. From when will the new Income Tax Bill, 2025 be applicable?
It will come into effect from April 1, 2026, applicable for Assessment Year 2026-27 onwards.

Q2. Who benefits from the new ₹4 lakh perquisite threshold?
Employees earning up to ₹4 lakh annually will not have to pay tax on specified perquisites like company-provided cars, domestic help, or utilities.

Q3. Is the standard deduction of ₹75,000 available under both regimes?
No, the ₹75,000 deduction applies only under the new tax regime.

Q4. Can all taxpayers claim the Section 87A rebate on capital gains?
No, only taxpayers with income up to ₹7 lakh (new regime) or ₹5 lakh (old regime) are eligible.

Q5. What happens to the old Income Tax Act, 1961?
It will be repealed and replaced entirely by the Income Tax Bill, 2025, effective April 1, 2026.

Conclusion

The Income Tax updates of August 2025 mark a significant shift for salaried employees. From higher exemption limits on perquisites and overseas medical treatment to clearer standard deductions and judicial relief on capital gains, these changes aim to bring fairness and simplicity.

As India transitions into the new Income Tax Act, 2025, salaried employees should stay updated, leverage available exemptions, and plan their finances smartly to maximize savings.