How the Income Tax Slab for FY 2025-26 impacts your investment returns

The income tax slab for FY 2025-26 has changed, and it’s important to understand how these changes affect your investments. The new tax system not only determines how much tax you pay but also directly impacts the returns you make on your investments.

In this post, we’ll explain the new tax slab and how it affects different types of investments. We’ll also offer practical advice on how you can adjust your strategy to make the most of the new tax rules.

What’s New with the Income Tax Slab for FY 2025-26?

In India, the income tax slab decides how much tax you have to pay based on your income. The income tax slab for FY 2025-26 has been updated to make taxes more fair, with lower tax rates for people earning less and higher rates for people earning more. The new tax rates are as follows:

●        Up to ₹4 lakh: 0% (NIL)

●        ₹4 lakh to ₹8 lakh: 5%

●        ₹8 lakh to ₹12 lakh: 10%

●        ₹12 lakh to ₹16 lakh: 15%

●        ₹16 lakh to ₹20 lakh: 20%

●        ₹20 lakh to ₹24 lakh: 25%

●        Above ₹24 lakh: 30%

Additionally, a standard deduction of ₹75,000 (for salaried individuals) has been added, which makes the basic exemption limit higher for those who choose the new tax system. The rationale is that the more money you make, the greater the percentage of tax you pay. This change has a direct impact on how you should plan your investments for a variety of reasons.

How the New Tax Slab Will Impact Your Investment Returns

The new tax slab that you bear for FY 2025-26 will affect the annualised returns that you earn on varying investments, including fixed deposits (FDs), mutual funds, real estate and tax-saving instruments, but everything else being equal, the new tax slab will impact returns after tax.

1. Fixed Deposits (FD)

FDs are a popular investment choice that is generally considered safe. FD interest usually attracts taxes at the income tax slab you are constrained by. With the new tax system, if you’re in a higher tax bracket, you’ll pay more tax on the interest from your FD, which means your return will be lower. For example, if you're in the 20% or 30% tax bracket, a large part of your FD interest will go toward taxes.

2. Mutual Funds and Equity Investments

In mutual funds and stocks, when you sell, you earn capital gains. Taxes are paid on capital gains, and there are two types of capital gains based on how long you hold the investment (STCG or LTCG).

According to the new tax rules, if you were in a higher bracket, you could be taxed at a higher rate on gains earned, which would effectively lower your overall return. Conversely, if you are in the lower tax brackets, the tax you will pay on capital gains will be less, which results in a higher overall return.

As a side note, it is important to note that long-term capital gains on equities (if held for more than one year) are taxed at 10% beyond ₹1 lakh in gains. Low-tax bracket investors can find significant benefits from the lower tax paid on capital gains when investing in equities.

3. Tax-Saving Instruments

Tax-saving instruments like the Public Provident Fund (PPF), National Pension Scheme (NPS), and Equity-Linked Savings Schemes (ELSS) not only help you save on taxes but also build wealth over time.

With the updated tax slabs, these instruments become even more important for lower-income earners. Tax-saving investments like ELSS and NPS offer tax deductions under Section 80C and Section 80CCD (Note: Section 80C and Section 80CCD benefits are available only under the old tax regime).

These tools not only help you reduce taxable income but also give you an opportunity to invest in assets that grow over time.

4. Property Investments

Investing in real estate is another way people earn money on the side. However, income from rent is taxed based on your income tax slab. The higher your tax bracket, the more taxes you pay on rental income, and this can reduce your return from the property.

On the other hand, the interest you pay on home loans is entitled to tax relief under Section 24(b) of the Income Tax Act and can lessen your tax burden. The tax relief will also be more beneficial for individuals in a lower tax bracket since they can increase the amount of income they retain from their property investment.

5. Tax Calculators: A Simple Way to Plan Your Taxes

To help manage the impact of the new tax slab, you can use tax calculators. These are online tools that help you calculate how much tax you’ll need to pay based on your income and the deductions available to you. By using a tax calculator, you can see how the new tax rules affect your overall tax bill and adjust your investments to make sure you’re saving as much as possible.

Tax calculators help you figure out better ways to reduce taxes and maximise returns from your investments. By using the right tax-saving strategies, you can ensure your investments are as tax-efficient as possible under the new system.

Smart Investment Strategies Under the New Tax Slab

With the new income tax slab implemented for FY 2025-26, it is time to rethink your investment strategy. Here are the useful tips to maximise your benefits from these new tax rules:

Maximise Your Tax Savings

Take advantage of as many tax-saving instruments as you can afford, such as ELSS, PPF, and NPS. They will help lower your taxable income and help you save for future wealth.

Invest in tax-efficient assets.

If you're in the highest tax bracket, consider investments that have tax-free returns (like some types of bonds) or tax-deferred returns (long-term equities).

Review your portfolio often.

Due to changes in tax rules, it is important to keep reviewing your investment portfolio. You can ensure your investments remain tax-efficient while not losing out to changes in the new tax slabs.

Conclusion

The income tax slab for FY 2025-26 has brought significant changes that will impact how much you pay in taxes and, ultimately, your investment returns. By understanding these changes, you can plan your investments more effectively and ensure that you keep more of your earnings.

Using tools like tax calculators can help you manage your taxes and optimise your investment strategy. With careful planning, the new tax structure can work in your favour, helping you reach your financial goals while reducing your tax liability.