New Tax Regime vs. Old Tax Regime: A Simple Guide
Under the Indian Income Tax Act, individual taxpayers can choose between two distinct tax frameworks for filing their annual Income Tax Returns (ITR): the New Tax Regime (Section 115BAC) and the traditional Old Tax Regime.
The New Tax Regime is the default tax regime for individual taxpayers. From FY 2025-26 (Budget 2025, carried forward unchanged by Budget 2026) it has wider slabs, a rebate that makes taxable income up to ₹12,00,000 tax-free, and a Standard Deduction of ₹75,000, but eliminates popular deductions such as Section 80C, 80D, HRA exemption under 10(13A), and Home Loan Interest under Section 24(b).
Slab Rates Comparison (FY 2025-26 & FY 2026-27)
| Income Slab Range (New Regime) | New Tax Rate (115BAC) | Income Slab Range (Old Regime) | Old Tax Rate |
|---|---|---|---|
| Up to ₹4,00,000 | NIL (0%) | Up to ₹2,50,000 | NIL (0%) |
| ₹4,00,001 – ₹8,00,000 | 5% | ₹2,50,001 – ₹5,00,000 | 5% |
| ₹8,00,001 – ₹12,00,000 | 10% | ₹5,00,001 – ₹10,00,000 | 20% |
| ₹12,00,001 – ₹16,00,000 | 15% | Above ₹10,00,000 | 30% |
| ₹16,00,001 – ₹20,00,000 | 20% | — | — |
| ₹20,00,001 – ₹24,00,000 | 25% | — | — |
| Above ₹24,00,000 | 30% | — | — |
How Breakeven Deductions Work
To determine whether the Old Tax Regime will save you more money than the New Tax Regime, you must calculate your Breakeven Deduction Threshold. This is the minimum total sum of eligible deductions (Section 80C + Section 80D + HRA + Home Loan Interest + NPS) required to make tax outflow under the Old Regime lower than under the New Regime.
Rule of Thumb: Under the current slabs the Old Regime rarely wins. For a gross salary of ₹15 Lakhs, only if your total deductions (80C ₹1.5L + HRA ₹1.2L + 80D ₹25k + Home Loan ₹2L) exceed about ₹5.4 Lakhs (rising to about ₹7.1 Lakhs at ₹20 Lakhs gross), the Old Tax Regime may be more beneficial. If your total deductions are low, the New Tax Regime yields higher take-home pay.
Worked Numerical Example: Gross Salary ₹15,00,000
Consider a salaried employee earning a gross annual income of ₹15,00,000 with ₹3,75,000 total eligible deductions:
| Calculation Component | Old Tax Regime | New Tax Regime (FY 2025-26 onwards) |
|---|---|---|
| Gross Salary | ₹15,00,000 | ₹15,00,000 |
| Standard Deduction | ₹50,000 | ₹75,000 |
| 80C + 80D + HRA + Home Loan | ₹3,75,000 | ₹0 (Not Allowed) |
| Net Taxable Income | ₹10,75,000 | ₹14,25,000 |
| Total Tax Payable (incl. 4% Cess) | ₹1,40,400 | ₹97,500 |
In this scenario, even with ₹3.75 Lakhs in deductions, the New Tax Regime saves about ₹42,900 a year. The Old Regime would need roughly ₹5.4 Lakhs of deductions to break even.
Section 87A Tax Rebate & Marginal Relief Explained
Under Section 87A of the Income-tax Act, 1961 (renumbered in the Income-tax Act, 2025 from 1 April 2026, with the same limits):
- New Regime Zero-Tax Threshold: If taxable income does not exceed ₹12,00,000, a rebate of up to ₹60,000 reduces income tax to zero. (With the ₹75,000 Standard Deduction, a salary of up to ₹12,75,000 pays no tax.) The rebate does not apply to special-rate income such as capital gains taxed under Sections 111A/112A.
- Marginal Relief: If taxable income slightly exceeds ₹12,00,000 (e.g. ₹12,10,000), tax payable is capped at the income above ₹12 Lakhs (i.e. ₹10,000 plus cess), preventing a sudden tax jump on a small salary increase.
Frequently Asked Questions (FAQ)
Can I switch between New and Old Tax Regimes every year?
Salaried individuals without business income can select their preferred regime annually at the time of filing their Income Tax Return (ITR-1 / ITR-2). Taxpayers with Business or Professional income (ITR-3 / ITR-4) can switch out of the New Regime only once in their lifetime.
Which employer deductions are allowed under the New Tax Regime?
The New Tax Regime allows employer contributions to NPS under Section 80CCD(2) up to 14% of Basic + DA for Central Government employees and 10% for private sector employees. Transport allowance for specially-abled employees and official travel reimbursements are also permitted.