New vs old tax regime for FY 2026-27: which saves salaried staff more

ReportsIshaan VardhanOct 6, 20268 min read

India gives salaried taxpayers a choice between two income tax systems. The new regime has lower rates but allows almost no deductions. The old regime has higher rates but lets you subtract rent, insurance premiums, home loan interest and similar items. For the financial year 2026-27 (1 April 2026 to 31 March 2027), the arithmetic favours the new regime for most people earning ₹10 lakh to ₹30 lakh a year, unless their deductions are unusually large.

Two terms for readers outside India. One lakh is ₹1,00,000 (100,000 rupees). CTC, or cost to company, is the total amount an employer spends on you in a year, including items you never get as cash, such as the employer’s provident fund contribution.

What changed for 2026-27, and what didn’t

The Income-tax Act, 2025 replaced the Income-tax Act, 1961 from 1 April 2026, as the Finance Minister confirmed in her Budget speech on 1 February 2026. The new law drops the old pair of terms “previous year” and “assessment year” and uses a single “tax year”: the twelve months starting 1 April. FY 2026-27 is therefore tax year 2026-27.

The rates did not change. The memorandum to the Finance Bill 2026 says no change is proposed in tax rates, and the new-regime slabs in section 202 of the new Act match last year’s. The section numbers did change. The familiar Section 80C deduction is now section 123, health insurance (old 80D) is section 126, and the rebate that makes income up to ₹12 lakh tax-free (old 87A) is section 156.

Tax slabs under both regimes

The new regime is the default; the old one applies only if you opt for it.

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A few rules sit on top of the slabs:

• Standard deduction: salaried people deduct ₹75,000 from salary in the new regime and ₹50,000 in the old (section 19).
• Rebate: in the new regime, a resident whose taxable income is up to ₹12 lakh pays no tax, because a rebate of up to ₹60,000 cancels it. With the standard deduction, that covers salary of up to ₹12.75 lakh. Just above ₹12 lakh, marginal relief caps the tax at the amount by which income exceeds ₹12 lakh. In the old regime, the rebate is up to ₹12,500 for taxable income up to ₹5 lakh.
• Cess and surcharge: a 4% health and education cess is added in both regimes. Surcharge starts above ₹50 lakh and, in the new regime, is capped at 25%.
• Older taxpayers: in the old regime, the nil slab is ₹3 lakh for residents aged 60 to 79 and ₹5 lakh for those aged 80 or more. The new regime has one set of slabs for everyone.

Deductions only the old regime allows

Section 202 of the new Act lists what you give up in the new regime. For a typical salaried person, these are the deductions that matter:

• House rent allowance (HRA): the exempt part is the least of the HRA you receive, rent paid minus 10% of salary, and 50% of salary (40% outside the listed cities). Here “salary” broadly means basic pay plus dearness allowance. From April 2026 the Income-tax Rules, 2026 extend the 50% limit from four cities to eight: Delhi, Mumbai, Kolkata, Chennai, Bengaluru, Hyderabad, Pune and Ahmedabad.
• Section 123 (old 80C): up to ₹1,50,000 a year for your own PF contribution, PPF, life insurance premiums, ELSS funds, children’s tuition fees, home loan principal and similar items.
• Section 126 (old 80D): health insurance of up to ₹25,000 for yourself and family, plus up to ₹25,000 for parents. Each limit rises to ₹50,000 where the insured person is a senior citizen.
• Home loan interest on a self-occupied house: up to ₹2,00,000 a year (section 22).
• Your own NPS contribution: up to an extra ₹50,000 (section 124(3)).
• Professional tax: the state levy on salaried people, up to ₹2,500 a year.

Two benefits work in both regimes: the standard deduction and your employer’s NPS contribution. For private-sector employees, the NPS deduction is capped at 14% of salary in the new regime and 10% in the old, so it is one of the few ways to cut tax in the new regime.

Worked examples at ₹10L, ₹15L, ₹20L and ₹30L CTC

These examples use the same method as our in-hand salary calculator. The assumptions:

• Basic pay is 50% of CTC, and the employee is a resident under 60 with no other income.
• Employer PF is 12% of the statutory wage ceiling of ₹25,000 a month, or ₹36,000 a year. That ceiling rose from ₹15,000 on 17 September 2026; for simplicity we apply it to the full year. Gratuity is provisioned at 4.81% of basic. Both are part of CTC but not paid as salary.
• Gross salary is therefore CTC minus employer PF and gratuity.
• For the old regime: ₹1,50,000 under section 123 (including the employee’s own ₹36,000 PF), ₹25,000 of health insurance, ₹2,500 of professional tax and, where stated, rent in one of the eight 50% cities, with HRA set at 50% of basic.

₹10 lakh CTC

Gross salary is ₹10,00,000 − ₹36,000 − ₹24,050 = ₹9,39,950.

New regime: taxable income is ₹9,39,950 − ₹75,000 = ₹8,64,950. Slab tax would be ₹26,495, but it is under ₹12 lakh, so the rebate wipes it out. Tax: nil.

Old regime, paying ₹20,000 a month in rent: the HRA exemption is the least of ₹2,50,000, ₹1,90,000 (₹2,40,000 rent minus ₹50,000) and ₹2,50,000, so ₹1,90,000. Taxable income is ₹9,39,950 − ₹50,000 − ₹1,90,000 − ₹1,50,000 − ₹25,000 − ₹2,500 = ₹5,22,450. Tax is ₹12,500 + 20% of ₹22,450 = ₹16,990, plus cess: ₹17,670.

The old regime could only tie at this level. It would need ₹3,89,950 of deductions to bring taxable income down to ₹5 lakh and reach zero tax.

₹15 lakh CTC

Gross salary is ₹15,00,000 − ₹36,000 − ₹36,075 = ₹14,27,925.

New regime: taxable income is ₹13,52,925. Tax is ₹20,000 (4–8 lakh) + ₹40,000 (8–12 lakh) + 15% of ₹1,52,925 (₹22,939) = ₹82,939, plus cess: ₹86,256.

Old regime, paying ₹25,000 a month in rent: the HRA exemption is ₹3,00,000 − ₹75,000 = ₹2,25,000. Taxable income is ₹14,27,925 − ₹50,000 − ₹2,25,000 − ₹1,50,000 − ₹25,000 − ₹2,500 = ₹9,75,425. Tax is ₹12,500 + 20% of ₹4,75,425 = ₹1,07,585, plus cess: ₹1,11,888.

The old regime would need about ₹5.26 lakh of deductions (beyond the ₹50,000 standard deduction) to match ₹82,939 of tax.

₹20 lakh CTC

Gross salary is ₹20,00,000 − ₹36,000 − ₹48,100 = ₹19,15,900.

New regime: taxable income is ₹18,40,900. Tax is ₹1,20,000 on the first ₹16 lakh + 20% of ₹2,40,900 (₹48,180) = ₹1,68,180, plus cess: ₹1,74,907.

Old regime, paying ₹30,000 a month in rent: the HRA exemption is ₹3,60,000 − ₹1,00,000 = ₹2,60,000. Taxable income is ₹19,15,900 − ₹50,000 − ₹2,60,000 − ₹1,50,000 − ₹25,000 − ₹2,500 = ₹14,28,400. Tax is ₹1,12,500 on the first ₹10 lakh + 30% of ₹4,28,400 (₹1,28,520) = ₹2,41,020, plus cess: ₹2,50,661.

Break-even needs about ₹6.8 lakh of deductions.

₹30 lakh CTC

Gross salary is ₹30,00,000 − ₹36,000 − ₹72,150 = ₹28,91,850.

New regime: taxable income is ₹28,16,850. Tax is ₹3,00,000 on the first ₹24 lakh + 30% of ₹4,16,850 (₹1,25,055) = ₹4,25,055, plus cess: ₹4,42,057.

Old regime, for a homeowner with ₹2,00,000 of home loan interest and ₹50,000 in their own NPS (no HRA): taxable income is ₹28,91,850 − ₹50,000 − ₹1,50,000 − ₹50,000 − ₹25,000 − ₹2,00,000 − ₹2,500 = ₹24,14,350. Tax is ₹1,12,500 + 30% of ₹14,14,350 (₹4,24,305) = ₹5,36,805, plus cess: ₹5,58,277.

Once both regimes reach the 30% band, the gap stops moving. The new regime charges ₹3,00,000 on the first ₹24 lakh and the old charges ₹1,12,500 on the first ₹10 lakh. With no deductions beyond the standard deduction, the old regime therefore costs ₹2,40,000 more in tax before cess at any salary in this range. Each rupee of deduction saves 30 paise, so it takes exactly ₹8 lakh of deductions to close the gap.

Summary

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Tax figures include the 4% cess. “Deductions needed” means deductions beyond the ₹50,000 standard deduction.

What the numbers tell you

Section 123, health insurance and professional tax together add up to ₹1,77,500. Even with a sizeable rent bill on top, that fell short of break-even at every income level we tested. Adding every common deduction at once (₹1.5 lakh under section 123, ₹50,000 of NPS, ₹75,000 of health insurance for yourself and senior-citizen parents, ₹2 lakh of home loan interest and professional tax) comes to ₹4,77,500. That is still well below the ₹8 lakh needed above ₹24 lakh of taxable income.

The old regime can still win when HRA is large: high rent in one of the eight cities on a high basic salary, combined with full use of the other deductions. It can also win when someone claims both HRA and home loan interest, for example a person who rents in one city and pays off a home in another.

How to choose and switch

1. Tell your employer at the start of the year. Employers ask which regime you want so they can deduct the right TDS (tax deducted at source) each month. If you don’t say, they deduct under the new regime; the CBDT took this position in Circular 4/2023 under the old Act.
2. Make the final choice in your return. If you have no business income, section 202(4) lets you opt for the old regime each year, along with a return filed by the due date. That date is 31 July for people filing ITR-1 or ITR-2. The return settles any difference.
3. Business income changes this. If you also run a business or profession, opting out of the new regime carries forward to later years, and you can switch back only once.

Before you declare a regime, put your CTC, rent and deductions into the in-hand salary calculator. It shows both regimes side by side. Your result may differ a little from the examples above, depending on the PF and professional tax settings you choose.

Frequently asked questions

Is a salary of ₹12.75 lakh really tax-free in the new regime?

For a resident with only salary income, yes. ₹12.75 lakh minus the ₹75,000 standard deduction is ₹12 lakh of taxable income, and the section 156 rebate cancels the tax on it. Just above that, marginal relief applies. At ₹12.1 lakh of taxable income, slab tax is ₹61,500, but you pay only ₹10,000 (the excess over ₹12 lakh) plus cess, or ₹10,400.

Can I claim HRA in the new regime?

No. The HRA exemption is one of the items section 202 removes from the new regime. The expanded list of eight 50% cities only helps people who choose the old regime.

I told my employer “new regime”. Can I still file under the old one?

Yes, if you have no business income and you file your return by the due date. Your declaration to the employer only decides monthly TDS. Keep proof of your deductions, such as rent and premium receipts.

Can I cut tax at all in the new regime?

A little. Apart from the ₹75,000 standard deduction, your employer’s NPS contribution is deductible up to 14% of salary.

This explainer is general information, not tax or financial advice. Please confirm your own case with a chartered accountant (CA).