Old vs New Tax Regime
FY2026-27: Which Saves More?

Every salaried person in India must choose between two income tax regimes each financial year. The new regime (introduced in 2020, restructured in 2023, and revised in 2025, continuing for FY2026-27) offers lower slab rates with no deductions. The old regime keeps higher slab rates but preserves deductions like 80C, HRA, and home loan interest. This article lays out the actual slabs, compares them with real income examples, and explains when each makes more sense.

The Tax Slabs for FY2026-27

These slabs were set by the Finance Act 2025 and continued unchanged in Budget 2026, so they apply for FY2026-27.

Following the Finance Act 2025 (Union Budget 2025), the new regime was further revised. The key change was expanding the nil-tax band and extending the Section 87A rebate threshold to ₹12 lakh of taxable income.

All rates above are base rates before 4% Health and Education Cess. Surcharge applies at higher income levels.

What the New Regime Rebate Means Practically

The Section 87A rebate under the new regime means that if your taxable income (after the ₹75,000 standard deduction) is ₹12 lakh or less, your income tax liability is zero. This effectively means a salaried person with a gross salary of up to ₹12.75 lakh and no other income pays no income tax under the new regime.

What the New Regime Does Not Allow

By choosing the new regime, you forego the following deductions and exemptions (among others):

• Section 80C — EPF employer contribution (above basic+DA threshold), ELSS, PPF, life insurance premiums, NSC, principal repayment of home loan, tuition fees, SCSS: up to ₹1.5 lakh
• Section 80D — Health insurance premiums (self and parents)
• HRA exemption — House Rent Allowance under Section 10(13A)
• Section 80CCD(1B) — Additional NPS contribution: up to ₹50,000
• Section 24(b) — Home loan interest: up to ₹2 lakh
• Leave Travel Allowance (LTA)
• Section 80E — Education loan interest
• Section 80TTA / 80TTB — Savings interest deduction

The new regime does retain a few exemptions: gratuity (under limits), VRS compensation, PF on retirement, leave encashment on retirement, and employer's NPS contribution under 80CCD(2).

Side-by-Side Tax Comparison — Worked Examples

All examples below assume a salaried employee with no business income. Values are for illustration; your actual computation will differ based on your HRA city classification, exact deduction amounts, and other income.

All tax values include 4% cess. HRA assumes Hyderabad (non-metro classification — 40% of basic for HRA purpose). Old regime values assume deductions as shown. Actual computation requires precise inputs. Use the calculator below for your specific situation.

Impact on Mutual Fund and ELSS Investments

This is where the regime choice intersects with investment decisions in a practical way.

Under the old regime, investing up to ₹1.5 lakh per year in ELSS (Equity Linked Savings Scheme) mutual funds qualifies for a deduction under Section 80C. At a 30% marginal slab, this translates to a tax saving of up to ₹46,800 (including 4% cess) — effectively reducing the net cost of the investment.

Under the new regime, this 80C deduction is not available. The ELSS investment can still be made, but the tax saving motive disappears. The decision to invest in ELSS then becomes purely about the potential long-term equity return, not the upfront tax benefit.

NPS Under the New Regime

One significant deduction that partially survives in the new regime is the employer's contribution to NPS under Section 80CCD(2). This deduction — available up to 10% of basic + DA for private sector employees — is allowed in the new regime and can meaningfully reduce taxable income for those whose employers offer this benefit. Employees with high basic salaries who use employer NPS contribution fully should factor this in when comparing regimes.

Switching Between Regimes

Salaried employees with only salary income can switch between old and new regimes every year when filing their ITR (Income Tax Return). However, the decision needs to be made carefully:

• If you switch to the new regime mid-year, your TDS (Tax Deducted at Source) for the year may have been computed on the old regime — the adjustment happens at filing time.
• Inform your employer early in the financial year (April) of your regime choice to avoid excess or insufficient TDS deduction across the year.
• Those with business income face a stricter rule — switching from new to old is permitted only once.

Frequently Asked Questions

Is the new regime the default for FY2026-27?

Yes. Since FY2023-24, the new tax regime is the default — if you do not make an active choice with your employer, TDS is computed under the new regime. To use the old regime, you must opt into it explicitly with your employer at the start of the financial year.

Does the ₹12 lakh rebate apply to all types of income?

The Section 87A rebate applies to total income including salary, interest, and rental income. However, special rate incomes — such as short-term capital gains at 20% and long-term capital gains at 12.5% — are not eligible for the 87A rebate. If your total income is ₹12 lakh but includes ₹1 lakh of STCG, the rebate only applies to the non-STCG portion.

What about surcharge?

Surcharge applies at 10% for income above ₹50 lakh and 15% for income above ₹1 crore (under the new regime; the old regime has higher surcharge rates at upper slabs). The new regime capped surcharge at 25% even for income above ₹5 crore — which made it more attractive at very high incomes. Surcharge significantly changes the effective tax rate; consult a Chartered Accountant for incomes in these ranges.