New Tax Regime vs Old Tax Regime FY 2026-27: Which Should You Choose?
Budget 2025 revised the new tax regime slabs significantly. Zero tax up to ₹12 lakh. Here's a complete comparison to help you choose the right regime for FY 2026-27.
In this article
1. What Changed in Budget 2025 for FY 2026-27?
The Union Budget 2025, presented by Finance Minister Nirmala Sitharaman in February 2025, introduced sweeping changes to the new tax regime. The most headline-grabbing announcement was simple: no income tax on earnings up to ₹12 lakh (gross income after standard deduction for salaried individuals, it is effectively ₹12.75 lakh). This was made possible by raising the Section 87A rebate from ₹25,000 to ₹60,000.
The new tax regime has been the default regime since FY 2023-24. If you do not explicitly opt for the old tax regime before filing your return (or before the due date), the Income Tax Department automatically applies the new regime. This default status was retained in Budget 2025 and applies for FY 2026-27 as well.
The revised slabs for FY 2026-27 in the new regime are dramatically more taxpayer-friendly than the earlier version. The government's stated goal is simplification: fewer deductions to track, no investment decisions forced by tax saving, and a cleaner compliance experience for the average taxpayer.
However, for those with significant deductions such as home loan interest, HRA, or heavy 80C investments, the old regime can still result in lower tax outgo. Budget 2025 did not change the old regime at all, keeping its slabs and deduction rules intact.
2. New Tax Regime Slabs FY 2026-27
The revised new regime slabs apply to all individuals, HUFs, and most taxpayers (excluding certain categories like cooperative societies and firms). Here are the exact slabs effective from 1 April 2025:
| Income Slab | Tax Rate | Tax on Slab (Max) |
|---|---|---|
| Up to ₹4,00,000 | Nil | ₹0 |
| ₹4,00,001 to ₹8,00,000 | 5% | ₹20,000 |
| ₹8,00,001 to ₹12,00,000 | 10% | ₹40,000 |
| ₹12,00,001 to ₹16,00,000 | 15% | ₹60,000 |
| ₹16,00,001 to ₹20,00,000 | 20% | ₹80,000 |
| ₹20,00,001 to ₹24,00,000 | 25% | ₹1,00,000 |
| Above ₹24,00,000 | 30% | As applicable |
Section 87A Rebate: For net taxable income up to ₹12,00,000, a full rebate of up to ₹60,000 is available, making effective tax zero. For salaried employees who claim the ₹75,000 standard deduction, gross salary up to ₹12,75,000 results in zero tax under the new regime.
Surcharge rates remain unchanged: 10% for income between ₹50L-₹1Cr, 15% for ₹1Cr-₹2Cr, 25% for ₹2Cr-₹5Cr, and 37% for above ₹5Cr (capped at 25% in the new regime for certain categories). Health and Education Cess of 4% applies on total income tax.
3. Old Tax Regime Slabs (Unchanged for FY 2026-27)
The old regime slabs have not changed since FY 2017-18. The basic exemption limit remains at ₹2.5 lakh for individuals below 60 years. Senior citizens (60-79 years) get ₹3 lakh exemption, and super seniors (80+) get ₹5 lakh exemption.
| Income Slab | Tax Rate | Tax on Slab (Max) |
|---|---|---|
| Up to ₹2,50,000 | Nil | ₹0 |
| ₹2,50,001 to ₹5,00,000 | 5% | ₹12,500 |
| ₹5,00,001 to ₹10,00,000 | 20% | ₹1,00,000 |
| Above ₹10,00,000 | 30% | As applicable |
Under the old regime, the standard deduction for salaried employees is ₹50,000. The Section 87A rebate for the old regime is ₹12,500 for net taxable income up to ₹5,00,000. Cess of 4% applies here too.
4. Deductions You Lose in the New Tax Regime
The new regime's lower rates come with a significant trade-off: most popular deductions and exemptions are not available. Here are the key ones you forfeit when choosing the new regime:
- Section 80C (up to ₹1,50,000): No deduction for PPF, ELSS, life insurance premiums, EPF employee contribution (self-employed), NSC, five-year FD, tuition fees, home loan principal repayment, etc.
- Section 80D (Health Insurance): Premiums paid for self, spouse, children, and parents — up to ₹25,000 (₹50,000 for senior citizens) — are not deductible.
- House Rent Allowance (HRA): The HRA exemption under Section 10(13A) is not available. Rent payments provide zero tax relief.
- Section 24(b) — Home Loan Interest: The ₹2,00,000 deduction on interest paid on a self-occupied home loan is not available. For let-out property, there are further restrictions under the new regime.
- Leave Travel Allowance (LTA): Exemption for actual travel costs twice in a 4-year block is not available.
- Section 80TTA / 80TTB: Deduction on savings account interest and FD interest for senior citizens is not available.
- Section 80G (Donations): Donations to eligible institutions are not deductible in the new regime.
- Chapter VIA deductions (80E, 80EE, 80EEA, etc.): Education loan interest, first-time home buyer extra deductions — all gone in the new regime.
5. Deductions Still Available in the New Regime
The new regime is not completely deduction-free. These key benefits are still available:
- Standard Deduction ₹75,000: Salaried employees and pensioners get a flat ₹75,000 deduction from gross salary (enhanced from ₹50,000 in Budget 2023). This makes gross salary up to ₹12,75,000 tax-free under the new regime in FY 2026-27.
- Section 80CCD(2) — Employer's NPS Contribution: Employer's contribution to the National Pension System (NPS) up to 14% of basic salary (10% for private sector employees until FY 2024-25, now 14%) remains deductible. This is a significant benefit for those whose employer contributes to NPS.
- Gratuity Exemption: Gratuity received from an employer is still exempt up to the statutory limit.
- VRS Compensation: Voluntary Retirement Scheme compensation up to ₹5 lakh is exempt.
- Perquisites not considered perquisites: Certain allowances like transport allowance for specially abled persons, conveyance allowance, etc., remain exempt.
- Section 10(10D) — Life Insurance Maturity: Maturity proceeds from life insurance policies (subject to conditions) remain exempt.
- Agricultural Income: Still exempt from income tax.
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The right regime depends on the total value of deductions you can legitimately claim. Use this framework:
| Scenario | Better Regime |
|---|---|
| Income below ₹12 lakh (salaried: ₹12.75L gross), no major deductions | New Regime |
| Income ₹15-20L, total deductions below ₹3.75L | New Regime |
| Income ₹15-20L, HRA + 80C + home loan interest totalling ₹4.5L+ | Old Regime |
| Income above ₹30L, deductions above ₹5.5L | Old Regime |
| Self-employed / business owners with no major deductions | New Regime |
| First job / young employee, no home loan or heavy investments | New Regime |
Quick rule of thumb: Add up all your eligible deductions under the old regime (80C + 80D + HRA + 24(b) + standard deduction ₹50K). If this total exceeds the break-even threshold at your income level, stick with the old regime. Otherwise, the new regime wins.
7. Worked Examples: ₹10L, ₹18L, and ₹30L Income
Example A: Salaried Employee with ₹10 Lakh Gross Salary
Assumptions: No home loan. Pays ₹10,000/month rent. 80C investments ₹1.5L. 80D premium ₹20,000.
| Particulars | New Regime | Old Regime |
|---|---|---|
| Gross Salary | ₹10,00,000 | ₹10,00,000 |
| Standard Deduction | (₹75,000) | (₹50,000) |
| 80C deduction | Nil | (₹1,50,000) |
| HRA exemption | Nil | (₹60,000) |
| 80D premium | Nil | (₹20,000) |
| Net Taxable Income | ₹9,25,000 | ₹7,20,000 |
| Tax (before cess) | ₹45,000+₹12,500 = ₹57,500 | ₹12,500+₹44,000 = ₹56,500 |
| Less: 87A Rebate | Nil (income >12L) | Nil (income >5L) |
| 4% Cess | ₹2,300 | ₹2,260 |
| Total Tax Payable | ₹59,800 | ₹58,760 |
Verdict: At ₹10L income with moderate deductions, the old regime saves about ₹1,040. The difference is marginal. If deductions are lower, the new regime wins.
Example B: Salaried Employee with ₹18 Lakh Gross Salary
Assumptions: Home loan interest ₹2L, HRA ₹80K exempt, 80C ₹1.5L, 80D ₹25K.
| Particulars | New Regime | Old Regime |
|---|---|---|
| Gross Salary | ₹18,00,000 | ₹18,00,000 |
| Total Deductions | (₹75,000) | (₹5,05,000) |
| Net Taxable Income | ₹17,25,000 | ₹12,95,000 |
| Income Tax (before cess) | ₹2,62,500 | ₹2,38,500 |
| 4% Cess | ₹10,500 | ₹9,540 |
| Total Tax Payable | ₹2,73,000 | ₹2,48,040 |
Verdict: Old regime saves ₹24,960 at ₹18L income when deductions total ₹5L+. The old regime wins clearly here.
Example C: Salaried Employee with ₹30 Lakh Gross Salary
Assumptions: Home loan interest ₹2L, 80C ₹1.5L, 80D ₹50K (senior parents), no HRA (owns home).
| Particulars | New Regime | Old Regime |
|---|---|---|
| Gross Salary | ₹30,00,000 | ₹30,00,000 |
| Total Deductions | (₹75,000) | (₹5,50,000) |
| Net Taxable Income | ₹29,25,000 | ₹24,50,000 |
| Income Tax (before cess) | ₹6,03,750 | ₹6,00,000 |
| 4% Cess | ₹24,150 | ₹24,000 |
| Total Tax Payable | ₹6,27,900 | ₹6,24,000 |
Verdict: At ₹30L income, the old regime saves only ₹3,900 even with deductions of ₹5.5L. At higher incomes, the new regime's lower marginal rates start narrowing the gap significantly. If deductions are below ₹5.5L, the new regime is clearly better at ₹30L.
8. Special Rules for Business Owners and Self-Employed
If you have income from business or profession (not just salary), the regime choice comes with a significant restriction: you cannot switch between regimes freely every year.
Under Section 115BAC, a person with business income who opts for the new regime can opt out only once in a lifetime. Once you switch back to the old regime, you cannot return to the new regime in subsequent years. Salaried individuals (with no business income) have more flexibility and can switch between regimes each year at the time of filing their return.
For business owners and self-employed professionals, the deductions available under the old regime extend beyond personal investments. Business expenses (Section 37), depreciation on assets, cost of goods sold, rent, salaries paid to staff, professional fees — all these reduce taxable income. These are different from the personal deductions (80C, HRA etc.) lost in the new regime, and they are available under both regimes as they are income computation deductions, not Chapter VIA personal deductions.
Therefore, business owners should focus the old vs new comparison on personal deductions only (80C, 80D, home loan interest on personal property), not on business deductions, which are available regardless.
LekhaBooks helps self-employed professionals and small business owners maintain clean books, track deductible expenses, and generate the P&L statement needed for accurate ITR filing under either regime.