Old vs New Tax Regime in India: Comparison for FY 2026-27

Every year, salaried employees, business owners, and freelancers across India face an important tax decision: old vs new tax regime, which one should you choose? The difference between the old and new tax regimes goes beyond simply comparing tax rates. It also depends on how your income, investments, deductions, and exemptions affect your overall tax liability.

India currently operates two parallel income tax systems, allowing taxpayers to choose between the old tax regime and the new tax regime. The old tax regime provides a wide range of deductions and exemptions that reduce your taxable income. On the other hand, the new tax regime offers lower income tax slab rates but removes most of the deductions and exemptions.

For FY 2026-27 (AY 2027-28), the new tax regime remains the default selection. Unless taxpayers specifically opt for the old regime when filing their Income Tax Return (ITR), the Income Tax Department will automatically assess their tax under the new regime.

In this blog, we explain the difference between the old and new tax regimes, their benefits, tax slabs, deductions, and how to choose the right option based on your income and financial planning.

What is the Old Tax Regime in India?

The old tax regime is the traditional income tax system that allows taxpayers to claim multiple deductions and exemptions to reduce taxable income. Under this system, taxpayers calculate taxable income after subtracting eligible deductions and exemptions from gross income. Higher investments and eligible expenses can further reduce taxable income and overall tax liability.

Key Features of the Old Tax Regime

• Higher slab rates compared to the new regime, with a top rate of 30% applied on income above ₹10 lakh.
• Allows deductions under Section 80C, 80D, House Rent Allowance (HRA), Leave Travel Allowance (LTA), home loan interest, and more.
• Basic exemption limit of ₹2.5 lakh (₹3 lakh for senior citizens and ₹5 lakh for super senior citizens above 80 years).
• Tax-free income up to ₹5 lakh due to the Section 87A rebate of ₹12,500
• Standard deduction of ₹50,000 for salaried individuals and pensioners.
• Requires investment proof and documentation to claim deductions at the time of filing.

Income Tax Slabs Under the Old Regime (FY 2026-27)

The old tax regime slabs have remained unchanged for several years. The following rates apply to individuals under the age of 60 and Non-Resident Indians (NRIs):

Income Slab	Tax Rate
Up to ₹2.5 lakh	Nil
₹2.5 lakh to ₹5 lakh	5%
₹5 lakh to ₹10 lakh	20%
Above ₹10 lakh	30%

Senior citizens aged 60 to 80 years get a higher basic exemption of ₹3 lakh. Super senior citizens above 80 years get an exemption of up to ₹5 lakh. These age-based exemptions are available only in the old regime.

What is the New Tax Regime in FY 2026-27?

The government introduced the new tax regime under Section 115BAC of the Income-tax Act, 1961, and made it effective from 1 April, 2020. This regime applies lower tax slab rates but removes most deductions and exemptions that taxpayers could claim under the old tax regime.

Since FY 2023-24, the government has made the new tax regime the default tax system for individual taxpayers and Hindu Undivided Families (HUFs). However, taxpayers can still choose the old tax regime while filing their income tax return if it offers better tax benefits.

For FY 2026-27 (AY 2027-28), the government introduced several changes to make the new regime more attractive. The basic exemption limit increased to ₹4 lakh, and the Section 87A tax rebate increased to ₹60,000. This means individuals with taxable income up to ₹12 lakh need not pay income tax under the new tax regime.

Salaried individuals also receive a standard deduction of ₹75,000. Because of this deduction, salaried taxpayers can have salary income up to ₹12.75 lakh without paying income tax under the new regime.  

Income Tax Slabs Under the New Tax Regime (FY 2026-27 / AY 2027-28)

Budget 2026 revised the new regime slab structure significantly. The following rates apply for FY 2026-27:

Income Slab	Tax Rate
Up to ₹4 lakh	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%

Note: The Section 87A rebate of ₹60,000 applies to resident individuals with taxable income up to ₹12 lakh. Once your income exceeds ₹12 lakh, the rebate does not apply, and you pay tax on the full income as per the slabs above.

Old vs New Tax Regime: Key Differences at a Glance

The old and new tax regimes differ not only in tax slab rates but also in deductions, exemptions, surcharge structure, and compliance requirements. The table below compares the major features for FY 2026-27:

Feature	Old Tax Regime	New Tax Regime
Basic Exemption Limit	₹2.5 lakh	₹4 lakh
Tax-Free Income Limit (with rebate)	₹5 lakh	₹12 lakh
Standard Deduction	₹50,000 for salaried individuals and pensioners	₹75,000 for salaried individuals and pensioners
Section 87A Rebate	Up to ₹12,500	Up to ₹60,000
Tax Deductions (80C, HRA, 80D, etc.)	Allowed	Most deductions not allowed
Employer Contribution to NPS (80CCD(2))	Up to 10% of salary (14% for government employees)	Up to 14% of salary
Home Loan Interest (Self-Occupied Property)	Deduction up to ₹2 lakh under Section 24(b)	Not allowed
Maximum Surcharge on High Income	Up to 37%	Capped at 25%
Default Tax Regime	No	Yes (since FY 2023-24)
Compliance and Documentation	Higher due to multiple deduction claims	Lower because most deductions are removed

Deductions Available Under the Old Tax Regime

The old tax regime allows an extensive set of deductions and exemptions that can substantially reduce your taxable income. Here are the most important ones:

a. Section 80C: Up to ₹1.5 Lakh

Section 80C is the most widely used deduction. You can claim up to ₹1.5 lakh in a financial year for qualifying investments and expenses. These include:

• Public Provident Fund (PPF) contributions
• Equity Linked Savings Schemes (ELSS) mutual funds
• Life insurance premium payments
• Employee Provident Fund (EPF) employee contributions
• 5-year tax-saving fixed deposits
• Tuition fees paid for two children
• National Savings Certificates (NSC)

b. Section 80D: Health Insurance Premium

Under Section 80D, you can claim a deduction on health insurance premiums paid for yourself, your spouse, children, and parents. The limits are:

• Up to ₹25,000 per year for self and family (below 60 years)
• Up to ₹50,000 per year if the insured is a senior citizen
• An additional ₹25,000 (or ₹50,000 for senior citizens) for parents’ health insurance

c. HRA: House Rent Allowance

Salaried employees who live in rented accommodation can claim HRA exemption under the old tax regime. The HRA exemption equals the lowest of the following three amounts: 

• Actual HRA received from the employer
• 50% of basic salary for metro cities (40% for non-metro cities)
• Actual rent paid minus 10% of basic salary

This can be a significant deduction for employees in cities like Mumbai, Delhi, or Bengaluru.

d. Home Loan Interest Under Section 24(b)

If you repay a home loan on a self-occupied property, you can deduct up to ₹2 lakh per year on the interest paid under Section 24(b). For a let-out property, there is no upper limit on interest deduction, but the overall set-off loss from house property is capped at ₹2 lakh. This deduction is not available in the new tax regime for self-occupied property.

e. NPS Deductions Under Section 80CCD

Section 80CCD(1B) allows an additional deduction of ₹50,000 for employee contributions to the National Pension System, over and above the ₹1.5 lakh limit under 80C. Under Section 80CCD(2), employer NPS contributions are deductible up to 10% of salary for private employees and 14% for government employees. The 80CCD(2) deduction is available in both regimes.

To explore more practical strategies for reducing your tax liability when earning a higher salary, read our detailed guide: How to Save Tax on Salary Over ₹10 Lakhs in India.

What Deductions are Available in the New Tax Regime?

The new tax regime removes most of the deductions available under the old regime. However, it does allow a few specific ones:

• Standard deduction of ₹75,000 for salaried individuals and pensioners.
• Employer contribution to NPS under Section 80CCD(2), up to 14% of basic salary.
• Home loan interest on let-out property under Section 24(b) without any upper limit.
• Deduction on family pension income up to ₹25,000.
• Transport allowance for specially-abled persons.
• Daily allowance for official duties.
• Contributions to Agniveer Corpus Fund under Section 80CCH.

Deductions Not Available in the New Tax Regime

• Section 80C investments
• House Rent Allowance (HRA)
• Leave Travel Allowance (LTA)
• Home loan interest on self-occupied property
• Section 80D health insurance premium
• Section 80E education loan interest
• Donations under Section 80G 

Tax Rebate and Standard Deduction: Old vs New Regime Comparison

Understanding the standard deduction and rebate provisions helps taxpayers estimate the amount they must pay under each regime. Budget 2026 increased benefits under the new regime, especially for salaried individuals.

Standard Deduction

Both regimes offer a standard deduction for salaried individuals and pensioners. The amounts differ between the two:

• Old Regime: ₹50,000 standard deduction
• New Regime: ₹75,000 standard deduction (increased in Budget 2026)

The new regime allows salaried taxpayers to automatically reduce taxable income by ₹75,000 before applying tax slabs. This higher deduction lowers taxable income without requiring any investment or exemption claim. 

Section 87A Tax Rebate

Section 87A offers a full rebate on income tax if your taxable income stays within a defined limit. Budget 2026 made a major enhancement specifically for the new regime:

• Old Regime: Rebate of up to ₹12,500 for taxable income up to ₹5 lakh. This makes income effectively tax-free up to ₹5 lakh.
• New Regime: Rebate of up to ₹60,000 for taxable income up to ₹12 lakh. This makes income effectively tax-free up to ₹12 lakh.

For salaried individuals under the new regime, the ₹75,000 standard deduction further increases the zero-tax threshold. As a result, salary income up to ₹12.75 lakh per year can become tax-free after applying the deduction and the Section 87A rebate.

Old vs New Tax Regime: Tax Calculation Example Under Both Regimes

A real tax calculation shows how deductions and slab rates affect the final tax liability under both the old and the new tax regimes.

Example:

Consider a salaried individual named Gautam with an annual income of ₹12 lakh. The taxpayer also claims common deductions such as Section 80C investments, health insurance, and HRA exemption. The calculation below compares how the same income is taxed under both regimes:

Tax Calculation for Gautam Under the Old Tax Regime

Under the old regime, taxpayers could reduce taxable income by claiming deductions and exemptions. These deductions significantly lower the final tax liability when investments and eligible expenses are high.

Component	Amount
Annual Salary	₹12,00,000
Standard Deduction	₹50,000
Section 80C Investments	₹1,50,000
Section 80D Health Insurance	₹25,000
HRA Exemption	₹1,00,000
Total Deductions	₹3,25,000

Taxable Income Calculation

₹12,00,000 – ₹3,25,000 = ₹8,75,000 taxable income

Under the old regime tax slabs:

• ₹2.5 lakh: No tax
• ₹2.5–₹5 lakh: 5%
• ₹5–₹10 lakh: 20%

The taxpayer pays tax only on the applicable portions of income. After applying slab rates and adding the 4% health and education cess, the final tax liability is calculated accordingly.

Tax Calculation for Gautam Under the New Tax Regime

The new tax regime removes most deductions but applies lower tax slab rates. Taxpayers usually claim only the standard deduction available for salaried individuals.

Component	Amount
Annual Salary	₹12,00,000
Standard Deduction	₹75,000
Total Deductions	₹75,000

Taxable Income Calculation

₹12,00,000 – ₹75,000 = ₹11,25,000 taxable income

Under the FY 2026–27 new regime slabs:

• Up to ₹4 lakh: No tax
• ₹4–₹8 lakh: 5%
• ₹8–₹12 lakh: 10%

After applying these slab rates, the calculated tax amount becomes eligible for the Section 87A rebate if the taxable income remains within the prescribed limit.

Applying the Section 87A Rebate

The new tax regime provides a rebate of up to ₹60,000 for taxable income up to ₹12 lakh. In this example, the taxable income equals ₹11.25 lakh, which qualifies for the rebate.

As a result, the rebate offsets the calculated tax and reduces the final tax liability to zero.

This example clearly shows how deductions benefit taxpayers under the old regime, while the higher rebate threshold favors many middle-income taxpayers under the new regime. Therefore, taxpayers should always compare tax liability under both regimes before selecting one while filing their income tax return.

Which Tax Regime is Better for Salaried Employees?

There is no single answer that fits everyone. The right choice between the old and new tax regimes depends on your income level, the total value of deductions you can claim, and your financial goals.

Choose the Old Tax Regime if You:

• Claim substantial deductions under 80C, 80D, and HRA that exceed ₹3.75 lakh at the ₹15 lakh income level.
• Pay home loan EMIs on a self-occupied property and claim ₹2 lakh interest deduction.
• Receive high HRA and live in a metro city with significant rent.
• Have existing tax-saving investments that are already in place.
• Have income above ₹25 lakh and total deductions exceeding ₹8 lakh.

Choose the New Tax Regime if You:

• Have few or no deductions to claim and prefer an easy filing process.
• Are you a young professional just starting without existing investments or home loans?
• Have income up to ₹12.75 lakh (salaried), where you pay zero tax.
• Are you a freelancer or startup founder who does not claim 80C or HRA? Note that freelancers with business income under presumptive taxation schemes (Sections 44AD or 44ADA) have restricted switching options, similar to other business income taxpayers.
• Want a higher monthly take-home salary without mandatory investment commitments.

How to Switch Between Old and New Tax Regimes?

The process to switch between tax regimes depends on your income type. Salaried individuals receive more flexibility, while business taxpayers must follow stricter rules.

For Salaried Individuals

Salaried employees and pensioners can switch between the old and new tax regimes every financial year.

• Declare your preferred tax regime to your employer at the beginning of the financial year.
• Your employer will calculate TDS based on the tax regime you choose.
• If you do not declare a regime, the employer will apply the new tax regime by default.
• You can still change the tax regime when you file the Income Tax Return (ITR) before the due date.

For Business Owners and Professionals with Business Income

Taxpayers who earn income from a business or profession must follow stricter switching rules.

• Firms cannot switch freely every year after leaving the new tax regime and choosing the old tax regime.
• Businesses can return to the new tax regime only once in a lifetime.
• After switching back to the new regime, businesses cannot choose the old regime again.
• Companies must submit Form 10-IEA before the ITR due date to exercise this option.

Steps to Calculate Your Income Tax Under Both Tax Regimes

You should calculate your tax under both regimes before selecting one. This comparison helps you identify the option that reduces your final tax liability.

Follow these steps to calculate your income tax correctly:

1. Calculate your gross total income. Include salary, rental income, business income, capital gains, and other sources.
2. Deduct eligible exemptions. Under the old regime, subtract HRA, LTA, and any other exempt allowances. Under the new regime, these do not apply.
3. Apply eligible deductions. Under the old regime, deduct 80C, 80D, home loan interest, NPS, and other Chapter VIA deductions. Under the new regime, apply only the permitted deductions.
4. Compute taxable income. This is what remains after all exemptions and deductions.
5. Apply the applicable slab rates. Use the correct slab table for your chosen regime to calculate tax on each income portion.
6. Check Section 87A rebate eligibility. If taxable income is up to ₹5 lakh (old) or ₹12 lakh (new), the rebate reduces your tax to zero.
7. Add 4% Health and Education Cess. Apply cess on the final tax after the rebate.
8. Add surcharge if applicable. Surcharge applies if your income exceeds ₹50 lakh. Both regimes charge identical surcharge rates up to ₹5 crore (10% above ₹50 lakh, 15% above ₹1 crore, and 25% above ₹2 crore). Only above ₹5 crore does the difference arise: the old regime allows 37%, while the new regime caps the surcharge at 25%.

Tip: You can also estimate your tax instantly using RegisterKaro’s Online Income Tax Calculator.

Common Mistakes to Avoid When Choosing a Tax Regime

Many taxpayers make avoidable errors when deciding between the old and new tax regimes. Here are the mistakes to watch out for:

• Not calculating tax under both regimes: Always compute your total tax liability under both options before making a decision. Do not assume the new regime is better just because rates are lower.
• Forgetting to inform your employer: If you want the old regime for TDS purposes, inform your employer at the start of the financial year. Failure to do so means TDS gets deducted under the new regime.
• Business owners switching without planning: If you have business income, switching from new to old to new again is a one-time option. Make this decision carefully and preferably with a tax consultant.
• Assuming the new regime is always better: For high-income taxpayers with significant home loan interest, HRA, and 80C investments, the old regime may still result in lower tax.

Tax rules change every year, making it confusing to choose the right tax regime. Let our experts compare the old vs new tax regime for you, maximize savings, and handle ITR filing smoothly. Contact RegisterKaro today for personalized tax guidance and smart compliance.

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