Old vs new tax regime FY 2026-27: which is better?

The new tax regime is the default for FY 2026-27 and suits taxpayers with few deductions, offering lower slab rates and a rebate that makes income up to Rs.12 lakh tax-free for residents. The old regime can still win where deductions like 80C, HRA and home-loan interest are large. The choice depends on your deduction profile.

The core trade-off

The new regime (Section 115BAC) gives lower slab rates and a larger Section 87A rebate but disallows most deductions and exemptions. The old regime has higher slab rates but allows 80C, 80D, HRA, LTA, home-loan interest and others. So the decision is simply: do your deductions save more tax than the new regime's lower rates?

FY 2026-27 new-regime slabs

Residents with taxable income up to Rs.12,00,000 pay nil tax after the 87A rebate (Rs.12,75,000 for salaried after the Rs.75,000 standard deduction). Verify the slabs against the Finance Act 2026.

A break-even view

As a rule of thumb, the old regime starts to win only when total deductions are large relative to income. Use the Income Tax Calculator to compare both for your exact figures — enter income and deductions and read the two outcomes side by side. For most salaried taxpayers without a home loan, the new regime is now lower.

Practical points

• The new regime is the default; opt for the old regime if beneficial (salaried may switch yearly; business income has restrictions via Form 10-IEA).
• Standard deduction is Rs.75,000 (new) and Rs.50,000 (old) for salaried.
• Employer NPS under 80CCD(2) is allowed even in the new regime.
• Decide before paying advance tax, as it affects instalments.

Worked example: salary of Rs.18 lakh

Take a salaried resident with a gross salary of Rs.18,00,000 for FY 2026-27, claiming HRA exemption of Rs.2,00,000, home-loan interest of Rs.2,00,000 under Section 24(b), Rs.1,50,000 under 80C and Rs.25,000 under 80D in the old regime.

Even with Rs.5,75,000 of deductions, the new regime wins by Rs.20,800. This is the pattern we see repeatedly in practice after the Finance Act 2025 slab reset: the deduction bar the old regime must clear is now very high — for most salary levels, roughly Rs.6.5-8 lakh of combined deductions are needed before the old regime overtakes.

Who should still run the old-regime comparison

• High HRA claimants in metro cities — rent of Rs.40,000+ per month with a correspondingly structured salary can produce HRA exemptions of Rs.3-4 lakh alone.
• Self-occupied + let-out property owners — Section 24(b) interest on a let-out property is deductible against rental income in both regimes, but the Rs.2 lakh set-off of house-property loss against salary works only in the old regime.
• Taxpayers with legacy commitments — insurance premiums, children's tuition, and home-loan principal already being paid mean the 80C basket fills without fresh cash outflow.
• NPS-heavy savers — note that employer NPS contribution under Section 80CCD(2) is deductible in the new regime too (up to 14% of basic salary), so it is not a reason to stay in the old regime.

Switching rules: salaried vs business income

A salaried taxpayer (no business income) can choose the regime every year at the time of filing the return — the choice made for TDS with the employer is not binding at filing. A taxpayer with business or professional income must opt out of the default new regime by filing Form 10-IEA on or before the due date, and effectively gets one switch back — once they re-enter the new regime, the old regime is closed to them permanently.

Under the Income-tax Act 2025 (in force from 1 April 2026) the new-regime provision formerly in Section 115BAC is renumbered as Section 202, and familiar deduction sections are renumbered (80C is now Section 123, 80D is Section 124). Rates and thresholds carry over unchanged.

Employer TDS: declaring your regime

Employers must ask each employee for their intended regime at the start of the year and deduct TDS on salary accordingly (CBDT Circular No. 04/2023 established this mechanism when the new regime became the default). If the employee makes no declaration, the employer must deduct under the new regime. A mismatch between the regime used for TDS and the regime chosen at filing is fine — it settles as refund or self-assessment tax — but large refunds lock up cash flow, so align the declaration early.

Common mistakes we see in practice

• Comparing regimes on last year's deductions instead of a realistic current-year projection.
• Forgetting that the Section 87A rebate in the new regime (income up to Rs.12,00,000 tax-free; Rs.12,75,000 for salaried after standard deduction) does not apply against special-rate income such as LTCG under Section 112A.
• Business-income taxpayers missing the Form 10-IEA due date and getting locked into the default regime for the year.
• Ignoring marginal relief just above Rs.12 lakh — a taxpayer at Rs.12,10,000 pays only the amount by which income exceeds Rs.12,00,000, not the full slab tax.

Run both computations on the NumberIQ income-tax calculator before deciding, and verify current slabs at incometax.gov.in.

Break-even deduction table by salary level

As a quick screening rule, the old regime only becomes competitive when total deductions (excluding standard deduction) cross roughly these levels:

These are screening thresholds, not precise break-evens — surcharge bands (10% above Rs.50 lakh, 15% above Rs.1 crore, capped at 25% in the new regime versus 37% in the old for the highest band) shift the arithmetic at senior-executive salary levels, and the lower surcharge cap is itself a material new-regime advantage above Rs.5 crore. Always run the full computation for incomes in surcharge territory.

Also verify how employer-provided perquisites behave: most exemptions vanish in the new regime, but employer NPS (80CCD(2)), gratuity, leave encashment on retirement (up to Rs.25 lakh), and employer EPF contributions within limits stay tax-free in both regimes — meaning a well-structured CTC narrows the gap less than employees expect.