Tax Regime Options under the Income-tax Act, 2025
The Income-tax Act, 2025 (effective from 1 April 2026) continues to allow taxpayers the choice between the New Tax Regime and the Old Tax Regime. The New Tax Regime offers lower rates but removes most popular deductions, whereas the Old Tax Regime preserves extensive investment and savings-related exemptions. This comprehensive guide helps you compare both and choose the optimal regime for your income profile.
Understanding the Two Tax Regimes
1. New Tax Regime (Default)
The default tax option which prioritizes lower tax rates and a simplified filing process.
- ✅ Lower tax rates at higher income slabs
- ✅ Enhanced rebate benefits (no tax up to ₹12 lakh)
- ❌ Most exemptions and standard deductions are ineligible
2. Old Tax Regime
The traditional tax structure designed to incentivize savings and investments.
- ✅ Claims for HRA, Home Loans, LIC, PPF, etc.
- ✅ Multiple exemption sections are available
- ❌ Higher tax rates applied on taxable income
Income Tax Slabs Under New Tax Regime (FY 2026-27)
The New Tax Regime is the default regime under the Income-tax Act, 2025. Slabs are structured as follows:
| Total Taxable Income | Tax Rate |
|---|---|
| Up to ₹4,00,000 | Nil |
| ₹4,00,001 to ₹8,00,000 | 5% |
| ₹8,00,001 to ₹12,00,000 | 10% |
| ₹12,00,001 to ₹16,00,000 | 15% |
| ₹16,00,001 to ₹20,00,000 | 20% |
| ₹20,00,001 to ₹24,00,000 | 25% |
| Above ₹24,00,000 | 30% |
Tax Rebate Under New Tax Regime (Section 156)
Taxpayers with a total taxable income not exceeding ₹12,00,000 are eligible for a full tax rebate, making their tax liability effectively zero. For salaried individuals, when standard deduction is added, there is no tax liability up to an annual income of approximately ₹12.75 Lakh.
Income Tax Slabs Under Old Tax Regime
For taxpayers opting to utilize deductions, the traditional tax slabs apply:
| Total Taxable Income | Tax Rate |
|---|---|
| Up to ₹2,50,000 | Nil |
| ₹2,50,001 to ₹5,00,000 | 5% |
| ₹5,00,001 to ₹10,00,000 | 20% |
| Above ₹10,00,000 | 30% |
Tax Rebate Under Old Tax Regime
Taxpayers under the Old Regime can claim a rebate if their taxable income does not exceed ₹5,00,000. The maximum rebate available is limited to ₹12,500.
Deductions Allowed vs Not Allowed (New Tax Regime)
While most deductions are barred, some specific provisions remain eligible under the New Tax Regime:
Allowed Deductions
- Standard Deduction for Salaried Employees & Pensioners
- Employer's Contribution to NPS
- Agniveer Corpus Fund Contribution
- Family Pension Deduction
- Transport Allowance (for specified disabled persons)
- Exemption on Gratuity, Leave Encashment, and VRS Compensation
Disallowed Deductions
- Section 80C (LIC, PPF, ELSS, Tax-Saving FD, etc.)
- Section 80D (Medical Insurance Premiums)
- Section 80E (Education Loan Interest)
- Section 80G (Donations)
- Section 80TTA (Savings Bank Interest)
- Exemptions for HRA and LTA
- Home Loan Interest for Self-Occupied Property (Section 24)
Major Deductions & Exemptions (Old Tax Regime)
Under the Old Regime, you can reduce taxable income significantly through these popular provisions:
Section 80C & 80CCD
Claim up to ₹1,50,000 annually under Section 80C (PPF, ELSS, LIC premium, EPF, housing loan principal repayment). Deduct an additional ₹50,000 for self-contributions to NPS under Section 80CCD(1B).
Section 80D (Medical Premium)
Deduct premiums paid for health insurance up to ₹25,000 for self/family, and up to ₹50,000 for senior citizen parents.
Section 24 (Home Loan Interest)
Deduct interest paid on housing loans up to ₹2,00,000 per year for self-occupied properties.
HRA & LTA Exemptions
Exemptions on House Rent Allowance (HRA) and Leave Travel Allowance (LTA) are fully available to salaried individuals to reduce taxable salary.
Quick Regime Comparison
| Particulars | New Tax Regime | Old Tax Regime |
|---|---|---|
| Default Regime | Yes | No |
| Tax Rates | Lower Slabs | Higher Slabs |
| Rebate Threshold | ₹12,00,000 (Taxable Income) | ₹5,00,000 (Taxable Income) |
| Standard Deduction | Available | Available |
| 80C & 80D Deductions | No | Yes |
| HRA & LTA Benefit | No | Yes |
| Documentation | Minimal | Higher (proofs required) |
| Best Suited For | People with low investments / high income | People claiming heavy tax deductions (> ₹3.5L) |
Which Tax Regime Should You Choose?
Evaluate your investments to choose the optimal regime:
- Opt for the New Tax Regime if: You prefer a straightforward calculation, do not have significant locking investments, or your total deductions are below ₹3,00,000.
- Opt for the Old Tax Regime if: You claim a high HRA exemption, pay interest on a home loan, and fully utilize Sections 80C and 80D (total deductions exceeding ₹3.5 Lakhs – ₹4 Lakhs).
Plan Your Taxes with Experts
Tax planning is highly personal. Let our team of Chartered Accountants calculate your tax outgo under both regimes and design the most efficient structure for you.
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Disclaimer:
The information provided in this article is intended for educational and general awareness purposes under the Income-tax Act, 2025. It does not constitute professional tax or legal advice. Readers are advised to consult a qualified Chartered Accountant or tax professional to calculate their individual liabilities. The authors and the firm accept no liability for decisions made based on this text.