1. New Tax Regime: The Default from April 2023
The new tax regime under Section 202 of ITA 2025 is the DEFAULT regime for all taxpayers from Tax Year 2023-24 onwards. If you do not actively choose the old regime, the new regime applies automatically. Salaried employees must notify their employer via Form 12BB at the start of each Tax Year if they want the old regime — silence means new regime. This default status makes understanding the new regime critical for every taxpayer.
2. New Regime Tax Slabs for Tax Year 2026-27
| Income Slab | Tax Rate |
|---|---|
| Up to Rs 4,00,000 | Nil |
| Rs 4,00,001 to Rs 8,00,000 | 5% |
| Rs 8,00,001 to Rs 12,00,000 | 10% |
| Rs 12,00,001 to Rs 16,00,000 | 15% |
| Rs 16,00,001 to Rs 20,00,000 | 20% |
| Rs 20,00,001 to Rs 24,00,000 | 25% |
| Above Rs 24,00,000 | 30% |
3. Section 157 Rebate: Zero Tax Up to Rs 12 Lakh
Section 157 rebate ensures that individuals with total income up to Rs 12 lakh pay ZERO income tax under the new regime. This was increased from Rs 7 lakh to Rs 12 lakh by Budget 2025. The rebate works as a full offset — total tax computed on income up to Rs 12L is rebated entirely. Example: income Rs 11 lakh → tax under new slabs = Rs 75,000 → rebate = Rs 75,000 → tax payable = Rs 0.
4. What Is Allowed in New Regime
Contrary to popular belief, the new regime does allow certain deductions and exemptions:
- Standard deduction: Rs 75,000 (for salaried employees and pensioners)
- Employer NPS contribution: Section 132 — up to 10% of Basic+DA, tax-free for employee
- Exempt allowances: transport allowance for physically disabled employees; conveyance for official work; daily per diem for outstation duty; uniform allowance (actually spent)
- Leave encashment at retirement: Schedule II exemption continues
- Gratuity: Schedule II exemption continues
- Life insurance death benefit: always exempt
- PPF interest and maturity: Schedule II continues
5. What Is NOT Allowed in New Regime
- Section 123 (80C) investments — ELSS, PPF contribution, LIC, home loan principal
- Section 125(1B) NPS extra Rs 50,000
- Section 126 (80D) health insurance premium deduction
- Section 57 home loan interest on self-occupied property Rs 2L
- HRA exemption (self-occupied/rented accommodation)
- LTA exemption
- Professional tax deduction
- House property loss set-off against salary
6. Old vs New Regime: When to Choose Old
The old regime is better when total deductions exceed the tax benefit from lower new regime slabs. The approximate break-even:
- Income below Rs 7L: new regime almost always better (zero tax vs minimal old regime tax)
- Income Rs 7L-Rs 15L: compute both — depends on deductions (HRA, home loan, 80C, 80D)
- Income above Rs 15L: old regime often better if you have: home loan (Rs 2L interest) + Section 123 investments (Rs 1.5L) + health insurance (Rs 25K) + employer NPS = total Rs 4L+ deductions
- Income above Rs 50L: new regime may be better even with full deductions, since lower slabs compensate
7. Switching Regime Year to Year
Salaried employees and pensioners can switch regimes every year — simply notify employer at the start of the year. The final choice is made at ITR filing. For business owners, the switch to old regime is irrevocable once opted out of new regime (for business income). This asymmetry means business owners must be more careful about the initial choice.
8. New Regime for Senior Citizens
Senior citizens (60+) do not get the higher basic exemption (Rs 3L or Rs 5L) under the new regime — the Rs 4L limit applies to all ages. However, the Section 157 rebate (zero tax up to Rs 12L) applies to seniors as well. Senior citizens with income below Rs 12L and modest deductions may find the new regime simpler and equivalent in tax to the old regime.
9. Why TaxClue
Regime comparison requires computing total tax under both regimes with all applicable deductions — and the answer is different for every taxpayer. TaxClue provides personalised regime comparison and year-optimal ITR filing. Contact us under ITA 2025.