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AY 2026-27 (FY 2025-26). This guide reflects Budget 2025 new-regime slabs and the ₹12 lakh Section 87A rebate. Last reviewed 7 May 2026.
India's salary taxation landscape changed materially again in Budget 2025. The new tax regime is the default, the slab structure has been re-widened for FY 2025-26, and the Section 87A rebate now covers taxable income up to ₹12 lakh — meaning a salaried employee earning up to ₹12.75 lakh in gross salary pays zero income tax under the new regime.
For most salaried employees, the question now is not "how do I maximise old-regime deductions" but "which regime actually saves me more money?" Then, within whatever regime you choose, there's a second layer of optimisation: how your CTC is structured determines how much hits your bank account regardless of which regime you're on.
The new tax regime slabs (AY 2026-27)
| Taxable income (after ₹75,000 standard deduction) | Tax rate |
|---|---|
| Up to ₹4 lakh | 0% |
| ₹4-8 lakh | 5% |
| ₹8-12 lakh | 10% |
| ₹12-16 lakh | 15% |
| ₹16-20 lakh | 20% |
| ₹20-24 lakh | 25% |
| Above ₹24 lakh | 30% |
Plus 4% health and education cess on the computed tax. Section 87A rebate fully wipes out tax for taxable income up to ₹12 lakh under the new regime — combined with the ₹75,000 standard deduction, that makes the first ₹12,75,000 of gross salary tax-free for AY 2026-27.
Old-regime slabs are unchanged: 0% up to ₹2.5 lakh, 5% from ₹2.5L-5L, 20% from ₹5L-10L, 30% above ₹10L. The 87A rebate under the old regime is still capped at ₹5 lakh of taxable income.
Old regime vs new regime: who should switch?
The old regime wins only when the sum of your eligible deductions exceeds the structural advantage of the new regime's wider slabs. With the 87A rebate now extending to ₹12 lakh, the crossover has moved up.
At ₹10 LPA: New regime wins easily — taxable income after the ₹75,000 standard deduction is ₹9.25 lakh, fully shielded by the 87A rebate. The old regime can't match zero tax without the deduction stack pushing taxable income below ₹5 lakh, which is rare at this gross.
At ₹15 LPA: New regime is the default winner. Taxable income of ₹14.25 lakh attracts roughly ₹98,000 of tax + cess. The old regime needs HRA, full 80C, ₹50,000 of NPS Tier 1 (80CCD(1B)), 80D, and meaningful home-loan interest stacked together to undercut that — typically only a metro tenant with an active home loan.
At ₹20-25 LPA: This is where the old regime starts to compete again, but only with ₹4.5-5 lakh of combined deductions (HRA + 80C + 80CCD(1B) + 80D + 24(b)). If your old-regime advantage exists only on paper because you "plan to" invest but don't, you lose both the deductions and the lower slab rates.
At ₹30 LPA+: The old regime can win meaningfully when a joint home loan, full HRA, and full 80C/80D stack are all real. Surcharge complicates the comparison — both regimes attract surcharge above ₹50 lakh, but the new regime caps the surcharge at 25% (vs 37% in the old regime) on incomes above ₹2 crore.
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The cleanest test: calculate your tax liability under both regimes using last year's actual numbers (not projected investments). Most people discover they've been on the "better" regime without checking.
Calculate your actual tax across both regimes
Salary structuring: optimising regardless of regime
Your regime choice affects the tax on your income. But how your CTC is structured affects what gets defined as income in the first place. These are different levers.
HRA optimisation (old regime only)
If you're on the old regime and paying rent, maximising HRA exemption is the biggest single lever. The exemption is the minimum of three values — so you want all three to be as high as possible.
The easiest win: ensure you're actually collecting rent receipts and submitting them to your employer. HRA paid without submitted receipts is fully taxable.
Warning
Landlord PAN is mandatory for rent above ₹1 lakh/year (₹8,333/month). If your landlord refuses, you lose the HRA exemption on that amount. Many urban tenants lose significant tax benefits for lack of a documented PAN number on their rent agreement.
Employer NPS contribution (both regimes)
Employer contribution to NPS under Section 80CCD(2) is deductible from income in both the old and new tax regimes — up to 10% of basic salary under the old regime, and up to 14% of basic salary for both government and non-government employees under the new regime (Budget 2024 raised the private-sector limit from 10% to 14% effective FY 2024-25). This is the only meaningful deduction that survives under the new regime.
If your employer offers a salary restructuring option, converting some special allowance to employer NPS contribution can save meaningful tax — but remember: the NPS corpus is locked until age 60 with mandatory annuity requirements.
At 30% bracket, ₹1 lakh of employer NPS saves ₹31,200 in tax (₹30,000 tax + ₹1,200 cess). That's a significant benefit, but only if you're comfortable with long-term NPS illiquidity.
LTA (Leave Travel Allowance)
LTA is exempt from tax (old regime) for travel within India for self and family, twice in a block of four calendar years. If your CTC includes LTA and you travel domestically, claim it — bring boarding passes, hotel receipts, cab booking receipts. The exemption limit equals the actual LTA component in your salary.
Under the new regime, LTA is fully taxable. If you move to the new regime, LTA in your salary structure is just taxable income.
Meal vouchers and food coupons
Employer-provided meal vouchers (Sodexo, Zeta, etc.) up to ₹2,200/month are exempt from tax under the old regime. Small benefit, but worth optimising.
Keeping your structure simple
The complexity of multi-component CTC structures is real. Many employees forget to submit proofs, miss exemptions, and then face TDS shortfalls at year-end. A simpler salary structure with fewer components is worth slightly less optimisation if you know you won't follow through on the documentation.
The mistake most salaried employees make
They optimise for annual tax saving and ignore the cash flow impact. An HRA exemption that requires paying ₹30,000/month rent doesn't save money if you're paying for a flat you don't need, just to claim the deduction. A Section 80C investment of ₹1.5 lakh in a 3-year FD locks up liquidity you might need.
The right sequence:
- Run the actual regime comparison using your real numbers
- Pick the regime that saves more tax given investments you are actually making (not hypothetical ones)
- Optimise salary structure within that regime
- Review once a year — regime choice can change as your income and obligations shift
FAQ
The follow-up questions people usually ask after the main recommendation is already clear.
Should I choose the new or old tax regime in 2026?
For most salaried employees up to ₹15 LPA, the AY 2026-27 new regime (Budget 2025 slabs, ₹12L Section 87A rebate, ₹75,000 standard deduction) is comfortably better. The crossover with the old regime now sits closer to ₹20-25 LPA, and only when HRA, full 80C, home-loan interest, and 80D together exceed roughly ₹4.5-5 lakh of deductions. Run both regimes against your actual numbers before deciding.
Can I switch between new and old tax regime every year?
Salaried employees can switch regime choice each financial year by informing their employer at the start of the year, and the final choice can still be made at ITR filing. Self-employed individuals and business owners face tighter rules — once they opt out of the default new regime, returning is limited.
What deductions are available under the new tax regime?
Under the new regime in AY 2026-27 you can claim the standard deduction of ₹75,000, employer NPS contribution under Section 80CCD(2) (10% of basic for government employees, 14% for private-sector after Budget 2024), agniveer corpus payment, and a handful of minor items. HRA exemption, LTA, Section 80C (PPF/ELSS/LIC), 80D (health insurance), home loan interest on a self-occupied property, and most other deductions are not available.
What is the standard deduction under the new tax regime in 2026?
The standard deduction for salaried employees under the new regime is ₹75,000 per year. With the Budget 2025 Section 87A rebate making taxable income up to ₹12 lakh tax-free under the new regime, a salaried employee earning up to ₹12,75,000 of gross salary pays zero income tax in AY 2026-27 — no investments required.
How does HRA exemption work and who benefits most?
HRA exemption under the old regime is the minimum of: actual HRA received, 50% of basic salary for Delhi/Mumbai/Kolkata/Chennai (40% elsewhere), and rent paid minus 10% of basic. Metro tenants paying high rents capture the largest exemption. Under the new regime HRA is fully taxable — for many high-rent metro employees, that lost exemption is the single biggest reason the old regime still wins.