The Finance Act, 2025 made the most significant change to personal income tax in years. The new tax regime under section 115BAC is the default for individuals and HUFs, and from FY 2025-26 (assessment year 2026-27) it is far more generous. Choosing between the two regimes is now a planning decision, not a formality.

New regime slabs for FY 2025-26

  • 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%

Health and education cess of 4% applies on the tax, and surcharge applies above ₹50 lakh. Under the new regime the highest surcharge is capped at 25%, against 37% under the old regime.

No tax up to ₹12 lakh

The rebate under section 87A has been raised to ₹60,000 for resident individuals whose total income does not exceed ₹12 lakh under the new regime. With the ₹75,000 standard deduction, a salaried employee earning up to ₹12.75 lakh pays no tax. Marginal relief applies just above ₹12 lakh, so the tax payable never exceeds the income above that limit.

Note that the rebate does not cover income taxed at special rates, such as capital gains on listed shares and equity mutual funds.

What you give up in the new regime

Most deductions and exemptions are not available in the new regime, including:

  • Section 80C investments (PPF, ELSS, life insurance, principal on home loan)
  • Section 80D health insurance premium
  • House rent allowance (HRA) and leave travel allowance
  • Interest on a home loan for a self-occupied house

A few benefits remain: the ₹75,000 standard deduction, the employer's contribution to NPS under section 80CCD(2) and the deduction for family pension.

When the old regime still wins

The old regime only makes sense when your deductions are large. As an illustration, for a salaried employee with a gross salary of ₹20 lakh, the new regime tax is about ₹1.92 lakh including cess. To pay less under the old regime, the same employee would need roughly ₹7 lakh of deductions and exemptions in addition to the ₹50,000 standard deduction — for example a combination of HRA, 80C, 80D and home loan interest.

Few taxpayers reach that level, which is why the new regime is now the better option for most salaried individuals. Business owners and HNIs with significant HRA, home loan interest or other allowable claims should still run the comparison every year.

Switching between regimes

  • Salaried individuals without business income can choose the regime every year when filing the return.
  • Taxpayers with business or professional income must opt out of the new regime by filing Form 10-IEA before the return due date, and can switch back only once.

Remember to tell your employer which regime you will follow at the start of the year, so TDS is deducted correctly.

Our recommendation

Review the choice before 31 March each year and again before filing your return. Try our regime simulator for a quick estimate, and speak to us for a full comparison that includes capital gains, rental income and other special-rate income. See our ITR filing and tax planning service for details.

Frequently asked questions

Is income up to ₹12 lakh tax-free under the new tax regime?

Yes, for FY 2025-26 a resident individual with total income up to ₹12 lakh pays no tax because of the ₹60,000 rebate under section 87A — up to ₹12.75 lakh for salaried employees after the standard deduction. The rebate does not cover special-rate income such as capital gains on listed shares.

Which deductions are allowed in the new tax regime?

The ₹75,000 standard deduction for salaried employees, the employer's NPS contribution under section 80CCD(2) and the family pension deduction. Section 80C, 80D, HRA and home loan interest on a self-occupied house are not allowed.

When is the old tax regime better than the new regime?

Only when deductions are large. For example, at a gross salary of ₹20 lakh, you need roughly ₹7 lakh of deductions in addition to the standard deduction for the old regime to save tax.

Can I switch between the old and new tax regime every year?

Salaried individuals without business income can choose every year when filing the return. Taxpayers with business income must opt out using Form 10-IEA and can switch back only once.

Section references are to the Income-tax Act, 1961, which applies to FY 2025-26. The Income-tax Act, 2025 applies from tax year 2026-27.

This article is general information based on the law as at the date shown and is not professional advice. Please consult us before acting on it.