Every year salaried employees tell their employer which tax regime they prefer, so that the right tax is deducted from salary. Since Budget 2025 lowered the new-regime rates, and Budget 2026 left them unchanged, the answer for most people has shifted. Here are worked examples using the rules for the 2026-27 tax year, for resident individuals below 60, with the reasoning behind each step.
The rules in brief
- New regime (the default): nil tax up to ₹4 lakh of taxable income, then 5%, 10%, 15%, 20% and 25% in ₹4 lakh steps, and 30% above ₹24 lakh. A rebate makes tax zero if taxable income is up to ₹12 lakh, with marginal relief just above it. Standard deduction ₹75,000. Most other deductions are not allowed; the main exception is the employer’s contribution to your NPS account.
- Old regime: nil up to ₹2.5 lakh, 5% to ₹5 lakh, 20% to ₹10 lakh and 30% above. Standard deduction ₹50,000, plus deductions such as 80C (up to ₹1.5 lakh), 80D health insurance, HRA exemption, home-loan interest (up to ₹2 lakh for a self-occupied home) and your own NPS contribution (₹50,000 extra).
- 4% health and education cess applies to both. Surcharge applies only above ₹50 lakh of income and is not covered here.
From 1 April 2026 these deductions sit under new section numbers in the Income-tax Act, 2025 — 80C is now section 123 and 80D is section 126 — but the limits are the same. We use the familiar numbers.
Example 1: ₹10 lakh salary
With ₹1.5 lakh in 80C, ₹25,000 in 80D and ₹1 lakh of HRA exemption, old-regime taxable income is ₹6.75 lakh and tax comes to about ₹49,400. Under the new regime, taxable income is ₹9.25 lakh — below ₹12 lakh — so tax is zero. The new regime wins clearly; the old regime would need about ₹4.5 lakh of deductions just to reach zero difference.
Example 2: ₹15 lakh salary
With the same 80C and 80D and ₹1.5 lakh of HRA exemption, old-regime taxable income is ₹11.25 lakh and tax is about ₹1,56,000. New-regime tax on ₹14.25 lakh is about ₹97,500. The new regime saves about ₹58,500. For the old regime to win, total deductions beyond the standard deduction would need to reach roughly ₹5.4 lakh.
Example 3: ₹25 lakh salary with a home loan
Take heavy deductions: ₹1.5 lakh 80C, ₹50,000 80D, ₹3 lakh HRA, ₹2 lakh home-loan interest and ₹50,000 own NPS — ₹7.5 lakh in all. Old-regime tax is about ₹3,35,400; new-regime tax is about ₹3,19,800. Even here the new regime is slightly ahead. The break-even is roughly ₹8 lakh of deductions.
Just above ₹12 lakh: marginal relief
Without a safeguard, earning one rupee more than ₹12 lakh of taxable income would suddenly create a tax bill of ₹60,000. Marginal relief prevents that: the tax cannot be more than the amount by which your income exceeds ₹12 lakh.
- A salary of ₹12.75 lakh leaves taxable income of exactly ₹12 lakh after the standard deduction, so tax is zero.
- A salary of ₹13 lakh gives taxable income of ₹12.25 lakh. The normal slab tax would be ₹63,750, but marginal relief limits it to the ₹25,000 excess — about ₹26,000 with cess.
- The relief fades out at a taxable income of about ₹12.7 lakh; above that, the normal slabs apply.
The employer’s NPS contribution helps in both regimes
If your employer pays into your NPS account, that contribution — up to 14% of basic salary plus dearness allowance in the new regime — is deducted from your taxable income. On a ₹15 lakh salary with a basic of ₹7.5 lakh, an employer contribution of ₹1.05 lakh cuts new-regime tax from about ₹97,500 to about ₹81,100. If your employer offers to route part of your pay this way, it is worth asking about, keeping in mind that NPS money is meant for retirement.
Can you change your mind?
- Salaried people without business income can choose either regime every year when they file their return, whatever they told their employer. If the employer deducted tax under the other regime, the difference is settled in the return.
- People with business or professional income have less freedom: once they leave the new regime, they can come back to it only once.
- To use the old regime, the return must be filed by the due date.
What this means
- For most salaried people, the new regime now gives lower tax.
- The old regime can still win for those with very large deductions — typically a big HRA in a metro, plus a home loan, plus full 80C and NPS.
- Do not buy an insurance policy or lock money into a product only to save tax. Under the new regime that deduction may be worth nothing.
- Your investments should follow your goals. ELSS, PPF and NPS still make sense on their merits, whichever regime you choose.
Frequently asked questions
Do senior citizens follow the same comparison?
Not exactly. In the old regime the tax-free limit is ₹3 lakh from age 60 and ₹5 lakh from 80, while the new regime has the same slabs for everyone. Seniors with large deductions should compare both.
Does the regime affect tax on my mutual fund gains?
No. Capital gains on mutual funds are taxed at their own rates in both regimes. Note that the ₹12 lakh rebate does not apply to special-rate gains such as equity capital gains.
Put in your own numbers in our old vs new tax regime calculator. It also shows the deductions you would need for the old regime to win. These are illustrations; confirm your choice with your tax adviser, as surcharge, capital gains and senior-citizen rules are not covered in detail here.
Figures above are illustrations based on assumed rates of return and are not a promise or guarantee of future returns. Mutual fund investments are subject to market risks, read all scheme related documents carefully. WishWiseWealth is an AMFI-registered Mutual Fund Distributor (ARN-188221).