Income tax for government employees

Income tax for central government employees is the tax on salary and pension income under the Income-tax Act, 2025 (Act No. 30 of 2025), which came into force on 1 April 2026 and makes the financial year 2026-27 the first tax year under the new statute. Tax is computed under either the new regime, which is the default and taxes income up to Rs. 12 lakh at nil after the Section 156(2)(a) rebate, or the old regime, which must be chosen and carries higher rates with the full catalogue of deductions. Section 3(1) of the Finance Act, 2026 charges the year at the rates in Part I-B of its First Schedule, and both tables stand where they stood a year earlier.

The taxation of a government salary differs from private employment in ways that are almost all favourable, and three of them are worth stating at the top. Retirement gratuity, the commuted portion of pension, and leave encashment on retirement are deductible in full for a central or state government employee at serials 3, 7 and 13 of the Table in Section 19(1), with no monetary ceiling, where a private-sector employee is capped at serials 5, 6, 8 and 14 of the same Table. Government accommodation is valued as a perquisite at the licence fee the government charges rather than at market rent, under serial 1 of Table I in rule 15(2)(a) of the Income-tax Rules, 2026. The third advantage has just been withdrawn: Section 16(ii) of the repealed Income-tax Act, 1961 gave a deduction for entertainment allowance to government employees and to nobody else, and the Income-tax Act, 2025 enacts no counterpart to it, so it is unavailable from the tax year 2026-27.

The choice between the regimes is arithmetic, not principle. The new regime taxes a larger base at lower rates and cancels the tax entirely up to Rs. 12 lakh; the old regime taxes a smaller base at higher rates. On a salary of Rs. 16 lakh with a near-maximal old-regime claim, the computation later in this article puts the two within Rs. 2,132 of each other, which is the honest measure of how narrow the old regime’s remaining advantage has become.

Governing law for the financial year 2026-27

The financial year 2026-27 is governed by the Income-tax Act, 2025, not the Income-tax Act, 1961. The new Act, Act No. 30 of 2025, received the President’s assent on 21 August 2025 and came into force on 1 April 2026, repealing the 1961 Act from that date. It reduces the statute from 819 sections to 536 and from 47 chapters to 23, and it replaces the twin concepts of the previous year and the assessment year with a single tax year, so the period this article covers is the tax year 2026-27, which older documents call the financial year 2026-27 or assessment year 2027-28.

The charge for the year comes from the Finance Act, not from the Income-tax Act. Section 3(1) of the Finance Act, 2026 charges income-tax for the tax year commencing 1 April 2026 under the Income-tax Act, 2025 at the rates in Part I-B of its First Schedule, and the same Act carries a second charging section running alongside it: Section 2 charges the assessment year commencing 1 April 2026, meaning income of the financial year 2025-26, under the repealed 1961 Act at Part I-A rates. Two years, two statutes, two Parts of one Schedule, and quoting the wrong one is the commonest citation error of this year.

Where each rate is written matters as much as who sets it. The new-regime slab table is in the Act itself, at the Table to Section 202(1), so the Finance Act does not restate it; the old-regime slabs are in Paragraph A of Part I-B of the First Schedule to the Finance Act, 2026; the surcharge is in Paragraph F of that Part for the old regime and in the Table at Section 3(4)(b) for the new; and the 4% cess is imposed by Section 3(15). Nothing a government employee pays changed in the Union Budget 2026. What changed is where in the statute book the provision is found.

The renumbering matters to anyone reading the bare Act, because the familiar section numbers no longer resolve. Two of the moves are not renumbering at all but a change of mechanism, and they are marked as such in the mapping below.

This article cites the Income-tax Act, 2025 and the Income-tax Rules, 2026 throughout, because those are the instruments that govern the tax year 2026-27, and it names the 1961-Act provision only where the sentence is about the earlier law. The reliefs continue and the rupee outcomes are unchanged; the labels moved and, for retirement benefits, so did the machinery.

One transition rule catches people filing right now. Income earned up to 31 March 2026, that is the financial year 2025-26 and assessment year 2026-27, remains governed by the repealed Income-tax Act, 1961 under Section 536(2) of the new Act, and a return for that year filed during 2026 still claims arrears relief under Section 89 on Form 10E. The 2025 Act, the renumbered sections, Form 39, and Form 130 apply to income earned from 1 April 2026 onward.

The two regimes and which one applies by default

The new regime is the default, and has been since the financial year 2023-24. A central government employee who declares nothing to the Drawing and Disbursing Officer and files nothing on the e-filing portal is taxed under Section 202(1) of the Income-tax Act, 2025, which opens “unless the person exercises the option in the manner provided under sub-section (4)”. The old regime is available but must be positively chosen.

The trade-off between them is simple to state and hard to guess at. The new regime offers seven slabs starting at nil up to Rs. 4 lakh, a Section 156(2)(a) rebate that cancels the tax entirely up to a total income of Rs. 12 lakh, and a Rs. 75,000 standard deduction, but it removes almost every other deduction and exemption. The old regime offers four slabs starting at nil up to Rs. 2.5 lakh, a rebate that reaches only Rs. 5 lakh, and a Rs. 50,000 standard deduction, but it keeps the Section 123 deduction for investments and payments, the extra National Pension System deduction under Section 124(3), the house rent allowance exemption, home-loan interest, health insurance, and professional tax.

A salaried employee or pensioner without business income may choose afresh in every single year, and may move back and forth without limit, under Section 202(4)(b). A taxpayer with business or professional income has one return ticket only: Section 202(4)(a)(iii) allows the option to be withdrawn once, and Section 202(4)(a)(iv) then bars that person from exercising it again unless the business income ceases altogether. The distinction matters to a government employee with consultancy or professional receipts on the side. The guide on how to switch tax regime covers the mechanics on both routes, including the Section 263(1) due date that the choice depends on.

New regime slabs for the financial year 2026-27

Under the default new regime, the tax on the total income of the tax year 2026-27 is computed on this table, which is printed in the Income-tax Act, 2025 itself at the Table to Section 202(1) rather than in a Finance Act schedule, and is unchanged from the previous year.

The new regime gives every individual the same Rs. 4 lakh basic exemption regardless of age. There is no higher exemption for a senior citizen or a super-senior citizen in the new regime, which is a material point for a pensioner deciding between the two: the age-based benefit exists only on the old side.

The standard deduction at serial 2 of the Table in Section 19(1) is Rs. 75,000, or the salary if less, where tax is computed under Section 202(1), and it applies to salary and to a service pension alike. It is not available against a family pension, which is taxed under a different head and carries its own deduction under Section 93(1)(d).

Old regime slabs for the financial year 2026-27

Under the old regime, which every taxpayer now chooses in the return itself under rule 136 of the Income-tax Rules, 2026, the slabs for an individual below 60 are these, in item (I) of Paragraph A of Part I-B of the First Schedule to the Finance Act, 2026 and unchanged from the previous year.

The old regime keeps its age-based basic exemptions, which is the one structural advantage it holds over the new regime for retired employees. Item (II) of the same Paragraph A gives a resident aged 60 to 79 a basic exemption of Rs. 3 lakh instead of Rs. 2.5 lakh, and item (III) gives a resident of 80 or above Rs. 5 lakh with no 5% band at all, so a super-senior pensioner’s first Rs. 5 lakh bears no tax before any deduction or rebate is applied and tax starts at 20%.

The jump from 5% to 20% at Rs. 5 lakh is the feature that decides most old-regime comparisons. The old regime has no 10% and no 15% band, so income crossing Rs. 5 lakh is taxed at four times the rate immediately below it, while the new regime steps up in 5-point increments across four bands over the same stretch. The old regime’s standard deduction is Rs. 50,000, Rs. 25,000 lower than the new regime’s.

The rebate and the zero-tax thresholds

The Section 156 rebate is what makes the new regime cheap at moderate incomes, and it is a rebate against tax rather than a deduction from income. Section 156(2)(a) of the Income-tax Act, 2025 gives a resident individual whose income is chargeable under Section 202(1) and does not exceed Rs. 12 lakh a deduction of 100% of the income-tax payable or Rs. 60,000, whichever is less, which is exactly the slab tax on Rs. 12 lakh, so the tax is nil. With the Rs. 75,000 standard deduction subtracted first, a government employee or pensioner with a salary or pension up to Rs. 12.75 lakh pays nothing.

The arithmetic is worth seeing once. Tax on a total income of Rs. 12,00,000 under the new regime is nil on the first Rs. 4 lakh, Rs. 20,000 at 5% on the next Rs. 4 lakh, and Rs. 40,000 at 10% on the next Rs. 4 lakh, a total of Rs. 60,000. The rebate cap of Rs. 60,000 cancels precisely that amount and nothing more. The two figures are set to match, which is why the Rs. 12 lakh line is exact rather than approximate.

Section 156(1) carries the old-regime line, at 100% of the income-tax payable or Rs. 12,500, whichever is less, on a total income up to Rs. 5 lakh, which cancels the tax on that income in full. Both limbs are available only to an individual resident in India; a non-resident gets neither.

Two limits on the rebate are missed often enough to be worth naming. Section 156(3) provides that the deduction under Section 156(2) shall not exceed the income-tax payable at the rates in Section 202(1), so income taxed at a special rate stays taxable at that rate: short-term capital gains under Section 196 and long-term capital gains under Section 197 are outside the rebate even where the total income is below Rs. 12 lakh, and a government employee who sold listed shares during the year cannot assume the Rs. 12 lakh line covers that gain. And the rebate applies to the tax before the Health and Education Cess, not after, though where the rebate reduces the tax to nil the cess on nil is also nil. The difference between a rebate, a deduction, and an exemption is the source of most of the confusion here.

Marginal relief above Rs. 12 lakh

Because the new regime switches the tax off completely at Rs. 12 lakh and on above it, Section 156(2)(b) limits the tax to the amount by which the total income exceeds Rs. 12 lakh. Without it, an extra Rs. 10,000 of income would attract Rs. 61,500 of tax.

The worked case makes the mechanism visible. At a total income of Rs. 12,10,000, the ordinary slab tax is Rs. 61,500, being nil on the first Rs. 4 lakh, Rs. 20,000 at 5%, Rs. 40,000 at 10%, and Rs. 1,500 at 15% on the Rs. 10,000 above Rs. 12 lakh. The excess over Rs. 12 lakh is Rs. 10,000. Marginal relief reduces the tax to that Rs. 10,000, on which the 4% cess adds Rs. 400, for a total of Rs. 10,400.

The relief shrinks as income rises and stops entirely at a total income of about Rs. 12,70,588, the point at which the ordinary slab tax first equals the excess over Rs. 12 lakh. Above that figure the slab tax is lower than the excess would be, so the relief has nothing to give and the ordinary computation applies. A parallel marginal relief operates at each surcharge threshold in both regimes, on the same principle. The Health and Education Cess carries no marginal relief at any threshold.

Choosing a regime, and how to switch

The old regime wins only where the deductions it allows exceed roughly Rs. 5 lakh beyond the standard deduction, and for most central government employees they do not. That threshold needs a full Rs. 1.5 lakh under Section 123, the extra Rs. 50,000 of National Pension System contribution under Section 124(3), a substantial house rent allowance exemption from renting in a metro, home-loan interest near the Rs. 2 lakh cap under Section 22(1)(b), and a health-insurance claim under Section 126, all in the same year.

An employee whose only claims are the standard deduction and the compulsory National Pension System contribution is better off under the new regime at every income level, and at a salary up to Rs. 12.75 lakh pays nothing at all. An employee in official accommodation is a clear new-regime case, because the largest single old-regime claim, the house rent allowance exemption, is unavailable to someone who draws no house rent allowance. A super-senior pensioner with heavy Section 153 deposit-interest deductions and health-insurance premiums is the clearest remaining old-regime case.

Switching is a two-stage act, and skipping the first stage costs cash flow rather than tax. Declare the intended regime to the Drawing and Disbursing Officer at the start of the financial year, so that tax deducted at source under Section 392 runs on the right basis and the monthly deduction is correct. Then exercise the choice in the return. The separate opt-out form is gone from 1 April 2026: rule 136 of the Income-tax Rules, 2026 provides that the Section 202(4) option is exercised or withdrawn in the return of income furnished under Section 263(1), and the 2026 Rules prescribe nothing answering to Form 10-IEA under Rule 21AGA of the 1962 Rules. Assessment year 2026-27 was the last year in which that form was filed. A salaried employee or pensioner may still change the choice at the filing stage even if a different regime was declared to the employer, and the excess tax deducted comes back as a refund.

The only reliable method is to compute both ways on the actual figures. The 7th CPC salary calculator produces the taxable salary that feeds the comparison, and the tax regime break-even guide sets out the deduction total at which the two meet.

Taxation of the salary components

A government salary is charged under Section 15(1) of the Income-tax Act, 2025 and built component by component from the definition in Section 16, and the treatment differs enough between components that a single blanket statement is wrong. This table sets out the position for the tax year 2026-27.

The single most important line for most employees is the dearness allowance one, because dearness allowance is a large share of a government salary and carries no exemption of any kind. At the current rate it is taxed exactly like basic pay. It nonetheless does work elsewhere in the computation: it forms part of the salary base for the house rent allowance exemption at serial 11 of the Schedule III Table and for the 14% employer contribution deductible under Section 124(1)(a), so a rise in dearness allowance raises both the tax and the size of two reliefs.

The Children Education Allowance line stopped being a trap on 1 April 2026. The DoPT reimbursement runs to Rs. 2,812.50 a month per child and the exemption at serial 7 of the Table in rule 280(2) of the Income-tax Rules, 2026 is Rs. 3,000 a month per child, so the whole reimbursement is exempt in the old regime, where the Rs. 100 a month exemption in the 1962 Rules had left more than Rs. 32,000 a year taxable for two children. The Rs. 100 and Rs. 300 figures still govern the return for the financial year 2025-26, and the exemption is worth nothing in the default regime under either set of Rules.

Perquisites: accommodation and the official car

A government employee’s taxable perquisite value is usually small, because the two largest perquisites are valued on government-specific concessional rules. Perquisites are the non-cash benefits listed in Section 17(1) of the Income-tax Act, 2025 and valued under rule 15 of the Income-tax Rules, 2026, which replaces Rule 3 of the 1962 Rules. The Drawing and Disbursing Officer must add their value to salary before computing tax deducted at source, and rule 204(2)(b) requires a statement of the particulars in Form No. 123 wherever salary for the tax year exceeds Rs. 1,50,000, that form having replaced Form 12BA. Below that figure rule 204(2)(a) puts the particulars in the relevant columns of Form No. 130 itself.

Government accommodation is valued not at market rent but at the licence fee the Central or State Government determines under its own rules, reduced by any rent the employee actually pays, under serial 1 of Table I in rule 15(2)(a). Every other employer values accommodation it owns at 10%, 7.5% or 5% of salary by city population under serial 2 of the same Table, so the government concession is written into the rule as a separate row rather than granted by concession in practice. This is also why an employee in official accommodation draws no house rent allowance at all: the accommodation itself is the benefit. For a Type IV quarter in a metro the difference between the licence fee and market rent runs to several lakh a year, and the tax follows the licence fee.

An official car used partly in the performance of duties and partly privately is valued on the fixed monthly figures in Table II to rule 15(3) rather than on actual running cost. Where the employer meets the running and maintenance expenses, serial 1(c)(i) of that Table sets the value at Rs. 5,000 a month for an engine up to 1.6 litres or an electric vehicle and Rs. 7,000 above it, with a further Rs. 3,000 where a chauffeur is provided; where the employee meets those expenses, serial 1(c)(ii) sets Rs. 2,000 and Rs. 3,000. A car used wholly and exclusively on official duty carries no value at all, provided the employer maintains the documents rule 15(3)(c) specifies.

Cash allowances such as dearness allowance and transport allowance are not perquisites; they are part of salary and are taxed in the ordinary way subject to any Schedule III entry. The practical consequence is that a government employee’s Form No. 130 usually shows salary made up of pay and cash allowances with a modest or nil perquisite line. The figures in Form No. 123 should still be checked, because an error there flows straight into the taxable salary and into the monthly deduction.

Retirement benefits and how the Act now relieves them

The retirement benefits are where a central government employee is most favoured, and the three largest are relieved in full with no monetary ceiling. The mechanism changed on 1 April 2026 even though the rupee outcome did not: gratuity, commuted pension and leave encashment are no longer exemptions under a Section 10 head but deductions from salary in the Table in Section 19(1), so a computation that still shows them as exempt income arrives at the same figure by the wrong route and cannot be reconciled to the Act. A private-sector employee is capped on each of the three. The position for the tax year 2026-27 is as follows.

The Rs. 25 lakh ceiling on retirement gratuity that appears in the CCS (Pension) Rules is a pension-rules ceiling on the amount payable, not a tax ceiling. Serial 3 of the Table in Section 19(1) of the Income-tax Act, 2025 allows the entire amount, and Section 19(2)(g) defines the gratuity it covers by reference to the revised pension rules of the Central Government and to the CCS (Pension) Rules, 2021 by name, so the two ceilings are frequently conflated and should not be. Serial 6 is the capped row, running to the least of the gratuity received, the amount the Central Government notifies, and half a month’s salary for each completed year, and it applies to everyone else. The same split runs through leave encashment: the cap a private-sector employee faces at serial 14 has no application to a government retiree, who falls at serial 13. Section 202(2)(a)(iv) withdraws serial 1 of that Table and nothing else, so every one of these survives the default regime. Under the repealed 1961 Act these were Sections 10(10)(i), 10(10AA)(i) and 10(10AA)(ii).

The Unified Pension Scheme position is statutory, and Section 124(12) of the Income-tax Act, 2025 is the operative provision: without it, the transfer of the individual corpus to the pool corpus at retirement would have been a taxable receipt at that moment. Section 124(11) charges what the subscriber actually receives on superannuation, voluntary retirement or FR 56(j) retirement, and Section 124(13)(a) takes both corpus definitions from notification F. No. FX-1/3/2024-PR dated 24 January 2025. An employee choosing between NPS and the Unified Pension Scheme therefore faces no tax penalty on either side of the choice.

That position was reached in two steps, both now spent. The Central Board of Direct Taxes, by Office Memorandum dated 2 July 2025, applied Sections 80CCD(1), 80CCD(1B), 80CCD(2), 80CCD(3) and 80CCD(4), and the exemptions in Sections 10(12A) and 10(12B), to the Unified Pension Scheme on the footing that it was an option under NPS. The Taxation Laws (Amendment) Act, 2025 (Act No. 29 of 2025), which received the President’s assent on 21 August 2025, then wrote the treatment into the statute through Sections 10(12AA), 10(12AB) and 80CCD(3A) of the 1961 Act, all three repealed from 1 April 2026 and carried forward as Schedule II Table serials 15 and 16 with Section 124(12).

Deductions under the old regime

The old regime is worth choosing only for its deductions, and two of them exist for government employees alone. The full set available to a central government employee is set out below, with the caps for the financial year 2026-27.

The entertainment allowance deduction is abolished from the tax year 2026-27, which is why it has no row above and why generic tax guidance still carrying it is a year out of date. Section 16(ii) of the repealed Income-tax Act, 1961 allowed it to a government employee and to no other class of taxpayer, at the least of Rs. 5,000, one-fifth of basic salary, or the allowance actually received, and it was deducted from salary rather than from total income. The Income-tax Act, 2025 enacts no counterpart: the Table in Section 19(1) runs from professional tax at serial 1 and the standard deduction at serial 2 straight into the gratuity, commuted pension and leave encashment reliefs. The cap of Rs. 5,000 had not been revised in decades, so the cash effect of the withdrawal is at most Rs. 1,500 of tax at the 30% rate, but the relief was genuinely government-specific and it is now gone in both regimes.

Section 123 rewards a government employee twice over, because several of the payments enumerated in Schedule XV are made anyway rather than chosen. The General Provident Fund subscription is paragraph 1(d) of that Schedule, the employee’s own National Pension System contribution is paragraph 1(y), and the Central Government Employees Group Insurance Scheme subscription is paragraph 1(c). Life insurance premiums, a Public Provident Fund deposit, the tuition fees of up to two children, and the principal repayment of a home loan are all in the same Schedule. An employee with a large GPF subscription and a home loan often reaches the Rs. 1.5 lakh cap without any discretionary investment at all, which is precisely the case in which the old regime is worth computing.

Section 124(1)(a) is the exception that crosses the regime boundary, because Section 202(2)(a)(xii) names it as one of the four Chapter VIII provisions the default regime keeps. The employer’s contribution to the National Pension System or the Unified Pension Scheme, up to 14% of basic pay plus dearness allowance where the employer is the Central or a State Government, is deductible under both regimes. Against basic pay plus dearness allowance of Rs. 9 lakh that is Rs. 1,26,000 of deduction, and it is the single largest deduction most employees have in the new regime. Section 124(2) extends the same 14% to a private employer’s contribution where the employee is taxed under Section 202(1), against 10% under Section 124(1)(b) otherwise.

Deductions under the new regime

The new regime removes almost everything, and the short list that survives is worth knowing precisely, because assuming a deduction is gone when it is not costs real money. The deductions allowed in the new tax regime are these:

• The standard deduction of Rs. 75,000, or the salary if less, at serial 2 of the Table in Section 19(1), on salary and on a service pension. Section 202(2)(a)(iv) removes serial 1 of that Table and no other serial, so the whole of the retirement-benefit relief at serials 3 to 14 survives as well.
• The employer’s National Pension System or Unified Pension Scheme contribution under Section 124(1)(a), up to 14% of basic pay plus dearness allowance for a central government employee, expressly saved by Section 202(2)(a)(xii).
• The family-pension deduction under Section 93(1)(d)(i), the lower of one-third of the family pension or Rs. 25,000. It sits in the “income from other sources” computation rather than in Chapter VIII, so nothing in Section 202(2) reaches it.
• The Agniveer Corpus Fund contribution made by the Central Government, under Section 125(2), which Section 202(2)(a)(xii) saves by name. The Agniveer’s own subscription under Section 125(1) is allowed only in the old regime.
• The allowances rule 280(3) of the Income-tax Rules, 2026 preserves, which is the prescription Section 202(2)(a)(ii) refers to: the travel, transfer, daily and conveyance allowances at rule 280(1)(a) to (d), and the transport allowance for an employee with a disability at serial 10 of the Table in rule 280(2), exempt up to Rs. 15,000 a month plus dearness allowance in the metros and Rs. 8,000 a month plus dearness allowance elsewhere from 1 April 2026, against Rs. 3,200 a month for the financial year 2025-26.

Section 202(2)(a) states what the new regime does not allow, provision by provision, and the list is worth reading against the old-regime table above. Sub-clause (i) removes the house rent allowance exemption and Leave Travel Concession, at Schedule III serials 11 and 8. Sub-clause (ii) removes the rest of the prescribed allowances at Schedule III serials 12 and 13. Sub-clause (iv) removes professional tax. Sub-clause (v) removes home-loan interest under Section 22(1)(b) on a property whose annual value is nil under Section 21(6). Sub-clause (xii) removes the whole of Chapter VIII except Sections 124(1), 124(2), 125(2) and 146, which is what takes out the Section 123 deduction, the extra Rs. 50,000 under Section 124(3), health insurance under Section 126 and deposit interest under Section 153. The entertainment allowance deduction is on neither list, because it is not available in either regime.

The most common error in this area is specific enough to name. Employees assume that because the employer’s contribution under Section 124(1)(a) survives, the employee’s own additional Rs. 50,000 under Section 124(3) survives with it. It does not: Section 202(2)(a)(xii) saves sub-sections (1) and (2) of Section 124 and stops there. An employee who continues making the extra Rs. 50,000 contribution purely for the deduction gets no tax benefit from it under the new regime.

Relief on pay commission and dearness allowance arrears

Arrears are taxed in full in the year they are received, not in the years they relate to, and Section 157 of the Income-tax Act, 2025 gives relief where that bunching pushes the employee into a higher band. This matters more to government employees than to almost anyone else, because dearness allowance arrears arrive twice a year and pay commission arrears arrive in a lump covering several years at once.

The mechanism is a recomputation, not a reopening. Under Section 157(1)(a) read with entry 1 of the rule 73 Table, the tax is worked out twice: once on the year of receipt including the arrears, and once by notionally spreading the arrears back to the years they relate to and recomputing each of those years. The difference between the two totals is the relief, and it is claimed in the return for the year of receipt. The earlier years are not revised, reopened, or reassessed; they are recomputed on paper inside the form.

The claim is procedural. Form No. 39 carries the particulars, and rule 73(3) requires it on or before the due date specified under Section 263(1)(c), which for a salaried assessee is 31 July of the financial year following the tax year. The rule fixes a deadline rather than a sequence, but furnishing the form before the return is still the safer order, because Section 270(1)(a)(ii) adjusts at processing for an incorrect claim apparent from the return, and a relief with no Form 39 on record gives the department nothing to verify against. A serving employee need not wait for the return at all: rule 73(4) allows the Form 39 particulars to go to the drawing and disbursing officer, and Section 392(4)(a)(ii) obliges that officer to take the relief into account when deducting tax. For a return covering income up to 31 March 2026, Section 536(2)(c) keeps the repealed Act applying, so the provision is Section 89 and the form is Form 10E under Rule 21AA.

Relief is available under both regimes, with the tax at each step computed under the regime and slabs that applied to that particular year, so a single Form 39 can span both. It is not automatic value: where the employee’s slab is the same in the year of receipt as in the years the arrears relate to, the relief is nil, because the bunching that Section 157 corrects has not changed anything. Pay fixed afresh on promotion or on the Modified Assured Career Progression scheme produces arrears of the same character and is eligible on the same terms.

Surcharge and cess

No surcharge applies below a total income of Rs. 50 lakh, which covers essentially every serving central government employee and pensioner. Above that threshold, surcharge is charged on the tax, not on the income, at 10% over Rs. 50 lakh, 15% over Rs. 1 crore, and 25% over Rs. 2 crore. Paragraph F of Part I-B of the First Schedule to the Finance Act, 2026 adds a fourth band of 37% above Rs. 5 crore, and it applies only in the old regime: where income is charged under Section 202, the Table at Section 3(4)(b) serial 10 of the same Act stops at 25%, which is why the new regime’s effective top rate is 39% against 42.744%. The surcharge attributable to dividend income and to capital gains under Sections 196, 197 and 198 is capped at 15% in both regimes and applied component by component.

Marginal relief operates at each surcharge threshold on the same principle as at the Rs. 12 lakh rebate line: where crossing a threshold would increase the tax by more than the increase in income, the additional tax is limited to the additional income.

The Health and Education Cess of 4% is charged on the tax plus surcharge by Section 3(15) of the Finance Act, 2026, applies in both regimes at every income level, and carries no marginal relief and no threshold. On a tax of Rs. 1,85,000 the cess adds Rs. 7,400. Where the Section 156 rebate reduces the tax to nil, the cess on nil is nil, which is why the Rs. 12.75 lakh salary figure is a true zero and not a small residual.

Tax deducted at source and the forms

In a government office the Drawing and Disbursing Officer is the employer for Section 392 of the Income-tax Act, 2025 and is personally responsible for deducting the right tax each month. Section 392(1) requires the deduction at the average rate of income-tax computed on the rates in force for the tax year, applied to the estimated salary income for the whole year, so a mid-year change in pay or in declared deductions changes every subsequent instalment rather than producing a single adjustment.

The employee’s side of this is Form No. 124 under rule 205 of the Income-tax Rules, 2026, furnished under Section 392(5)(b), on which the house rent allowance exemption, Leave Travel Concession, house-property interest, and the Chapter VIII deductions are declared to the DDO with the evidence the Table in rule 205(2) requires. For house rent allowance that evidence is the landlord’s name, address and Permanent Account Number where the aggregate rent for the year exceeds Rs. 1,00,000, and, new in the 2026 Rules, the employee’s relationship with the landlord if any. Form 12BB under Rule 26C of the 1962 Rules is the predecessor and still governs the financial year 2025-26. A declaration made and not substantiated by the year end is withdrawn from the computation and the tax is recovered from the remaining salary.

Income from another employer, a house-property loss, or income under another head goes to the DDO separately, on Form No. 122 under rule 204(1), and Section 392(4)(a) requires the officer to take those particulars into account, increasing or decreasing the deduction as the case may be.

At the year end the DDO issues Form No. 130, the successor to Form 16, which rule 215(1) requires to be generated or downloaded from the portal the Director General of Income-tax (Systems) specifies and furnished to the employee by 15 June of the financial year immediately following the tax year. It carries the salary breakup, the perquisites, the Schedule III exclusions, the deductions and the tax computed. Where salary exceeds Rs. 1,50,000 the perquisite particulars go on Form No. 123 under rule 204(2)(b) alongside it.

Check the deduction record against Form No. 168, the annual information statement under Section 510 and rule 245, which replaces Form 26AS, before filing. A deduction shown in Form No. 130 but missing from Form No. 168 means the DDO deducted the tax and the deposit or the statement has not reached the system, and the credit will not be allowed until it does.

Filing the return

The return for the tax year 2026-27 is due by 31 July 2027 under Section 263(1)(c) for an individual not subject to audit, subject to any extension the Central Board of Direct Taxes grants. Filing is on the income-tax e-filing portal, and the regime is exercised at this stage under rule 136.

Form selection turns on the composition of income rather than its size alone, and rule 164 of the Income-tax Rules, 2026 widened the simplest form. ITR-1, Sahaj is prescribed by rule 164(2) for a resident, other than not ordinarily resident, whose income is from salary or a family pension as defined in Section 93(1)(d), from not more than two house properties with no loss to carry forward, from other sources apart from lottery winnings and race horses, and from long-term capital gains under Section 198 not exceeding Rs. 1,25,000. The two-property limit reached the 1962 Rules first, by Central Board of Direct Taxes Notification No. 45/2026, G.S.R. 226(E), dated 30 March 2026, which substituted “two house properties” for “one house property” in Rule 12(1)(a)(ii) for assessment year 2026-27, and rule 164(2)(b) carries it into the new Rules. Rule 164(3) then lists thirteen disqualifications, of which the one that catches a senior employee is clause (k), a total income exceeding Rs. 50 lakh. ITR-2 under rule 164(4) takes everything else an individual without business income can have.

Two steps commonly come as a surprise. Advance tax under Section 404 is payable in instalments during the year where the liability net of tax deducted at source is Rs. 10,000 or more, which arises for an employee with substantial interest, rental, or capital-gains income that the DDO never saw, and interest under Sections 424 and 425 runs on the shortfall whether or not the taxpayer knew of the obligation. Most pensioners are outside all of this: Section 403(3) exempts a resident aged 60 or more with no business or professional income from advance tax entirely, however large the other income. And the old regime is no longer claimed on a separate form: Form 10-IEA has no counterpart in the 2026 Rules, and rule 136 puts the Section 202(4) option in the return itself.

Worked computations

Three computations under the rules above show how the figures actually fall. All three are salary-calculator.in constructions worked from the Finance Act 2026 slab tables in this article, and all ignore surcharge, which does not arise below Rs. 50 lakh.

A salary of Rs. 12,75,000 under the new regime. The Rs. 75,000 standard deduction brings the taxable salary to Rs. 12,00,000. The slab tax is nil on the first Rs. 4 lakh, Rs. 20,000 at 5% on the next Rs. 4 lakh, and Rs. 40,000 at 10% on the next Rs. 4 lakh, a total of Rs. 60,000. The Section 156(2)(a) rebate of up to Rs. 60,000 cancels the whole of it, so the tax is nil and the cess on nil is nil. This is the origin of the Rs. 12.75 lakh figure.

A salary of Rs. 20,00,000 under the new regime. After the Rs. 75,000 standard deduction the taxable salary is Rs. 19,25,000. The tax is nil on the first Rs. 4 lakh, Rs. 20,000 on the band to Rs. 8 lakh, Rs. 40,000 on the band to Rs. 12 lakh, Rs. 60,000 on the band to Rs. 16 lakh, and Rs. 65,000 at 20% on the Rs. 3,25,000 above Rs. 16 lakh, a total of Rs. 1,85,000. The rebate is unavailable above Rs. 12 lakh, so the 4% cess adds Rs. 7,400 and the tax is Rs. 1,92,400. Any Section 124(1)(a) deduction the employee has reduces the taxable salary before this computation and is not shown here.

A salary of Rs. 16,00,000 computed both ways. Take a government employee whose salary income including the employer’s National Pension System contribution is Rs. 16,00,000, whose basic pay plus dearness allowance is Rs. 9,00,000 so that the employer contribution at 14% is Rs. 1,26,000, and who has a full Rs. 1,50,000 under Section 123, the extra Rs. 50,000 under Section 124(3), a house rent allowance exemption of Rs. 1,20,000, home-loan interest of Rs. 2,00,000, health insurance of Rs. 25,000, and professional tax of Rs. 2,500.

Under the new regime, the deductions available are the Rs. 75,000 standard deduction and the Rs. 1,26,000 under Section 124(1)(a), giving a taxable income of Rs. 13,99,000. The tax is nil, Rs. 20,000, Rs. 40,000 across the first three bands, plus 15% of the Rs. 1,99,000 above Rs. 12 lakh, which is Rs. 29,850, a total of Rs. 89,850. With the 4% cess of Rs. 3,594 the tax is Rs. 93,444.

Under the old regime, the subtractions are the Rs. 50,000 standard deduction, Rs. 2,500 of professional tax, Rs. 1,26,000 under Section 124(1)(a), Rs. 1,50,000 under Section 123, Rs. 50,000 under Section 124(3), the Rs. 1,20,000 house rent allowance exemption, Rs. 2,00,000 of home-loan interest, and Rs. 25,000 under Section 126, giving a taxable income of Rs. 8,76,500. The tax is nil on the first Rs. 2,50,000, Rs. 12,500 at 5% to Rs. 5 lakh, and Rs. 75,300 at 20% on the Rs. 3,76,500 above it, a total of Rs. 87,800. With the 4% cess of Rs. 3,512 the tax is Rs. 91,312.

The old regime wins by Rs. 2,132. That is the result after claiming Rs. 5,47,500 of deductions and exemptions that the new regime denies, which is close to the maximum a salaried employee can assemble. Removing any single element of that claim, the home loan or the metro rent in particular, flips the answer to the new regime immediately. This is the practical meaning of the statement that most government employees are better off under the new regime: the old regime has not become useless, but it now requires a nearly complete deduction set to win, and then wins by very little.

Pensioners and family pensioners

A retired government employee is taxed much like a serving one, with the pension in place of the salary, but a family pension is taxed under an entirely different head. The distinction between the two is the most consequential point in this section.

The monthly uncommuted pension of a retired employee is taxable as salary and gets the standard deduction, Rs. 75,000 in the new regime or Rs. 50,000 in the old, exactly as a serving employee’s salary does. The route is Section 16(b), which puts any annuity or pension inside the definition of salary, with Section 15(2) treating a former employer as an employer, which is what keeps a pension under the salary head after the employment has ended. A pensioner is therefore effectively tax-free up to a pension of Rs. 12.75 lakh a year under the new regime, on the same arithmetic as an employee. The commuted portion taken as a lump sum at retirement is deducted in full at serial 7 of the Table in Section 19(1) and never enters the annual computation again; the residual pension after commutation is what is taxed, and its restoration after fifteen years simply increases the taxable pension from that date.

A family pension is paid to a survivor who never had the employment relationship, so it is taxed under income from other sources rather than salary, and the salary standard deduction does not apply to it. Section 93(1)(d) of the Income-tax Act, 2025 defines it as a regular monthly amount payable by the employer to a family member of an employee on that employee’s death, and allows instead the lower of one-third of that income or Rs. 25,000 where tax is computed under Section 202(1), or Rs. 15,000 in any other case. The Rs. 25,000 limb reached the statute book through the Finance (No. 2) Act 2024, which raised it from Rs. 15,000 in the 1961 Act with effect from assessment year 2025-26, and the 2025 Act carried the raised figure across. Applying the Rs. 75,000 standard deduction to a family pension is a common error and not a small one, since it substitutes Rs. 75,000 for Rs. 25,000. The Rs. 9,000 minimum family pension and the dearness relief paid on it are both part of the taxable family pension.

Two old-regime provisions particularly help an older pensioner, and both are absent from the new regime. The basic exemption rises with age under items (II) and (III) of Paragraph A of Part I-B of the First Schedule to the Finance Act, 2026, to Rs. 3 lakh from 60 and Rs. 5 lakh from 80, where the Section 202(1) table gives everyone the same Rs. 4 lakh. And Section 153(2)(b) allows a senior citizen a deduction of up to Rs. 50,000 on interest from deposits with a bank, a co-operative bank or a Post Office, on any account including time deposits, against the Rs. 10,000 savings-account limit for everyone else under Section 153(2)(a). That is substantial for a pensioner living partly on deposit interest, and Section 202(2)(a)(xii) removes it in the default regime. A pensioner with a large deposit portfolio and health-insurance premiums should compute the old regime; one with a simple pension and little else does better under the new regime, and above 80 the two effects pull in opposite directions and must be netted on the actual figures. The income tax for pensioners article works the pensioner-specific computation in full.

Related Articles

• Government accommodation
• Income tax slabs for AY 2027-28
• Income-tax Act 2025
• Section 202 of the Income-tax Act 2025
• The tax year replaces the previous year and assessment year
• New tax regime
• Old tax regime
• Old vs new tax regime
• Section 115BAC
• Section 87A rebate
• Marginal relief
• Standard deduction
• Deductions allowed in the new tax regime
• Entertainment allowance deduction
• Professional tax
• Section 80C
• Section 80D
• Section 80TTB
• Home-loan interest under Section 24(b)
• HRA exemption under Section 10(13A)
• Leave Travel Concession
• Rebate, deduction, and exemption: the difference
• Health and education cess
• Surcharge on income tax
• Section 157 relief on arrears
• Form 10-IEA to opt out of the new regime
• Form 16
• Form 12BB
• Form 12BA
• Form 26AS and the AIS
• ITR-1 Sahaj
• Advance tax
• TDS on salary (Section 192)
• Tax regime break-even: when the old regime wins
• Income tax for pensioners
• NPS tax benefits
• Taxation Laws (Amendment) Act 2025
• Central government employees in India
• Take-home salary of central government employees
• House rent allowance
• Dearness allowance
• Transport allowance
• Children Education Allowance
• Risk and hardship allowance
• Dress allowance
• National Pension System
• Unified Pension Scheme
• Old Pension Scheme
• Central government pension
• Gratuity for central government employees
• Commutation of pension
• Leave encashment
• Family pension
• Pay matrix
• Pay fixation on promotion
• 7th Central Pay Commission
• 8th Central Pay Commission
• Department of Expenditure
• Department of Personnel and Training
• 7th CPC salary calculator
• Children Education Allowance calculator

External references

• Income Tax Department e-filing portal
• Central Board of Direct Taxes
• Income-tax Act, 2025, official text
• Gazette of India
• Department of Expenditure, Ministry of Finance
• Department of Pension and Pensioners’ Welfare
• Pension Fund Regulatory and Development Authority

References

1. Income-tax Act, 2025 (Act No. 30 of 2025), Presidential assent 21 August 2025, in force 1 April 2026, repealing the Income-tax Act, 1961 and introducing the tax year.
2. Finance Act, 2026 (Act No. 4 of 2026), Section 3(1) charging the tax year 2026-27 under the Income-tax Act, 2025 at Part I-B rates of the First Schedule; Paragraph A of Part I-B, items (I), (II) and (III), for the old-regime slabs and the age-based exemptions; Paragraph F of Part I-B and the Table at Section 3(4)(b) serial 10 for surcharge; and Section 3(15) for the 4% Health and Education Cess. Section 2 of the same Act charges assessment year 2026-27 under the repealed Income-tax Act, 1961 at Part I-A rates and does not govern this year.
3. Income-tax Act, 2025, Section 202: the Table to Section 202(1) carrying the seven default-regime slabs, Section 202(2)(a) listing the exemptions and deductions withdrawn, and Section 202(4) governing the option out. Section 115BAC(1A) of the repealed Income-tax Act, 1961 is the predecessor.
4. Income-tax Act, 2025, Section 156: 156(1) rebate of 100% of the tax or Rs. 12,500 whichever is less up to a total income of Rs. 5 lakh; 156(2)(a) rebate of 100% or Rs. 60,000 whichever is less up to Rs. 12 lakh where tax is computed under Section 202(1); 156(2)(b) marginal relief; 156(3) capping the rebate at the tax payable at Section 202(1) rates. Section 87A of the repealed 1961 Act is the predecessor.
5. Income-tax Act, 2025, Section 19(1) Table: serial 2, the standard deduction of Rs. 75,000 or the salary whichever is less under the new regime and Rs. 50,000 or the salary whichever is less under the old, renumbering Section 16(ia) of the repealed 1961 Act; serial 1, professional tax under article 276(2) of the Constitution, renumbering Section 16(iii) and excluded from the new regime by Section 202(2)(a)(iv). The Act enacts no counterpart to Section 16(ii) of the 1961 Act (entertainment allowance, government employees only), which ceased on 1 April 2026.
6. Income-tax Act, 2025, Section 19(1) Table serials 3, 7 and 13 (retirement and death gratuity, commuted pension, and leave encashment on retirement, each in full for a government employee) and Schedule II Table serial 6 (the National Pension System lump sum up to 60%), replacing Sections 10(10)(i), 10(10A)(i), 10(10AA)(i) and 10(12A) of the Income-tax Act, 1961.
7. Income-tax Act, 2025, Schedule II Table serials 15 and 16 and Section 124 with sub-sections (11), (12) and (13) (Unified Pension Scheme), replacing Sections 10(12AA), 10(12AB) and 80CCD(3A) of the Income-tax Act, 1961, which the Taxation Laws (Amendment) Act, 2025 (Act No. 29 of 2025), Presidential assent 21 August 2025, had inserted; and Central Board of Direct Taxes Office Memorandum dated 2 July 2025.
8. Income-tax Act, 2025, Chapter VIII: Section 123 read with Schedule XV (Rs. 1,50,000, with the General Provident Fund subscription at paragraph 1(d), the employee’s National Pension System contribution at 1(y) and the Central Government Employees Group Insurance Scheme at 1(c)); Section 124(1)(a) (14% employer contribution, Central or State Government), 124(2) and 124(3) (Rs. 50,000); Section 125(1) and (2) (Agniveer Corpus Fund); Section 126 (health insurance and Central Government Health Scheme contributions); and Section 153(2)(a) and (b) (Rs. 10,000 and Rs. 50,000 on deposit interest). Sections 80C, 80CCD(2), 80CCD(1B), 80CCH, 80D and 80TTB of the repealed 1961 Act are the predecessors.
9. Income-tax Act, 2025, Section 22(1)(b) and (c) with Section 22(2)(a) and Section 21(6), on the Rs. 2,00,000 cap on interest for a self-occupied property, withdrawn in the default regime by Section 202(2)(a)(v); and Section 11 read with Schedule III (Table: Sl. No. 8 and 11) with rules 278 and 279 of the Income-tax Rules, 2026, on Leave Travel Concession and the house rent allowance exemption, withdrawn by Section 202(2)(a)(i). Sections 24(b), 10(5) and 10(13A) of the repealed 1961 Act are the predecessors.
10. Income-tax Act, 2025, Schedule III (Table: Sl. No. 12 and 13) with rule 280 of the Income-tax Rules, 2026, notified by Central Board of Direct Taxes Notification No. 22/2026, G.S.R. 198(E), dated 20 March 2026: rule 280(2), Table serial numbers 7 and 8 (Children Education Allowance and Hostel Subsidy at Rs. 3,000 and Rs. 9,000 a month a child from 1 April 2026) and serial 10 (transport allowance for an employee who is blind, deaf and dumb, or orthopaedically handicapped in the lower or upper extremities, at Rs. 15,000 a month plus dearness allowance in the metros and Rs. 8,000 elsewhere); and rule 280(3), which is the prescription Section 202(2)(a)(ii) refers to, preserving rule 280(1)(a) to (d) and rule 280(2) serial 10 in the default regime. Section 10(14) read with Rule 2BB of the Income-tax Rules, 1962, at Rs. 3,200, Rs. 100 and Rs. 300 a month, governs the financial year 2025-26.
11. Income-tax Act, 2025, Section 157 and rule 73 of the Income-tax Rules, 2026, on relief for arrears of salary and pension: Section 157(1)(a) with entry 1 of the rule 73 Table for the computation, Form No. 39 due under rule 73(3) by the Section 263(1)(c) date, rule 73(4) with Section 392(4)(a)(ii) for relief through the disbursing officer. Section 89(1) with Rule 21AA and Form 10E of the repealed 1961 Act governs the financial year 2025-26.
12. Income-tax Act, 2025, Section 93(1)(d), deduction of one-third of a family pension subject to Rs. 25,000 where tax is computed under Section 202(1) and Rs. 15,000 in any other case; Section 57(iia) of the repealed 1961 Act is the predecessor, its Rs. 25,000 limb inserted by the Finance (No. 2) Act 2024 with effect from assessment year 2025-26.
13. Income-tax Act, 2025, Sections 15, 16 and 17, and rule 15 of the Income-tax Rules, 2026: rule 15(2)(a), Table I serial 1, valuing government accommodation at the licence fee less rent paid and serial 2 valuing other employers’ accommodation at 10%, 7.5% or 5% of salary; and rule 15(3), Table II serial 1(c), valuing an official car used partly privately at Rs. 5,000 or Rs. 7,000 a month plus Rs. 3,000 for a chauffeur. Rule 3 of the Income-tax Rules, 1962 is the predecessor.
14. Income-tax Act, 2025, Section 392, and the Income-tax Rules, 2026: rule 204(1) and Form No. 122; rule 204(2) and Form No. 123; rule 205 with its Table and Form No. 124; rule 215(1) and Form No. 130, due 15 June; rule 136 on the Section 202(4) option; and rule 164(2) to (4) prescribing Form SAHAJ (ITR-1) and Form No. ITR-2. Section 192 with Rules 26B and 26C, and Forms 12BA, 12BB, 16 and 10-IEA, all under the repealed 1961 and 1962 instruments, are the predecessors.