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 87A rebate, or the old regime, which must be chosen and carries higher rates with the full catalogue of deductions. The Finance Act 2026 left both tables unchanged from the previous year.

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 fully exempt for a central or state government employee with no monetary ceiling, where a private-sector employee faces a cap on each. Government accommodation is valued as a perquisite at the licence fee the government charges rather than at market rent. The third advantage has just been withdrawn: Section 16(ii) of the Income-tax Act, 1961 gave a deduction for entertainment allowance to government employees and to nobody else, and the Income-tax Act,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.

This article sets out which law governs the year and how the section numbers have moved, the slab tables for both regimes, the rebate and the marginal relief that cushions incomes just above Rs. 12 lakh, how to choose and switch, the treatment of every component of a government salary and of the two perquisites that matter, the exempt retirement benefits including the Unified Pension Scheme provisions inserted in 2025, the deductions available under each regime, the relief on pay commission and dearness allowance arrears, surcharge and cess, tax deducted at source and the forms, three worked computations, and the position of pensioners and family pensioners.

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 rates themselves do not come from the Income-tax Act at all. They are set each year by the Finance Act, and the Finance Act 2026 left the slabs, the rebate, the standard deduction, the surcharge, and the cess of both regimes exactly where they stood for the previous year. The consolidated text published by the Central Board of Direct Taxes is titled the Income-tax Act, 2025 as amended by the Finance Act, 2026. 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. The mapping for a salaried government employee is as follows.

This article uses the 1961-Act numbers as the primary reference throughout, because they remain the numbers in which orders, circulars, Form 16 annexures, and everyday practice are still written, and it names the 2025-Act equivalent wherever the provision is load-bearing. The reliefs continue; only the labels moved.

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 Income-tax Act, 1961, 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 the new regime under Section 115BAC(1A), renumbered Section 202. 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 87A 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 Section 80C, the extra National Pension System deduction under Section 80CCD(1B), 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. A taxpayer with business or professional income has one return ticket only: having opted out of the new regime, that person may come back to it once, and after that the choice is locked. 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 139(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 financial year 2026-27 is computed on this table, set by the Finance Act 2026 under Section 115BAC(1A) of the 1961 Act, carried into Section 202 of the Income-tax Act, 2025, and 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 under Section 16(ia) is Rs. 75,000 in the new regime, 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.

Old regime slabs for the financial year 2026-27

Under the old regime, which a salaried employee or pensioner chooses in the return itself and which only a taxpayer with business or professional income selects through Form 10-IEA, the slabs for an individual below 60 are these, also unchanged by the Finance Act 2026.

The old regime keeps its age-based basic exemptions, which is the one structural advantage it holds over the new regime for retired employees. A senior citizen aged 60 to 79 has a basic exemption of Rs. 3 lakh instead of Rs. 2.5 lakh, and a super-senior citizen of 80 or above has Rs. 5 lakh, so a super-senior pensioner’s first Rs. 5 lakh bears no tax before any deduction or rebate is applied.

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 87A rebate is what makes the new regime cheap at moderate incomes, and it is a rebate against tax rather than a deduction from income. A resident individual with a total income up to Rs. 12 lakh receives a rebate of up to Rs. 60,000, 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.

Under the old regime the same section gives a rebate of up to Rs. 12,500 on a total income up to Rs. 5 lakh, which cancels the tax on that income in full. Both rebates are available only to a resident individual; a non-resident gets neither. Under the Income-tax Act, 2025 the provision is Section 156, with sub-section (1) carrying the old-regime line and sub-section (2) the new-regime line.

Two limits on the rebate are missed often enough to be worth naming. It does not apply to income taxed at special rates, so short-term capital gains under Section 111A and long-term capital gains under Section 112A stay taxable at their own rates even where the total income is below Rs. 12 lakh; 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, marginal relief 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 80C, the extra Rs. 50,000 of National Pension System contribution under Section 80CCD(1B), a substantial house rent allowance exemption from renting in a metro, home-loan interest near the Rs. 2 lakh cap under Section 24(b), and a health-insurance claim under Section 80D, 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 80TTB 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 192 runs on the right basis and the monthly deduction is correct. Then confirm or change the choice in the return. Opting out of the new regime requires Form 10-IEA filed on the e-filing portal before the return is submitted; the old regime cannot be claimed in the return alone. A salaried employee or pensioner without business income may 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 taxed component by component under Section 17(1), and the treatment differs enough between components that a single blanket statement is wrong. This table sets out the position for the financial 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 Section 10(13A) house rent allowance exemption and for the 14% employer contribution deductible under Section 80CCD(2), so a rise in dearness allowance raises both the tax and the size of two reliefs.

The Children Education Allowance line is a reliable trap. The DoPT reimbursement runs to Rs. 2,812.50 a month per child at the current rate, while the income-tax exemption under Rule 2BB is Rs. 100 a month per child. The two figures are not the same thing and the difference is fully taxable salary; assuming the reimbursement is exempt because it is a reimbursement understates the taxable salary by more than Rs. 32,000 a year for two children.

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 non-cash benefits taxed under Section 17(2), and the Drawing and Disbursing Officer must add their value to salary before computing tax deducted at source, and must give the employee a statement in Form 12BA alongside Form 16.

Government accommodation is valued not at market rent but at the licence fee the government charges for the quarters. This is why an employee in official accommodation draws no house rent allowance at all: the accommodation itself is the benefit, and its perquisite value is the licence fee rather than the rental value of comparable private housing in the same city. 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 for private travel is valued on the fixed monthly figures in Rule 3 of the Income-tax Rules rather than on actual running cost, which again produces a modest number. Cash allowances such as dearness allowance and transport allowance are not perquisites at all; they are part of salary under Section 17(1) and are taxed in the ordinary way subject to any specific exemption.

The practical consequence is that a government employee’s Form 16 usually shows salary made up of pay and cash allowances with a modest or nil perquisite line. The figures in Form 12BA should still be checked, because an error there flows straight into the taxable salary and into the monthly deduction.

Retirement benefits and their exemptions

The retirement benefits are where a central government employee is most favoured, and the three largest are fully exempt with no monetary ceiling. A private-sector employee faces a cap on each of the three. The position for the financial 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. Section 10(10)(i) exempts whatever a government employee receives in full, so the two ceilings are frequently conflated and should not be. The same applies to leave encashment: the Rs. 25 lakh cap that a private-sector employee faces under Section 10(10AA)(ii) has no application to a government retiree under clause (i).

The Unified Pension Scheme position rested on an administrative footing until 2025 and is now statutory. 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 is 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). Section 80CCD(3A) is the load-bearing one: without it, the transfer of the individual corpus to the pool corpus at retirement would have been a taxable receipt at that moment. An employee choosing between NPS and the Unified Pension Scheme therefore faces no tax penalty on either side of the choice.

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, and generic tax guidance has been slow to say so. Section 16(ii) of the 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 80C rewards a government employee twice over, because several of the qualifying payments are made anyway rather than chosen. The General Provident Fund subscription qualifies, as does the employee’s own National Pension System contribution, the Public Provident Fund, life insurance premiums, the tuition fees of up to two children, and the principal repayment of a home loan. 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 80CCD(2) is the exception that crosses the regime boundary. The employer’s contribution to the National Pension System or the Unified Pension Scheme, up to 14% of basic pay plus dearness allowance for a central government employee, 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.

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 under Section 16(ia), on salary and on a service pension.
• The employer’s National Pension System or Unified Pension Scheme contribution under Section 80CCD(2), up to 14% of basic pay plus dearness allowance for a central government employee.
• The family-pension deduction under Section 57(iia), the lower of one-third of the family pension or Rs. 25,000.
• The Agniveer Corpus Fund contribution made by the Central Government, under Section 80CCH(2), for an Agniveer under the Agnipath scheme. The Agniveer’s own contribution under Section 80CCH(1) is allowed only in the old regime.
• A few duty-related exemptions under Section 10(14) that meet the actual cost of performing a duty rather than confer a general benefit, including the transport allowance for an employee with a specified disability, exempt up to Rs. 15,000 a month plus dearness allowance in the eight metros and Rs. 8,000 a month plus dearness allowance elsewhere under rule 15 of the Income-tax Rules, 2026 from 1 April 2026, against Rs. 3,200 a month for the financial year 2025-26.

What the new regime does not allow is the bulk of the familiar list: Section 80C, the extra Rs. 50,000 for NPS under Section 80CCD(1B), Section 80D, the house rent allowance exemption under Section 10(13A), Leave Travel Concession, home-loan interest on a self-occupied house under Section 24(b), Section 80TTB, and the professional tax deduction, which sits at serial number 1 of the Table in Section 19(1) of the Income-tax Act, 2025 and is excluded from the new-regime computation by Section 202(2)(a)(iv). The entertainment allowance deduction is not on this list because it is not available in either regime: the 2025 Act enacts no counterpart to Section 16(ii).

The most common error in this area is specific enough to name. Employees assume that because the employer’s NPS contribution under Section 80CCD(2) survives, the employee’s own additional Rs. 50,000 under Section 80CCD(1B) survives with it. It does not. Only the employer contribution carries over, and 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 89(1) gives relief where that bunching pushes the employee into a higher slab. 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 89(1) read with Rule 21A(2), 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 and unforgiving. Form 10E must be filed on the e-filing portal before the return is submitted. A relief claimed in the return without a Form 10E on record is disallowed by an intimation under Section 143(1), and the tax comes back with interest. From the tax year 2026-27 the provision is Section 157 of the Income-tax Act, 2025 and the form is Form No. 39 under the Income Tax Rules, 2026; for a return covering income up to 31 March 2026 the provision is Section 89 and the form is Form 10E.

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 10E 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 89 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. A further band of 37% above Rs. 5 crore exists only in the old regime; the new regime caps the surcharge at 25%, which is why its effective top rate is lower. The surcharge on certain capital gains and dividend income is capped at 15% in both regimes.

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, 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 87A 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 192 and is personally responsible for deducting the right tax each month. Deduction runs on the average rate: the estimated tax for the whole year is divided across the remaining months, so a mid-year change in salary or in declared deductions changes every subsequent instalment rather than producing a single adjustment.

The employee’s side of this is Form 12BB under Rule 26C, on which the house rent allowance exemption, Leave Travel Concession, home-loan interest, and the Chapter VI-A deductions are declared to the DDO, with the supporting evidence the rule requires. A declaration made and not substantiated by the year end is withdrawn from the computation and the tax is recovered from the remaining salary. From the tax year 2026-27 the equivalent form under the Income-tax Act, 2025 is Form 124, prescribed by Rule 205 of the Income-tax Rules, 2026, which adds a disclosure of the employee’s relationship with the landlord.

At the year end the DDO issues Form 16, whose Part A comes from the TRACES system and carries the quarterly deduction and deposit record, and whose Part B is prepared by the employer and carries the salary breakup under Section 17(1), the perquisites under Section 17(2), the exemptions, the deductions, and the tax computed. Form 12BA accompanies it wherever there is a perquisite. Under the Income-tax Act, 2025, Form 16 becomes the system-generated Form 130.

Check the deduction record against Form 26AS and the Annual Information Statement before filing. A deduction shown in Form 16 but missing from Form 26AS means the DDO deducted the tax and the deposit or the return has not reached TRACES, and the credit will not be allowed until it does.

Filing the return

The return for the financial year 2026-27 is due by 31 July 2027 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 may be confirmed or changed at this stage.

Form selection turns on the composition of income rather than its size alone. ITR-1, Sahaj covers a total income up to Rs. 50 lakh from salary or pension, one house property, and other sources such as interest, and it is the right form for the large majority of serving employees and pensioners. ITR-2 is required where total income exceeds Rs. 50 lakh, where there is more than one house property, or where capital gains exceed the small limit permitted in ITR-1. A government employee who sold listed shares or a house during the year files ITR-2.

Two steps commonly come as a surprise. Opting out of the new regime requires Form 10-IEA filed before the return, not within it. And advance tax is payable in instalments during the year where the liability net of tax deducted at source is Rs. 10,000 or more, under Section 404 of the Income-tax Act 2025 and Section 208 of the 1961 Act before it, which arises for an employee with substantial interest, rental, or capital-gains income that the DDO never saw. Interest under Sections 424 and 425, formerly Sections 234B and 234C, 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.

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 87A 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 80CCD(2) 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 of Section 80C, the extra Rs. 50,000 under Section 80CCD(1B), 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 80CCD(2), 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 80CCD(2), Rs. 1,50,000 under Section 80C, Rs. 50,000 under Section 80CCD(1B), the Rs. 1,20,000 house rent allowance exemption, Rs. 2,00,000 of home-loan interest, and Rs. 25,000 under Section 80D, 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 single 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. 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 was exempt under Section 10(10A)(i) 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 57(iia) allows instead the lower of one-third of the family pension or Rs. 25,000 under the new regime, or Rs. 15,000 under the old, the new-regime cap having been raised by the Finance (No. 2) Act 2024 with effect from assessment year 2025-26. 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, to Rs. 3 lakh from 60 and Rs. 5 lakh from 80, where the new regime gives everyone the same Rs. 4 lakh. And Section 80TTB allows a deduction of up to Rs. 50,000 on interest from bank and post-office deposits, which is substantial for a pensioner living partly on deposit interest. 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

• 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 89 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, continuing the slab tables, rebate, standard deduction, surcharge, and cess of both regimes unchanged for the financial year 2026-27.
3. Income-tax Act, 1961, Section 115BAC(1A) (the default new regime and its slabs), renumbered Section 202 of the Income-tax Act, 2025.
4. Income-tax Act, 1961, Section 87A (rebate up to Rs. 60,000 on total income up to Rs. 12 lakh under the new regime and up to Rs. 12,500 on Rs. 5 lakh under the old), renumbered Section 156.
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 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, 1961, Sections 10(10)(i), 10(10A)(i), 10(10AA)(i) and 10(12A), exempting gratuity, commuted pension, leave encashment on retirement, and the National Pension System lump sum for government employees.
7. Taxation Laws (Amendment) Act, 2025 (Act No. 29 of 2025), Presidential assent 21 August 2025, inserting Sections 10(12AA), 10(12AB) and 80CCD(3A) of the Income-tax Act, 1961 for the Unified Pension Scheme; and Central Board of Direct Taxes Office Memorandum dated 2 July 2025.
8. Income-tax Act, 1961, Sections 80C, 80CCD(1B), 80CCD(2), 80CCH(1) and 80CCH(2), of which Section 115BAC(2)(i) preserves only 80CCH(2) in the new regime, 80D, 80TTB, 24(b), 10(5) and 10(13A), on the deductions and exemptions available under each regime.
9. Income-tax Act, 1961, Section 10(14) read with Rule 2BB of the Income-tax Rules, 1962, on the Rs. 3,200 a month transport allowance for an employee with a specified disability and the Rs. 100 and Rs. 300 a month Children Education Allowance exemptions, which govern the financial year 2025-26; and Central Board of Direct Taxes Notification No. 22/2026, G.S.R. 198(E), dated 20 March 2026, rule 15 of the Income-tax Rules, 2026, which raised that transport allowance exemption to Rs. 15,000 a month plus dearness allowance in the eight metros and Rs. 8,000 elsewhere from 1 April 2026.
10. Income-tax Act, 1961, Section 89(1) read with Rule 21A(2) and Form 10E, on relief for arrears of salary and pension, renumbered Section 157 with Form No. 39 under the Income Tax Rules, 2026.
11. Income-tax Act, 1961, Section 57(iia), deduction of one-third of the family pension subject to Rs. 25,000 under the new regime and Rs. 15,000 under the old, the new-regime cap raised by the Finance (No. 2) Act 2024 with effect from assessment year 2025-26.
12. Income-tax Act, 1961, Sections 17(1) and 17(2) with Rule 3 of the Income-tax Rules, on the valuation of government accommodation at the licence fee and of an official car on fixed monthly figures, and Section 192 with Rule 26C on tax deducted at source, Form 12BB and Form 16.