New tax regime

The new tax regime is the default way personal income tax is charged on the salary and pension of a central government employee, imposed for the tax year 2026-27 by Section 202 of the Income-tax Act 2025. It offers seven slabs at lower rates than the old regime and takes away most of the deductions and exclusions the old regime allowed. Section 202(1) computes the tax at its Table rates unless the person positively exercises the option under Section 202(4).

Its headline feature is that a total income up to Rs. 12 lakh bears no tax. Section 156(2)(a) allows a deduction from the tax of 100% of the income-tax payable or Rs. 60,000, whichever is less, which cancels the slab tax entirely for a resident individual at that income. For a salaried person or a pensioner, the Rs. 75,000 standard deduction at serial 2 of the Section 19(1) Table sits on top, so a salary or pension up to Rs. 12.75 lakh a year can attract no tax at all. The Finance Act 2026 changed no slab and no rebate, so the figures are the same as those the Finance Act 2025 set for the financial year 2025-26.

Two Acts are live at once for a reader in September 2026, and the distinction runs through everything below. The tax year 2026-27, the year now running, is governed by the Income-tax Act 2025. The assessment year 2026-27, whose returns were due on 31 July 2026, is governed by the repealed Income-tax Act 1961 and its Section 115BAC, which Section 536(2)(c) of the 2025 Act continues for that purpose. The arithmetic is identical under both; the citations are not.

For the head-to-head choice, see the old versus new tax regime article, and for the wider picture, income tax for government employees.

The slab table under Section 202(1)

The Table to Section 202(1) of the Income-tax Act 2025 taxes total income in seven slabs. These are the rates for the tax year 2026-27, and they are the same rates the Finance Act 2025 wrote into Section 115BAC(1A) for the financial year 2025-26.

A health and education cess of 4% is added under Section 3(15) of the Finance Act 2026, on the tax as increased by any surcharge. Serial 1 of the Table gives the same nil band of Rs. 4 lakh to every individual and attaches no age condition, so the new regime carries no equivalent of the higher exemption a senior citizen draws in the old regime under items (II) and (III) of Paragraph A of Part I-B of the First Schedule to the Finance Act 2026. Section 202(1) applies to a Hindu undivided family, an association of persons, a body of individuals and an artificial juridical person as well as to an individual.

The Rs. 12 lakh rebate and the Rs. 12.75 lakh salaried threshold

The slabs are only half the computation, because the Section 156(2) rebate cancels the tax entirely for most middle-income earners. Where the total income of a resident individual is chargeable under Section 202(1) and does not exceed Rs. 12 lakh, Section 156(2)(a) allows a deduction from the tax of 100% of the income-tax payable or Rs. 60,000, whichever is less. So although the Table shows tax accruing from Rs. 4 lakh upwards, the tax actually payable on a total income of exactly Rs. 12 lakh is nil. The Section 87A rebate article carries the same relief under its repealed-Act number.

For a salaried person and a pensioner, the Rs. 75,000 standard deduction raises the ceiling further. Serial 2 of the Section 19(1) Table gives Rs. 75,000, or the salary if less, where income-tax is computed under Section 202(1), against Rs. 50,000 in any other case, and the deduction is taken before the slabs apply. A gross salary of Rs. 12.75 lakh therefore reduces to a total income of Rs. 12 lakh, which the rebate then makes tax-free. Rs. 12.75 lakh a year is the practical zero-tax threshold for a salaried government employee.

Two limits on the rebate are worth stating. It is available only to a resident individual, so a Hindu undivided family, firm or company taxed under Section 202(1) does not get it. And Section 156(3) provides that the deduction shall not exceed income-tax payable at the rates in Section 202(1), which confines it to slab-rate income: tax on a short-term capital gain under Section 196 or a long-term gain under Section 197 stands outside the rebate, so tax can still fall due where the total income is around Rs. 12 lakh.

Marginal relief just above Rs. 12 lakh

Without protection, a taxpayer whose income slightly exceeds Rs. 12 lakh would face a cliff: the rebate falls away and the full slab tax becomes payable on the whole income. Section 156(2)(b) prevents that. Where the total income exceeds Rs. 12 lakh and the income-tax payable on it exceeds the amount by which the income exceeds Rs. 12 lakh, the difference between the two is allowed as a deduction, which limits the tax to the excess over Rs. 12 lakh.

Take a total income of Rs. 12,10,000. The slab tax is Rs. 61,500, being Rs. 20,000 on the Rs. 4 lakh to Rs. 8 lakh band, Rs. 40,000 on the Rs. 8 lakh to Rs. 12 lakh band and Rs. 1,500 on the Rs. 10,000 above Rs. 12 lakh. The income exceeds Rs. 12 lakh by Rs. 10,000, so Section 156(2)(b) allows Rs. 51,500 as a deduction and the tax becomes Rs. 10,000, or Rs. 10,400 with the 4% cess. The relief tapers as income rises and runs out at a total income of Rs. 12,70,588, the point at which Rs. 60,000 plus 15% of the excess over Rs. 12 lakh equals the excess itself. Beyond that figure the ordinary slab tax applies in full. The marginal relief article works through the taper and the separate relief that applies at the surcharge thresholds.

Deductions the regime allows, and those it removes

The trade-off is lower rates for fewer deductions, and Section 202(2)(a) is where the removal is written. It is a list of twelve sub-clauses, and for a salaried reader four of them do the work.

Section 202(2)(a)(xii) removes the whole of Chapter VIII other than Sections 124(1), 124(2), 125(2) and 146. That single sub-clause is what takes away Section 123 read with Schedule XV, the Rs. 1.5 lakh basket that the repealed Act carried at Section 80C and which includes the employee’s own general provident fund subscription at Schedule XV paragraph 1(d); the employee’s own National Pension System contribution at Schedule XV paragraph 1(y); the additional Rs. 50,000 under Section 124(3); and the health-insurance deduction under Section 126. It is also what leaves the employer’s contribution standing, because Sections 124(1) and 124(2) are named in the exception.

That employer deduction is the one worth having. Section 124(1)(a) allows the whole of the employer’s contribution to a notified pension scheme up to 14% of salary where the employer is the Central Government or a State Government, and Section 124(13)(b) defines salary for the purpose as basic pay plus dearness allowance where the terms of employment so provide, excluding every other allowance and perquisite. For an employee of any other employer, Section 124(2) substitutes 14% for the 10% of Section 124(1)(b) where the total income is chargeable under Section 202(1), so the default regime is the more generous of the two on this head. The NPS tax benefits article sets out the interaction with Section 124(5), which bars the same rupee being counted twice.

Three further sub-clauses of Section 202(2)(a) matter to a government employee. Sub-clause (iv) removes serial 1 of the Section 19(1) Table, the deduction for tax on employment under article 276(2) of the Constitution, which is the professional tax a State levies. Sub-clause (v) removes the Section 22(1)(b) deduction for interest on borrowed capital in respect of a property within Section 21(6), which is the self-occupied house. Sub-clause (i) removes Schedule III Table serials 5, 6, 7, 8, 11 and 17, which include the leave travel concession exclusion at serial 8 and the house rent allowance exclusion at serial 11.

Sub-clause (ii) is the one most often overstated. It removes Schedule III Table serials 12 and 13, the prescribed-allowance entries that succeed Section 10(14) of the repealed Act, but it does so “other than those as may be prescribed for this purpose”, and rule 280 of the Income-tax Rules 2026 makes that prescription. The transport allowance for an employee with a disability, at serial 10 of the rule 280(2) table, survives in the default regime on that route. Writing that the new regime withdraws the Section 10(14) family altogether is wrong.

Two things the new regime does not touch are worth naming, because both are large for a government employee. Schedule II is untouched by Section 202(2) in its entirety, so the exclusion of general provident fund interest at serial 3 of the Schedule II Table holds in the default regime exactly as it does in the old one, subject to the Rs. 5,00,000 contribution threshold in rule 277(3)(d)(i) of the Income-tax Rules 2026. And the retirement-receipt deductions in the Section 19(1) Table at serials 3 to 14, which cover the death-cum-retirement gratuity, commuted pension and leave encashment, survive intact, because sub-clause (iv) reaches only serial 1. The deductions allowed in the new tax regime article carries the full list.

Outside Chapter VIII, the family-pension deduction stands. Section 93(1)(d)(i) allows one-third of the income or Rs. 25,000, whichever is less, where income-tax is computed under Section 202(1), against Rs. 15,000 in any other case, so a family pensioner is better off on this head under the default regime. The Agniveer Corpus Fund position splits: Section 125(2), the Central Government’s own contribution, is named in the Section 202(2)(a)(xii) exception, while Section 125(1), the Agniveer’s own subscription, is not and falls away.

Surcharge and cess

For higher incomes a surcharge is added on top of the tax before cess. Serial 10 of the Table to Section 3(4)(b) of the Finance Act 2026, which sets the surcharge where income is chargeable under Section 202, gives three rates: 10% where total income exceeds Rs. 50 lakh, 15% above Rs. 1 crore and 25% above Rs. 2 crore. No surcharge arises below Rs. 50 lakh, which covers essentially every serving central government employee and pensioner.

The familiar claim that the new regime caps the surcharge at 25% is right about the outcome and wrong about the mechanism. No cap was imposed. Serial 10 simply has no Rs. 5 crore row and no 37% rate, whereas Paragraph F of Part I-B of the First Schedule, Table 1, serial 1, which carries the old-regime surcharge for an individual, runs all four bands including 37% above Rs. 5 crore. The default regime is lighter for a very high earner because a band was never written for it. With the 30% top slab, the 25% surcharge and the 4% cess, the maximum marginal rate in the new regime is 39%, against 42.744% in the old.

Both entries cap the surcharge attributable to dividend income and to capital gains at 15% whatever band the rest of the income falls in, at clause (v) of serial 10 and clause (vi) of the Paragraph F entry. Section 3(5) of the Finance Act 2026 then gives marginal relief on the surcharge itself by the formula Tn = Rn + Sn, limiting the tax and surcharge at each threshold to the tax at the threshold plus the income above it. The 4% cess under Section 3(15) is charged afterwards, on the tax and surcharge as reduced by that relief, and carries no marginal relief of its own. The surcharge on income tax and health and education cess articles work both through.

Choice of regime for the tax year 2026-27

The new regime is the default, so a government employee who does nothing is taxed under Section 202(1). Opting out is governed by Section 202(4), and the machinery changed on 1 April 2026.

A salaried employee or a pensioner with no business or professional income falls under Section 202(4)(b), which requires the option to be exercised along with the return of income furnished under Section 263(1) for the tax year. Rule 136 of the Income-tax Rules 2026, at serial 4 of its table, states the manner for every person taxed under Section 202(4): the option is exercised or withdrawn in that return, and nothing else is prescribed. There is no separate form and no lock-in for the salaried class, so the choice may be remade every year as deductions change.

The employee also tells the Drawing and Disbursing Officer at the start of the year which regime to apply, so that the tax deducted at source under Section 392 from the monthly salary tracks the eventual liability. That intimation is an administrative convenience for the deductor, not the exercise of the option, and it does not bind the return.

A person with business or professional income is treated more strictly under Section 202(4)(a). The option must be exercised on or before the Section 263(1) due date, it applies to subsequent tax years once exercised, it may be withdrawn only once for a year other than the year of exercise, and after withdrawal the person can never exercise it again unless the business or professional income ceases, in which case the Section 202(4)(b) route reopens.

Form 10-IEA is gone. The Income-tax Rules 2026, notified by G.S.R. 198(E) dated 20 March 2026, prescribe no equivalent, and that makes rule 136 the whole of the procedure. Assessment year 2026-27 is the last year for which the form is filed. An option already exercised survives the change: Section 536(2)(f) deems an option exercised under a provision of the repealed Act, and in force immediately before the commencement of the 2025 Act, to have been exercised under the corresponding provision, so a business taxpayer already in the old regime through Form 10-IEA continues in it without re-electing, and the single withdrawal allowed by the proviso to Section 115BAC(6) carries into Section 202(4)(a)(iii).

The assessment year 2026-27 position

For the assessment year 2026-27, the year whose returns are being filed now, the door to the old regime has closed for a salaried employee and a pensioner. The due date under Section 139(1) of the repealed Act for that class was 31 July 2026, fixed by the four-row table that Section 5 of the Finance Act 2026 substituted into Explanation 2 with effect from 1 March 2026, and no order under Section 119 extended it.

A belated return cannot carry the old regime, and the reason is structural. Clause (i) of Section 115BAC(6) of the repealed Act requires the option on or before the Section 139(1) due date, and clause (ii) requires it along with the return furnished under Section 139(1). A belated return is furnished under Section 139(4), a different sub-section, so neither limb is satisfied and the taxpayer stays in the default regime under Section 115BAC(1A). The Section 234F late-filing fee of Rs. 5,000 is usually the smaller half of the loss.

Two routes remain, and both are contested or discretionary. Where an original return was filed on time, a revised return under Section 139(5) may be attempted on tribunal reasoning that a valid revised return substitutes the original. Otherwise an application for condonation of delay under Section 119(2)(b) is the only avenue, and it turns on the authority being satisfied of genuine hardship. A filer with business or professional income not liable to audit worked to 31 August 2026, and that date has passed as well; an audit case under Section 44AB has until 31 October 2026 and a Section 92E case until 30 November 2026, so for those two groups the old regime is still open. The how to switch tax regime guide sets out the four dates and the verification trap that can push a timely return past them.

Section 202 and the renumbering from repealed Section 115BAC

The regime was introduced by Section 115BAC of the Income-tax Act 1961, first as an option from the financial year 2020-21 and then, by the Finance Act 2023, as the default from the financial year 2023-24. The Income-tax Act 2025 carries it forward at Section 202 and adds one structural change a reader consulting the bare text should know about: the slab table sits in the Table to Section 202(1) of the Act itself, not in a schedule to the Finance Act, which is where the old arrangement put it. Paragraph A of Part I-B of the First Schedule to the Finance Act 2026 carries the old-regime rates instead, and Section 3(2)(b) of that Act names the two alternatives side by side. The Finance Act supplies the surcharge, the marginal relief on it and the cess; the Act itself supplies the slabs.

The renumbering runs through the rest of the regime.

None of it changes the arithmetic. A computation done correctly under either Act on the same income produces the same figure, which is why the transition is a citation problem rather than a tax one.

Worked example for a central government employee

Take a central government employee with a gross salary of Rs. 14,00,000 in the tax year 2026-27, which includes the employer’s National Pension System contribution of Rs. 1,20,000 brought to charge as salary by Section 16(k). The employee makes no election, so Section 202(1) applies.

The Section 124(1)(a) deduction pulls the total income to Rs. 12,05,000, and Section 156(2)(b) then limits the tax to the Rs. 5,000 by which the income exceeds Rs. 12 lakh, so the employee pays Rs. 5,200 after cess. The same computation for the financial year 2025-26 gives the same Rs. 5,200 under Section 115BAC(1A), Section 16(ia), Section 80CCD(2) and the proviso to Section 87A. Had the employee been able to claim large old-regime deductions, through the provident fund subscription, insurance, house rent allowance and home-loan interest, the old regime might produce a lower figure, which is why the comparison should be run on the individual’s actual deductions rather than on the headline rates.

Related Articles

• Section 202, Income-tax Act 2025
• Rebate, deduction, and exemption: the difference
• Health and education cess
• Form 10-IEA to opt out of the new regime
• Tax regime break-even: when the old regime wins
• Income tax slabs for AY 2027-28
• Section 115BAC
• Old versus new tax regime
• Old tax regime
• How to switch tax regime
• Section 87A rebate
• Standard deduction
• Marginal relief on income tax
• Surcharge on income tax
• Deductions allowed in the new tax regime
• Income-tax Act 2025
• Income tax for government employees
• Income tax for pensioners
• TDS on salary
• HRA exemption under Section 10(13A)
• Leave travel concession
• NPS tax benefits
• Additional NPS deduction of Rs. 50,000
• National Pension System
• General Provident Fund
• Agniveer Corpus Fund
• Family pension
• Professional tax
• Section 157 relief
• Revised return
• Section 234F late filing fee
• Condonation of delay under Section 119(2)(b)
• Senior citizen tax
• Advance tax
• Central Board of Direct Taxes
• Take-home salary of central government employees
• Central government employees in India

External references

• Income Tax Department: e-filing portal
• Income Tax Department (about and Acts)
• Central Board of Direct Taxes
• Department of Revenue, Ministry of Finance
• The Gazette of India

References

1. Income-tax Act, 2025 (Act No. 30 of 2025), in force 1 April 2026: Section 202(1) and its Table (the default regime and its seven slab rates), Section 202(2)(a) (the exemptions and deductions withdrawn, including sub-clause (xii) on Chapter VIII), and Section 202(4)(a) and (b) (exercise of the option, the single withdrawal, and the exception on ceasing to have business income).
2. Income-tax Act, 2025, Section 156(2)(a) and 156(2)(b) (the rebate of up to Rs. 60,000 up to a total income of Rs. 12 lakh, and the marginal relief above it) with Section 156(3) (the deduction confined to tax at the Section 202(1) rates).
3. Income-tax Act, 2025, Section 19(1), Table serials 1 and 2 (the employment-tax deduction and the standard deduction of Rs. 75,000 where tax is computed under Section 202(1), Rs. 50,000 otherwise), and Section 93(1)(d)(i) (family-pension deduction of Rs. 25,000 in the default regime).
4. Income-tax Act, 2025, Sections 124(1)(a), 124(2) and 124(13)(b) (the employer’s National Pension System contribution at 14% of basic pay plus dearness allowance) and Section 125(1) and 125(2) (the Agniveer Corpus Fund, only the Central Government’s contribution surviving the default regime).
5. Income-tax Rules, 2026, notified by G.S.R. 198(E) dated 20 March 2026: rule 136, serial 4 of its table (the option under Section 202(4) exercised or withdrawn in the return furnished under Section 263(1)), rule 280 (the prescribed allowances preserved by Section 202(2)(a)(ii)) and rule 277(3)(d)(i) (the Rs. 5,00,000 provident-fund contribution threshold).
6. Finance Act, 2026 (Act No. 4 of 2026, assented 30 March 2026): Section 3(2)(b) (the two alternative rate sets), Section 3(4)(b), Table serial 10 (the surcharge where income is chargeable under Section 202), Section 3(5) (marginal relief on surcharge), Section 3(15) (the 4% health and education cess), First Schedule, Part I-B, Paragraph A (the old-regime slabs and the age-based exemptions) and Paragraph F, Table 1, serial 1 (the old-regime surcharge including the 37% band).
7. Income-tax Act, 1961, Section 115BAC, in particular sub-section (1A) (the slab rates for the financial year 2025-26) and sub-section (6) (exercise of the option through Section 139(1)); repealed on 1 April 2026 by Section 536(1) of the Income-tax Act, 2025, and continued for the assessment year 2026-27 by Section 536(2)(c).
8. Income-tax Act, 2025, Section 536(2)(f) (an option exercised under the repealed Act deemed exercised under the corresponding provision of the 2025 Act).
9. Finance Act, 2026, Section 5 (substituting Explanation 2 to Section 139(1) of the Income-tax Act, 1961 with effect from 1 March 2026, fixing 31 July 2026 as the due date for a salaried assessee and a pensioner for the assessment year 2026-27).