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. It offers a wider set of slabs at lower rates than the old regime, but it takes away most of the deductions and exemptions that the old regime allowed. Since the financial year 2023-24 it has been the default: unless a taxpayer positively chooses the old regime, their tax is worked out under the new one.

Its headline feature, after the Finance Act 2025, is that income up to Rs. 12 lakh bears no tax. This is achieved through a Section 87A rebate of up to Rs. 60,000, which fully cancels the tax on a total income up to Rs. 12 lakh for a resident individual. For a salaried person or a pensioner, the Rs. 75,000 standard deduction sits on top of that, so a salary or pension up to Rs. 12.75 lakh a year can attract no tax at all. These figures apply for the financial year 2025-26 (assessment year 2026-27) and continue unchanged for 2026-27, since Budget 2026 made no change to the slabs or the rebate.

This article sets out the regime in full: the slab table, the Rs. 12 lakh rebate and the Rs. 12.75 lakh salaried threshold, the marginal relief that cushions incomes just above Rs. 12 lakh, the standard deduction, the short list of deductions the regime still allows and the long list it removes, the surcharge and cess, how a government employee actually chooses between the regimes, and where the new Income-tax Act 2025 renumbers the provision. For the head-to-head choice against the old regime, see the old versus new tax regime article, and for the wider picture, income tax for government employees .

The slab table

Under the new regime, income is taxed in seven slabs. The rates for the financial year 2025-26 (assessment year 2026-27), which continue for 2026-27, are as follows.

A health and education cess of 4 per cent is added to the tax (and to any surcharge). One point of difference from the old regime is that the new regime gives the same basic exemption of Rs. 4 lakh to everyone: it does not carry the higher age-based exemption that a senior citizen gets under the old regime, where the basic exemption rises to Rs. 3 lakh at 60 and Rs. 5 lakh at 80.

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

The slabs are only half the story, because the Section 87A rebate wipes out the tax entirely for most middle-income earners. The Finance Act 2025 raised the new-regime rebate so that a resident individual with a total income up to Rs. 12 lakh pays no tax: the rebate equals the whole of the tax that the slabs would produce, capped at Rs. 60,000. So although the slab table shows tax accruing from Rs. 4 lakh upwards, the actual tax on an income of exactly Rs. 12 lakh is nil.

For a salaried person and a pensioner, the standard deduction of Rs. 75,000 raises this ceiling further. Because the deduction is taken off the salary or pension before the slabs are applied, a gross salary of Rs. 12.75 lakh reduces to a taxable income of Rs. 12 lakh, which the rebate then makes tax-free. Rs. 12.75 lakh a year is therefore the practical zero-tax threshold for a salaried government employee under the new regime.

Two limits on the rebate are worth stating. It is available only to a resident individual, not to a Hindu Undivided Family, firm, or company. And it covers only normal income taxed at slab rates; it does not cover income taxed at a special rate, such as long-term or short-term capital gains under Sections 112A and 111A, so tax can still be due on that part even where the total is around Rs. 12 lakh.

Marginal relief just above Rs. 12 lakh

A taxpayer whose income slightly exceeds Rs. 12 lakh would, without protection, face a sharp jump: the rebate falls away entirely, and the full slab tax becomes payable on the whole income. Marginal relief prevents that cliff. Where the tax on the income above Rs. 12 lakh would be more than the amount by which the income exceeds Rs. 12 lakh, the tax is limited to that excess.

Take a taxable income of Rs. 12,10,000. The slab tax would be Rs. 61,500 (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 rebate is not available, because the income is above Rs. 12 lakh. But the income exceeds Rs. 12 lakh by only Rs. 10,000, and the tax of Rs. 61,500 is far more than that, so marginal relief caps the tax at Rs. 10,000, plus the 4 per cent cess, giving Rs. 10,400. The relief tapers as income rises and runs out at around Rs. 12.70 lakh of taxable income, beyond which the ordinary slab tax applies in full. This is the subject of the marginal relief article.

The deductions the new regime allows, and those it removes

The trade-off at the heart of the new regime is lower rates in exchange for fewer deductions. The regime allows only a short list, and the list of what it removes is long. This is set out in full in the deductions allowed in the new tax regime article; the essentials are these.

The new regime allows: the Rs. 75,000 standard deduction on salary and pension; the employer’s contribution to the National Pension System under Section 80CCD(2), which for a central government employee is 14 per cent of basic pay plus dearness allowance and is a genuinely valuable deduction that survives into the new regime; the Agniveer Corpus Fund deduction under Section 80CCH; and the family-pension deduction, raised to Rs. 25,000 in the new regime.

The new regime removes: the Section 80C basket of Rs. 1.5 lakh (including the employee’s own general provident fund , life insurance, and tuition fees); the employee’s own NPS deduction under Section 80CCD(1) and the extra Rs. 50,000 under 80CCD(1B); the Section 80D health-insurance deduction; the house rent allowance exemption under Section 10(13A); the leave travel concession exemption; the deduction for interest on a home loan for a self-occupied house under Section 24(b); and almost all of the other Chapter VI-A deductions. A government employee who claims large deductions under the old regime, through GPF, insurance, HRA, and a home loan, may therefore still find the old regime cheaper, which is exactly the comparison the old versus new tax regime article works through.

Surcharge and cess

For higher incomes, a surcharge is added on top of the tax before cess. In the new regime the surcharge is 10 per cent where total income exceeds Rs. 50 lakh, 15 per cent above Rs. 1 crore, and 25 per cent above Rs. 2 crore. The new regime deliberately caps the surcharge at 25 per cent: the 37 per cent top surcharge that the old regime applies above Rs. 5 crore does not apply here, which makes the new regime meaningfully lighter for very high earners. On the tax plus any surcharge, the 4 per cent health and education cess is then charged. The surcharge on income tax article sets out the slabs and the marginal relief that also applies at each surcharge threshold.

How a government employee chooses the regime

The new regime is the default, so a government employee who does nothing is taxed under it. Choosing the old regime instead depends on the kind of income.

A salaried employee or a pensioner who has no business or professional income can choose freely, year by year. They may simply compute their tax both ways, decide which is lower, and opt for the old regime in the income-tax return for that year if it suits them, switching back to the new regime the next year if their deductions change. There is no lock-in for the salaried class. In practice the employee also tells the Drawing and Disbursing Officer at the start of the year which regime they want, so that the tax deducted at source from the monthly salary matches; the final choice is still made in the return.

A person who has business or professional income is treated more strictly. To opt out of the new regime they must file Form 10-IEA before the due date, and once they have opted out and later returned to the new regime, they cannot opt out again. This lock-in rarely affects a serving government employee, whose income is salary, but it can affect a pensioner who also runs a business or profession.

Section 115BAC and the Income-tax Act 2025

The new 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 , in force from 1 April 2026, carries the regime forward and renumbers the default-regime provision as Section 202. For the financial year 2025-26 (assessment year 2026-27), whose returns are filed from mid-2026, the tax is still computed under the 1961 Act and Section 115BAC; the new Act first applies to the tax year 2026-27. The change of numbering does not alter the slabs, the rebate, or the deductions, but a reader consulting the bare Act after April 2026 should look for Section 202 rather than 115BAC.

A worked example for a government employee

Take a central government employee with a gross salary of Rs. 14,00,000 in the financial year 2025-26, including basic pay, dearness allowance, and allowances, whose employer contributes Rs. 1,20,000 to the NPS under Section 80CCD(2). Under the new regime the tax is worked as follows.

The Rs. 80CCD(2) deduction pulls the taxable income to Rs. 12,05,000, and marginal relief 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. Had the same employee been able to claim large old-regime deductions, through GPF, insurance, HRA, and home-loan interest, the old regime might have produced a lower figure, which is why the comparison should always be run on the individual’s actual deductions.

Related Articles

• 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
• National Pension System
• General Provident Fund
• Section 89 relief
• 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
• Ministry of Finance

References

1. Income-tax Act, 1961, Section 115BAC (the new tax regime and its status as the default from the financial year 2023-24, by the Finance Act 2023), renumbered as Section 202 of the Income-tax Act, 2025 (in force from 1 April 2026).
2. Finance Act, 2025: the new-regime slab table (nil up to Rs. 4 lakh, then 5, 10, 15, 20, 25, and 30 per cent), and the Section 87A rebate raised to Rs. 60,000 with the rebate threshold of a total income of Rs. 12 lakh, together with marginal relief above Rs. 12 lakh.
3. Income-tax Act, Section 16 (standard deduction of Rs. 75,000 in the new regime for salary and pension) and the family-pension deduction of Rs. 25,000 in the new regime.
4. Income-tax Act, Section 80CCD(2) (employer contribution to the National Pension System, 14 per cent of basic pay plus dearness allowance for a central government employee) and Section 80CCH (Agniveer Corpus Fund), the principal deductions that survive in the new regime.
5. Income-tax Act, the surcharge rates in the new regime (10, 15, and 25 per cent, with the 37 per cent top rate not applying) and the 4 per cent health and education cess; and the requirement of Form 10-IEA to opt out of the new regime for a taxpayer with business or professional income.