Old tax regime

The old tax regime is the alternative set of income-tax rates a person elects under Section 202(4) of the Income-tax Act, 2025, charged at the rates in Paragraph A of Part I-B of the First Schedule to the Finance Act 2026, and it buys the full set of Chapter VIII deductions and Schedule III exemptions that the default regime removes. It is no longer the default and has not been since the financial year 2023-24.

The trade is narrow and easy to state. The new tax regime charges lower rates across seven bands and gives a rebate of up to Rs. 60,000 that carries a salary or pension of Rs. 12,75,000 to nil tax, but Section 202(2) strips almost every deduction out of the computation. The old regime keeps those deductions and taxes what remains at four steep bands, with a rebate that runs out at a total income of Rs. 5,00,000. Which one is cheaper is arithmetic, not preference, and the old versus new tax regime article works the comparison through at each income level.

Two things about the old regime changed on 1 April 2026 and are easy to miss. Section 536(1) of the Income-tax Act, 2025 repealed the Income-tax Act, 1961, so the section numbers a taxpayer learned over two decades no longer exist: Section 80C is Section 123 read with Schedule XV, Section 87A is Section 156(1), and the standard deduction sits at serial 2 of a Table in Section 19(1). And the one deduction that belonged to government employees alone, the entertainment allowance under Section 16(ii), was not renumbered at all. It was dropped.

For the wider setting, see income tax for government employees and income tax for pensioners.

Where the old-regime rates are written

Paragraph A of Part I-B of the First Schedule to the Finance Act 2026 (Act No. 4 of 2026, assented 30 March 2026) carries the old-regime rates. This is a change of location worth knowing about, because the default-regime slabs moved the other way: they sit in the Table to Section 202(1) of the Income-tax Act, 2025 itself, which is a departure from the old arrangement under which the annual Finance Act carried every rate. Section 3(2)(b) of the Finance Act 2026 names the two alternatives side by side.

Item (I) of that Paragraph sets the rates for an individual below the age of 60.

Four bands against the default regime’s seven is the whole difficulty. The rate quadruples from 5% to 20% at Rs. 5,00,000 and reaches 30% at Rs. 10,00,000, a figure the default table does not reach until Rs. 24,00,000. A 4% health and education cess is charged under Section 3(15) of the Finance Act 2026 on the tax as increased by any surcharge, at the same rate in both regimes, so it never shifts the choice between them.

The age-based basic exemption

Items (II) and (III) of Paragraph A raise the nil band with age, and this is the one structural advantage the old regime holds that has nothing to do with deductions. Item (II) sets the basic exemption at Rs. 3,00,000 for a senior citizen aged 60 or more but below 80 at any time during the tax year. Item (III) sets it at Rs. 5,00,000 for a super-senior citizen of 80 or above, and item (III) carries no 5% band at all: above Rs. 5,00,000 the rate goes straight to 20%.

Serial 1 of the Table to Section 202(1) attaches no age condition to its Rs. 4,00,000 nil band, so the default regime gives a pensioner of 82 exactly what it gives an employee of 24. The advantage is real but small in rupees. Measured against the flat Rs. 4,00,000, item (II) is worth nothing at all to a senior citizen, whose exemption is lower, and item (III) is worth Rs. 5,000 of tax to a super-senior citizen at the 5% rate on the Rs. 4,00,000 to Rs. 5,00,000 slice. A senior-citizen pensioner drawing deposit interest gains far more from Section 153(2)(b), which allows up to Rs. 50,000 of interest from bank, co-operative bank and post office deposits, than from the exemption itself. Both are worth nothing below a pension of Rs. 12,75,000, at which point the default regime already charges nil.

The Section 156(1) rebate and the absence of marginal relief

Section 156(1) of the Income-tax Act, 2025 allows a resident individual a deduction of 100% of the income-tax payable or Rs. 12,500, whichever is less, where the total income does not exceed Rs. 5,00,000. That is the successor to Section 87A of the 1961 Act, and after the Rs. 50,000 standard deduction it carries a gross salary of Rs. 5,50,000 to nil.

The sub-section stops there, and the stopping point is the trap. Section 156 carries both rebates in one section and they are not built alike. Section 156(2)(a) gives the default regime a rebate of up to Rs. 60,000 to a total income of Rs. 12,00,000, and Section 156(2)(b) then adds a marginal-relief limb capping the tax at the amount by which total income exceeds Rs. 12,00,000. Section 156(1) has no such limb. A resident individual in the old regime with a total income of Rs. 5,00,000 pays nothing; at Rs. 5,00,100 the rebate is gone entirely and the tax is Rs. 12,520 plus cess. The cliff is Rs. 12,500 of tax across Rs. 100 of income, and no provision softens it.

Both Section 156(2) limbs are framed against income chargeable under Section 202(1), which is why neither reaches an old-regime computation, and Section 156(3) caps the Section 156(2) deduction at the tax payable at the Section 202(1) rates. The Section 87A rebate and marginal relief articles set out both mechanisms. A separate marginal relief does operate in the old regime, but only on the surcharge, under Section 3(5) of the Finance Act 2026.

Standard deduction, professional tax, and the withdrawn entertainment allowance

Serial 2 of the Table to Section 19(1) of the Income-tax Act, 2025 gives the old regime a standard deduction of Rs. 50,000 or the salary, whichever is less. The entry states both figures at once: Rs. 75,000 where income-tax is computed under Section 202(1), and Rs. 50,000 in any other case. It is granted automatically, needs no proof and no declaration, and reaches a service pension as well as a salary because Section 15(2) makes a former employer an employer. It does not reach a family pension, which is charged as income from other sources and carries its own deduction under Section 93(1)(d).

Serial 1 of the same Table allows any salaried person to deduct the professional tax actually paid to a state under article 276(2) of the Constitution. Section 202(2)(a)(iv) removes serial 1, and only serial 1, from the default computation, so the deduction belongs to the old regime alone. On a maximum state levy of Rs. 2,500 a year it is worth Rs. 750 of tax at the 30% rate, which is small but free.

The third salary deduction is gone. Section 16(ii) of the Income-tax Act, 1961 gave a government employee, and nobody else, the least of Rs. 5,000, one-fifth of basic salary, or the entertainment allowance actually received. The Table to Section 19(1) of the 2025 Act runs from the employment tax at serial 1 through the retirement receipts to leave encashment at serial 14, and enacts no counterpart. The deduction ceased on 1 April 2026 in both regimes. It is worth stating plainly because it is the one place where the change of Act was not a renumbering: a government employee who claimed it for the assessment year 2026-27 was right to, and will find nothing to claim for the tax year 2026-27.

What Section 202(2) removes, and what the old regime therefore keeps

The old regime is defined by subtraction. Section 202(2)(a) of the Income-tax Act, 2025 lists what the default computation strips out, sub-clause by sub-clause, and everything on that list is what opting out buys back:

• (i) Schedule III Table serials 5, 6, 7, 8, 11 and 17, which include the leave travel concession at serial 8 and the house rent allowance exemption at serial 11.
• (ii) Schedule III serials 12 and 13, the successors to Section 10(14), other than those prescribed by rule 280(3) of the Income-tax Rules, 2026. This is a partial removal, not a total one, and the prescribed allowances survive in the default regime.
• (iii) Now blank. Section 56 of the Finance Act 2026 omitted the words referring to Section 144 with effect from 1 April 2026.
• (iv) Serial 1 of the Section 19(1) Table, the employment-tax deduction, and nothing else from that Table.
• (v) Section 22(1)(b) for properties within Section 21(6), which is the self-occupied house-property interest deduction.
• (xii) The whole of Chapter VIII, other than Sections 124(1), 124(2), 125(2) and 146.

Two consequences follow that are commonly stated wrongly. First, the widely repeated line that only a handful of deductions survive the default regime understates it: every entry in the Section 19(1) Table from serial 2 downwards survives, which means the standard deduction, the government death-cum-retirement gratuity at serial 3, commuted pension and leave encashment all remain available under the default regime. So does all of Schedule II, including the provident-fund exclusions. Second, Section 202(2)(b)(ii) separately bars setting a loss under the head income from house property against income under any other head, and Section 202(2)(c) refuses relief created by any other law. Those are not deduction withdrawals but they bite in the same direction.

The Chapter VIII deductions under the 2025 numbering

Chapter VIII of the Income-tax Act, 2025 is what Chapter VI-A of the 1961 Act became, and Section 202(2)(a)(xii) removes it wholesale from the default computation except for four sections. For a central government employee or pensioner the principal entries read as follows.

For a government employee the Rs. 1,50,000 under Section 123 is usually filled without effort. Schedule XV paragraph 1(d) covers the general provident fund subscription, paragraph 1(c) covers the Central Government Employees Group Insurance Scheme and states its sub-limit as 20% of salary, and the balance goes on life insurance premiums, children’s tuition fees and home-loan principal repayment. Paragraph 1(w) ties the National Pension System Tier II Tax Saver to the additional account under Section 20(3) of the Pension Fund Regulatory and Development Authority Act, 2013 with a lock-in of not less than three years.

Two interaction rules sit inside Section 124 and are easy to breach. Section 124(5) bars the same rupee being counted under both Section 123 and Section 124(3), and Section 124(10) imposes the same bar in the other direction. Section 124(13)(b) defines salary for the employer-contribution limb as basic pay plus dearness allowance where the terms of employment so provide, excluding every other allowance and perquisite, which is the definition the dearness allowance rate feeds into.

Outside Chapter VIII, the old regime restores two salary exemptions from Schedule III: the house rent allowance exemption at serial 11, computed under rule 279 of the Income-tax Rules, 2026, and the leave travel concession at serial 8. On a central government salary in a class X city the house rent allowance exemption is frequently the largest single item on the list, and it is what usually decides the comparison.

House property interest and the pre-construction instalments

Section 22(1)(b) of the Income-tax Act, 2025 allows the interest payable on capital borrowed to acquire, construct, repair, renew or reconstruct a property, and Section 21(6) takes the annual value of a self-occupied house as nil. The two together produce a loss under the head income from house property, which the old regime sets against salary and the default regime does not, because Section 202(2)(a)(v) removes the deduction and Section 202(2)(b)(ii) blocks the set-off. Section 21(7)(a) allows the nil annual value for two houses specified by the assessee.

Section 22(2)(a) caps the deduction at Rs. 2,00,000, on two conditions: the acquisition or construction must be completed within five years from the end of the tax year in which the capital was borrowed, and the assessee must furnish a certificate from the person to whom the interest is payable, specifying the amount and any refinancing loan. Where those conditions fail, Section 22(2)(b) allows Rs. 30,000. Section 22(5) caps the aggregate across both self-occupied houses at Rs. 2,00,000, so a second house adds no headroom.

Pre-construction interest sits inside the same ceiling. Section 22(1)(c) spreads interest for the period before acquisition or construction over five equal instalments beginning with the tax year of completion. As enacted, Section 22(2) capped clause (b) alone; section 38 of the Finance Act 2026 substituted the reference to read sub-section (1)(b) and (c), with effect from 1 April 2026, the day the 2025 Act came into force. That restores the 1961 position, where the second proviso to Section 24(b) of the repealed Act capped the aggregate deduction under the clause, instalments included, at two lakh rupees. No tax year was ever computed with the instalments outside the cap. An employee who completed construction in the tax year 2026-27 and expected the instalment on top of a full Rs. 2,00,000 of current interest will find it absorbed. The home loan interest article works through the two limbs.

Surcharge, marginal relief and cess

Paragraph F of Part I-B of the First Schedule to the Finance Act 2026, Table 1, serial 1, carries the surcharge for an individual in the old regime, and it runs all four bands: 10% where total income exceeds Rs. 50,00,000, 15% above Rs. 1,00,00,000, 25% above Rs. 2,00,00,000 and 37% above Rs. 5,00,00,000. Clause (vi) of that entry caps the surcharge attributable to dividend income and to capital gains at 15% whatever band the rest of the income falls in.

The default regime is lighter at the top, and the reason is structural rather than a cap. Serial 10 of the Table to Section 3(4)(b), which sets the surcharge where income is chargeable under Section 202, has three rows and no Rs. 5,00,00,000 row at all. The 37% band was never written for the default regime. With a 30% top slab, a 37% surcharge and a 4% cess, the maximum marginal rate in the old regime is 42.744%, against 39% in the default one, and that gap is the single reason a very high earner never chooses the old regime on rate grounds alone.

Section 3(5) of the Finance Act 2026 gives marginal relief on the surcharge by the formula Tn = Rn + Sn, holding 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. None of this reaches a serving central government employee: the highest basic pay on the pay matrix, Rs. 2,50,000 a month at Level 18, produces a total income well under Rs. 50,00,000 even with full dearness allowance.

Who still gains from the old regime

The answer changed sharply in 2025 and the honest version is narrow. When the rebate reached a total income of Rs. 12,00,000, the default regime became cheaper for the great majority of salaried taxpayers, including most central government employees, and it did so without requiring a single receipt.

The test is arithmetic. Where the default regime charges nil, the old regime must also reach nil to compete, and reaching nil in the old regime means bringing total income down to Rs. 5,00,000, because Section 156(1) stops there. On a gross salary of Rs. 12,00,000 that requires Rs. 6,50,000 of deductions after the Rs. 50,000 standard deduction. On a gross of Rs. 12,75,000, the point at which the default regime’s nil tax runs out, it requires Rs. 7,25,000. The old regime is not close to competitive on a mid-level salary unless the house rent allowance exemption is large.

Above the rebate ceiling the comparison changes shape rather than direction. Between a gross salary of Rs. 12,75,000 and about Rs. 13,46,000 the marginal relief at Section 156(2)(b) holds the default-regime tax to the excess over Rs. 12,00,000, so each extra rupee of salary costs exactly one rupee of tax, while the old regime’s marginal rate in that band is 20%. The deductions the old regime needs therefore fall as salary rises through that band, which is the opposite of the usual assumption. The tax regime break-even guide sets out the crossover at each income, and the old versus new tax regime article carries the full table.

Three groups remain genuine candidates: an employee servicing a home loan close to the Rs. 2,00,000 ceiling in a class X city with a substantial house rent allowance exemption, an employee with a large disability or specified-illness claim under Sections 127, 128 or 154, and a taxpayer whose income runs high enough that the deduction stack is worth more than the rate differential. A senior-citizen pensioner is rarely one of them, because a pension up to Rs. 12,75,000 already pays nothing by default.

Exercising the option under Section 202(4)

Section 202(4) provides that nothing in Section 202(1) applies where a person exercises the option under that section in the prescribed manner, and it splits the mechanics by whether there is business income.

For a salaried employee or a pensioner without business or professional income, Section 202(4)(b) is a single line: the option is exercised along with the return of income to be furnished under Section 263(1). Rule 136 of the Income-tax Rules, 2026, notified by Notification No. 22/2026, G.S.R. 198(E), dated 20 March 2026, puts the election in the return and prescribes no form. Form 10-IEA has no successor and was never required of a salaried filer in the first place. The choice is annual, carries no lock-in, and may be reversed the following year with nothing to file.

For a person with business or professional income, Section 202(4)(a) is far more restrictive. The option must be exercised on or before the Section 263(1) due date, it then applies to subsequent tax years without being repeated, Section 202(4)(a)(iii) permits it to be withdrawn only once and only for a tax year other than the one for which it was exercised, and Section 202(4)(a)(iv) bars that person from ever exercising it again. The one escape is written into the same clause: where the person ceases to have any income from business or profession, the ordinary route at clause (b) becomes available.

At the start of the year an employee also tells the Drawing and Disbursing Officer which regime to assume so that monthly tax deducted at source is close to the final liability. That intimation is not the election. It fixes the deduction under Section 392 and nothing else, and the binding choice is made in the return. The how to switch tax regime guide sets out the sequence.

A belated return cannot carry the old regime, for a structural reason rather than a punitive one. Section 202(4)(b) attaches the election to a return furnished under Section 263(1), and a belated return is furnished under Section 263(4), which is a different sub-section. Nothing in Section 202 reaches it.

Assessment year 2026-27, under the repealed 1961 Act

The transition has an overlap year, and confusing the two years is the most common practical error in this area right now. Section 536(1) of the Income-tax Act, 2025 repealed the Income-tax Act, 1961 on 1 April 2026, but Section 536(2)(c) keeps the repealed Act and its rules in force for assessment year 2026-27, which is the financial year 2025-26. Returns filed during 2026 therefore run on Section 115BAC, Section 87A, Section 80C and Section 139(1), not on their successors. Returns for the tax year 2026-27, filed during 2027, run on the 2025 Act.

For a salaried employee or pensioner the assessment year 2026-27 election is over. The due date at serial 4 of the Table in Explanation 2 to Section 139(1), as substituted by Section 5 of the Finance Act 2026, was 31 July 2026 for a residual assessee, and it passed with no extension order under Section 119. A person who has not filed can now file only a belated return under Section 139(4), which is confined to the default regime, and the two remaining routes are both discretionary: a revised return under Section 139(5) where an original return was filed on time, or an application for condonation of delay under Section 119(2)(b), whose successor for later years is Section 239(3)(b) of the 2025 Act in the same terms.

Two groups still have the door open for that year. A filer liable to audit under Section 44AB is on 31 October 2026, and one caught by Section 92E is on 30 November 2026. Both dates are still ahead, and a Form 10-IEA filed before the return remains the route for either of them, under Rule 21AGA of the Income-tax Rules, 1962.

A worked example on a Rs. 12,00,000 salary

Take a central government employee below 60 with a gross salary of Rs. 12,00,000 in the tax year 2026-27, claiming the maximum of the usual old-regime items: Rs. 1,50,000 under Section 123, Rs. 50,000 under Section 124(3), Rs. 25,000 under Section 126, and Rs. 2,00,000 of self-occupied house-property interest under Section 22(1)(b), which arises as a loss set against salary.

The same employee under the default regime pays nothing. Gross salary of Rs. 12,00,000 less the Rs. 75,000 standard deduction at serial 2(a) leaves a total income of Rs. 11,25,000; the slab tax under Section 202(1) is Rs. 52,500, being Rs. 20,000 on the Rs. 4,00,000 to Rs. 8,00,000 band and Rs. 32,500 on the balance; and Section 156(2)(a) rebates the whole of it, since the income is below Rs. 12,00,000 and the tax is below Rs. 60,000.

Rs. 59,800 against nil, on a deduction stack of Rs. 4,25,000 that most employees never reach. To close the gap this employee needs Rs. 6,50,000 of deductions beyond the standard deduction, or a further Rs. 2,25,000, and the only item on the list large enough to supply it is a house rent allowance exemption. An employee living in government accommodation draws no house rent allowance at all and therefore has no path to it.

Common misreadings of the old regime

• Applying the Rs. 75,000 standard deduction. Serial 2 of the Section 19(1) Table gives Rs. 75,000 only where tax is computed under Section 202(1). In the old regime it is Rs. 50,000, and using the wrong figure understates the tax by Rs. 7,500 at the 30% rate.
• Expecting marginal relief at Rs. 5,00,000. Section 156(1) has no marginal-relief limb. The limb is at Section 156(2)(b) and reaches only the default regime.
• Assuming a senior citizen gains from the age-based exemption. Item (II) sets Rs. 3,00,000 against the default regime’s Rs. 4,00,000, so a senior citizen’s basic exemption is lower in the old regime, not higher. Only item (III), at Rs. 5,00,000, exceeds it.
• Still claiming the entertainment allowance. It was valid to assessment year 2026-27 under Section 16(ii) of the 1961 Act and has no counterpart in the 2025 Act.
• Adding pre-construction interest on top of Rs. 2,00,000. The Finance Act 2026 brought Section 22(1)(c) inside the Section 22(2) cap with effect from 1 April 2026.
• Filing Form 10-IEA as a salaried employee. It was never required of a filer without business income, and Rule 136 of the Income-tax Rules, 2026 prescribes no successor to it for anyone.
• Treating the choice as permanent. It is annual for a salaried employee or pensioner under Section 202(4)(b). It is close to permanent for a person with business income, under Section 202(4)(a)(iv).

Related Articles

• Section 202, Income-tax Act 2025
• New tax regime
• Old versus new tax regime
• Tax regime break-even: when the old regime wins
• Section 115BAC
• Income-tax Act 2025
• Income tax slabs for AY 2027-28
• Section 87A rebate
• Standard deduction
• Marginal relief on income tax
• Surcharge on income tax
• Health and education cess
• Deductions allowed in the new tax regime
• Section 80C
• Section 80D
• Section 80TTB
• Section 80GG
• Home loan interest under Section 24(b)
• HRA exemption under Section 10(13A)
• Leave travel concession
• Entertainment allowance
• Professional tax
• NPS tax benefits
• General Provident Fund
• Dearness allowance
• Senior citizen tax
• Family pension
• How to switch tax regime
• Form 10-IEA to opt out of the new regime
• Section 119(2)(b) condonation of delay
• Income tax for government employees
• Income tax for pensioners
• TDS on salary
• Central government employees in India

External references

• Income Tax Department: e-filing portal
• Income Tax Department: Acts and Rules
• Finance Act, 2026 (Act No. 4 of 2026), Gazette of India
• Central Board of Direct Taxes
• Department of Revenue, Ministry of Finance
• Ministry of Finance

References

1. Income-tax Act, 2025, Section 202: sub-section (1) and its Table (the default rates), sub-section (2)(a) clauses (i), (ii), (iv), (v) and (xii) (what the default computation removes), sub-section (2)(b)(ii) (the bar on setting a house-property loss against another head), and sub-section (4)(a) and (b) (how the option into the old regime is exercised).
2. Finance Act, 2026 (Act No. 4 of 2026, assented 30 March 2026): Section 3(2)(b) (the two alternative rate sets), Section 3(5) (marginal relief on surcharge by the formula Tn = Rn + Sn), Section 3(15) (the 4% health and education cess), First Schedule Part I-B Paragraph A items (I), (II) and (III) (the old-regime slabs and the age-based basic exemptions), and Paragraph F Table 1 serial 1 (the old-regime surcharge, including the 37% band above Rs. 5 crore).
3. Income-tax Act, 2025, Section 19(1) Table: serial 1 (tax on employment under article 276(2) of the Constitution) and serial 2 (the standard deduction, Rs. 75,000 where tax is computed under Section 202(1) and Rs. 50,000 in any other case).
4. Income-tax Act, 2025, Section 156: sub-section (1) (the old-regime rebate of Rs. 12,500 up to a total income of Rs. 5,00,000, with no marginal-relief limb), sub-section (2)(a) and (b) (the default-regime rebate and its marginal relief), and sub-section (3).
5. Income-tax Act, 2025, Chapter VIII: Sections 123 with Schedule XV paragraphs 1(c), 1(d), 1(w) and 1(y), 124(1), 124(3), 124(5), 124(10) and 124(13)(b), 126, 127, 128, 129, 133, 134, 153(2)(a) and (b), and 154; with Schedule III Table serials 8 and 11 (leave travel concession and house rent allowance) and rules 279 and 280(3) of the Income-tax Rules, 2026.
6. Income-tax Act, 2025, Sections 21 and 22: Section 21(6) (nil annual value of a self-occupied house), Section 21(7)(a) (two such houses), Section 22(1)(b) and (c), Section 22(2)(a) and (b) (the Rs. 2,00,000 and Rs. 30,000 caps) as amended by the Finance Act, 2026 with effect from 1 April 2026, and Section 22(5).
7. Income-tax Rules, 2026, rule 136, notified by Notification No. 22/2026, G.S.R. 198(E), dated 20 March 2026: the option under Section 202(4) is exercised or withdrawn in the return of income furnished under Section 263(1), and no successor to Form 10-IEA is prescribed.
8. Income-tax Act, 2025, Section 536: sub-section (1) (repeal of the Income-tax Act, 1961 on 1 April 2026) and sub-section (2)(c) (the repealed Act continuing to govern assessment year 2026-27); with Section 16(ii) of the Income-tax Act, 1961, the entertainment-allowance deduction that has no counterpart in the 2025 Act.