Old versus new tax regime

The old versus new income tax regime choice is the single decision that most affects how much income tax a central government employee or pensioner pays. Since the financial year 2023-24 the new regime under Section 115BAC of the Income-tax Act, 1961 has been the default, and for the financial year 2026-27 it is tax-free up to a salary of Rs. 12.75 lakh; the old regime, which must be chosen, keeps the full catalogue of deductions but taxes at higher rates. Which one leaves a person better off is pure arithmetic, driven by how many deductions they can claim.

This article is the dedicated comparison for the financial year 2026-27, assessment year 2027-28. It sets out the slabs of both regimes, the standard deduction and the Section 87A rebate, the cess and surcharge, the full list of what each regime allows, the points that matter specifically to a government employee and a pensioner, and the break-even level of deductions at which the old regime overtakes the new, with worked examples at several income levels. For the wider computation, see income tax for government employees ; for the deductions themselves, see the standard deduction and the house rent allowance articles.

The two regimes

The new regime is the low-rate, few-deductions option. It was introduced by the Finance Act 2020, made the default from the financial year 2023-24, and reshaped by the Finance Act 2025, which set the current slab ladder and the rebate that makes income up to Rs. 12 lakh tax-free. It offers lower rates and a large rebate but removes almost every deduction and exemption. An employee or pensioner who does nothing is taxed under it.

The old regime is the higher-rate, full-deductions option. It is the pre-existing rate structure, and it preserves the whole catalogue of deductions, the Chapter VI-A deductions from Section 80C to 80U, the house rent allowance exemption, home-loan interest, and more. It has not been discontinued and remains available for the financial year 2026-27, but it must be actively chosen.

The trade-off is simple to state. The new regime taxes a larger base at lower rates; the old regime taxes a smaller base at higher rates. Which wins depends entirely on how far an individual’s deductions can shrink the base.

How the two regimes came about

The two-regime system is recent. Until the financial year 2020-21 there was a single set of slabs with the full range of deductions. The Finance Act 2020 introduced the new regime under Section 115BAC as an optional low-rate structure without most deductions, aimed at simplifying the tax and at those who did not invest for deductions. For three years it was the minority choice, because its rates were only modestly lower and it stripped away everything an employee was used to claiming. The Finance Act 2023 changed the trajectory: it made the new regime the default from the financial year 2023-24, extended the standard deduction to it, and raised its rebate. The Finance Act 2025 went further, widening the slabs and lifting the rebate so that income up to Rs. 12 lakh became tax-free. Each step has pulled more taxpayers into the new regime, which is now where most salaried employees and pensioners sit unless a specific deduction profile pulls them back to the old. Understanding the choice today means understanding that the new regime is no longer the bare-bones option it was in 2020; it has been made deliberately attractive.

The slabs for the financial year 2026-27

Under the new regime, the slabs are:

The new regime has a single basic exemption of Rs. 4 lakh for every age; there is no higher slab for senior citizens.

Under the old regime, for an individual below 60, the slabs are:

The old regime keeps the age-based basic exemption that matters to pensioners: Rs. 2,50,000 below 60, Rs. 3,00,000 for a senior citizen aged 60 to below 80, and Rs. 5,00,000 for a super-senior citizen aged 80 and above.

The standard deduction, the rebate, cess and surcharge

Four adjustments sit on top of the slabs, and they decide the real tax.

The standard deduction under Section 16(ia) is Rs. 75,000 under the new regime and Rs. 50,000 under the old, applied to salary and to pension. Using the Rs. 75,000 figure under the old regime is a common and costly error.

The Section 87A rebate is what makes the low end of the new regime tax-free. Under the new regime the rebate is up to Rs. 60,000, so taxable income up to Rs. 12,00,000 pays no tax; combined with the Rs. 75,000 standard deduction, a salaried employee or pensioner is effectively tax-free up to a gross salary or pension of Rs. 12.75 lakh. Under the old regime the rebate is up to Rs. 12,500, so taxable income up to Rs. 5,00,000 is tax-free. The rebate is for resident individuals only and does not apply to income taxed at special rates such as capital gains.

Marginal relief protects income just above the new regime’s Rs. 12 lakh rebate limit. At a taxable income of Rs. 12,10,000 the slab tax would be Rs. 61,500, but the income over Rs. 12 lakh is only Rs. 10,000, so the tax is limited to Rs. 10,000 before cess. The relief phases out by around Rs. 12.75 lakh of taxable income.

A Health and Education Cess of 4 per cent is added to the tax and any surcharge in both regimes. Surcharge applies above Rs. 50 lakh of income, at 10, 15, 25 and, in the old regime only, 37 per cent as income rises; the new regime caps surcharge at 25 per cent, which is one of its quiet advantages for very high earners.

What each regime allows

The heart of the comparison is what survives in each regime.

The single line to remember is that under the new regime the only meaningful deductions that survive are the standard deduction and the employer’s contribution to the National Pension System under Section 80CCD(2).

What this means for a government employee

Three points decide the choice for a serving employee.

The employer’s NPS contribution under Section 80CCD(2) is the golden exception. For a central government employee the employer contributes 14 per cent of basic pay plus dearness allowance to NPS, and that amount is deductible under Section 80CCD(2) in both regimes. The Finance Act 2024 raised the new-regime ceiling for this deduction to 14 per cent for all employees, so it applies uniformly. Because the deduction is available either way, it lowers the taxable base equally in both regimes and is therefore neutral to the regime choice, a point that is widely misunderstood.

The employee’s own contributions are old-regime only. The employee’s own share of NPS and the additional Rs. 50,000 under Section 80CCD(1B), like the whole Rs. 1.5 lakh of Section 80C that a General Provident Fund subscription feeds, are allowed only under the old regime. Assuming Section 80CCD(1B) survives in the new regime is a frequent mistake.

The house rent allowance exemption is old-regime only, and for an employee paying high rent in a metro it is often the item that tips the balance to the old regime. The city classification for HRA and the HRA exemption calculator work through the exemption.

Retirement benefits are favourable regardless of the regime. Gratuity is fully exempt for a government employee, the commuted portion of pension under commutation of pension is fully exempt, and leave encashment on retirement is fully exempt. These exemptions do not depend on the regime chosen.

For a pensioner, the monthly pension is taxed under the head Salaries and gets the standard deduction in both regimes, so a pensioner is tax-free up to Rs. 12.75 lakh of pension under the new regime. The old regime tends to suit a pensioner only where the higher age-based exemption or the Section 80TTB deduction on deposit interest makes a real difference. A family pension is taxed as income from other sources with the Section 57(iia) deduction, not the salary standard deduction.

How to choose: the break-even

The old regime beats the new only when its deductions bring taxable income down far enough that its higher rates apply to a small enough base. Because the employer NPS deduction is available in both regimes, it should be left out of the comparison; what matters is the differential deductions, chiefly Section 80C, Section 80CCD(1B), Section 80D, the house rent allowance and home-loan interest. The break-even quantum of these deductions rises with income.

Consider three salaried employees, each taking the standard deduction of the regime being tested, all below the surcharge threshold, with the 4 per cent cess included.

At a gross salary of Rs. 10,00,000, the new regime leaves taxable income of Rs. 9,25,000, which is below Rs. 12 lakh, so the rebate makes the tax nil. The old regime, with only the standard deduction, leaves Rs. 9,50,000 taxable and a tax of about Rs. 1,06,600. To match the new regime’s zero, the old regime would need taxable income down at Rs. 5 lakh, that is around Rs. 5 lakh of deductions. The new regime wins for almost every employee at this level.

At a gross salary of Rs. 15,00,000, the new regime tax is about Rs. 97,500 on taxable income of Rs. 14,25,000. The old regime, with only the standard deduction, taxes Rs. 14,50,000 at about Rs. 2,57,400. The two are equal only when the old regime’s deductions reach roughly Rs. 6 lakh in total, which needs nearly the full slate: Rs. 1.5 lakh of Section 80C, Rs. 50,000 of Section 80CCD(1B), Rs. 25,000 of Section 80D, Rs. 2 lakh of home-loan interest and a sizeable house rent allowance exemption.

At a gross salary of Rs. 20,00,000, the new regime tax is about Rs. 1,92,400. The old regime with only the standard deduction is about Rs. 4,13,400, and it matches the new regime only when total deductions reach about Rs. 7.5 lakh. As a rule of thumb, in the income band where both regimes tax the top rupee at 30 per cent, break-even sits at roughly Rs. 7.5 lakh to Rs. 8 lakh of deductions. Below a gross salary of Rs. 12.75 lakh the new regime is almost unbeatable, because the tax is nil. The only reliable method is to compute the tax both ways for the specific salary and deductions, which the income tax calculator does.

When the old regime wins: a worked example

The break-even looks different from the other side. Take an employee on a gross salary of Rs. 15,00,000 who claims the full range of old-regime deductions: Rs. 1,50,000 under Section 80C from the General Provident Fund and other savings, Rs. 50,000 under Section 80CCD(1B) for additional NPS, Rs. 25,000 under Section 80D for health insurance, Rs. 2,00,000 of home-loan interest under Section 24(b), and a house rent allowance exemption of about Rs. 1,45,000, together with the Rs. 50,000 standard deduction. Those deductions total about Rs. 6,20,000, bringing taxable income down to roughly Rs. 8,80,000. The old-regime tax on that is about Rs. 12,500 on the second slab plus 20 per cent of the amount between Rs. 5 lakh and Rs. 8.8 lakh, close to Rs. 88,500, or about Rs. 92,000 with cess. Against the new regime’s Rs. 97,500 on the same salary, the old regime now wins, though only by a few thousand rupees.

This is the profile for which the old regime is built: an employee with a home loan, a full savings basket and a real rent outgo. It is worth seeing how fragile the advantage is. Strip out the home-loan interest, and the old regime’s taxable income rises to about Rs. 10,80,000, its tax to roughly Rs. 1,45,000, and the new regime is comfortably ahead again. The old regime rewards a specific, deduction-heavy financial life; for an employee who rents modestly, has no home loan and saves little beyond the mandatory provident fund, the new regime almost always wins.

A pensioner’s comparison

A pensioner’s arithmetic differs in two ways. From age 60 the old regime gives a higher basic exemption, Rs. 3,00,000, and from age 80 it gives Rs. 5,00,000, against the flat Rs. 4,00,000 of the new regime. And Section 80TTB lets a senior citizen deduct up to Rs. 50,000 of interest on deposits, which many pensioners hold in fixed deposits, a deduction available only in the old regime. A pensioner with a pension of Rs. 8,00,000 and Rs. 50,000 of deposit interest, claiming Section 80TTB and some Section 80C, can find the old regime competitive, while a pensioner with little beyond the pension is better off in the new regime, where a pension up to Rs. 12.75 lakh is tax-free. The monthly pension gets the standard deduction in either regime; only the extra old-regime deductions and the age exemption move the answer.

High earners and the surcharge

For income above Rs. 50 lakh a surcharge is added to the tax, and here the new regime has a structural edge at the very top. Both regimes charge a surcharge of 10 per cent above Rs. 50 lakh, 15 per cent above Rs. 1 crore and 25 per cent above Rs. 2 crore, but the old regime adds a 37 per cent band above Rs. 5 crore that the new regime does not: the new regime caps the surcharge at 25 per cent. The effective peak rate is therefore materially lower under the new regime for the highest earners. Marginal relief applies at each surcharge threshold, so crossing a threshold by a small margin does not raise the tax by more than the extra income. For a senior officer whose income crosses Rs. 50 lakh, the surcharge, not just the slab, becomes part of the comparison.

Declaring your regime to the employer

During the financial year, an employee tells the office which regime to use for deducting tax at source, and declares the deductions being claimed on the prescribed form, so that the monthly deduction is close to the final liability. This is only a working choice. The regime and the deductions are finally settled when the return is filed, and an employee who declared one regime to the office can still choose the other at filing if it works out better. The sensible course is to run both regimes once early in the year, tell the office the one that fits, and check again at filing, because a mid-year change in rent, a home loan or an investment can shift the answer.

How to opt

The default is the new regime, so the old regime must be chosen. A salaried employee or pensioner without business or professional income can choose the regime afresh every year, simply by selecting it in the income tax return on or before the due date under Section 139(1), usually 31 July. No special form is needed for such a taxpayer. Form 10-IEA is required only for a taxpayer with business or professional income who wishes to opt out of the new regime or return to it, and such a taxpayer can switch only twice in a lifetime. During the year, an employee declares the intended regime and deductions to the employer so that tax deducted at source matches, but the final choice can still be made at filing.

The Income-tax Act, 2025

The Income-tax Act, 2025 received the President’s assent on 21 August 2025 and takes effect from 1 April 2026, replacing the 1961 Act for income from that date. The substance of the two regimes carries over, but the sections are renumbered: the new regime under Section 115BAC becomes Section 202, and the Section 87A rebate becomes Section 156. Income earned up to 31 March 2026 is still governed by the 1961 Act even though the return is filed in 2026-27, so the renumbered sections apply to income from 1 April 2026 onward. The income tax for government employees article carries the section mapping.

Common errors

• Applying the Rs. 75,000 standard deduction under the old regime, where it is Rs. 50,000.
• Assuming Section 80CCD(1B), the extra Rs. 50,000 of self NPS, survives in the new regime. Only the employer’s Section 80CCD(2) does.
• Reading the Rs. 12 lakh figure as the first Rs. 12 lakh being exempt. It is a rebate: at a taxable income of Rs. 12,00,001 the rebate is lost and, subject to marginal relief, tax applies from Rs. 4 lakh upward.
• Assuming senior citizens get a higher basic exemption in the new regime. The higher Rs. 3 lakh and Rs. 5 lakh exemptions are old-regime only.
• Filing Form 10-IEA as a salaried taxpayer. Only business-income taxpayers need it.
• Assuming the house rent allowance exemption is available in the new regime. It is old-regime only.
• Confusing the Rs. 12 lakh rebate threshold, which is taxable income, with the Rs. 12.75 lakh tax-free ceiling, which is gross salary after the standard deduction.

See also

• Leave Travel Concession
• Income tax for government employees
• Standard deduction
• Professional tax
• Section 89 relief
• House-rent allowance
• City classification for HRA
• Dearness allowance
• Transport allowance
• Take-home salary for central government employees
• National Pension System
• Unified Pension Scheme
• Old Pension Scheme
• NPS vs OPS vs UPS
• General Provident Fund
• Central government pension
• Pension calculation
• Commutation of pension
• Family pension
• Gratuity for central government employees
• Leave encashment
• Pay matrix
• 7th Central Pay Commission
• Central Board of Direct Taxes
• Central government employees in India
• Income tax calculator
• HRA exemption calculator
• 7th CPC salary calculator

External references

• Income Tax Department, e-filing portal
• Central Board of Direct Taxes
• Department of Expenditure
• Press Information Bureau

References

1. Income-tax Act, 1961, Section 115BAC, and the new-regime slab rates set by the Finance Act 2025, continued for the financial year 2026-27 (the Union Budget 2026 made no change).
2. Income-tax Act, 1961, Section 87A: new-regime rebate up to Rs. 60,000 (income up to Rs. 12 lakh) and old-regime rebate up to Rs. 12,500 (income up to Rs. 5 lakh), with marginal relief.
3. Income-tax Act, 1961, Section 16(ia): standard deduction of Rs. 75,000 (new) and Rs. 50,000 (old).
4. Income-tax Act, 1961, Sections 80C, 80CCD(1B), 80CCD(2), 80D, 24(b), 10(13A), 10(5) and 80TTB, and the Finance Act 2024 raising Section 80CCD(2) to 14 per cent under the new regime.
5. Income-tax Act, 1961, Section 57(iia): the family-pension deduction (Rs. 25,000 new, Rs. 15,000 old, or one-third whichever is less).
6. Finance Act 2025 surcharge schedule, with the 25 per cent cap under the new regime and the 37 per cent top rate under the old.
7. Income-tax Act, 2025 (assent 21 August 2025, effective 1 April 2026): Section 202 (new regime) and Section 156 (rebate); CBDT section-mapping utility.
8. Central Board of Direct Taxes, Form 10-IEA and Section 115BAC(6), on regime-switching for salaried and business-income taxpayers.