Old versus new tax regime

The old versus new income tax regime choice is the decision that most changes what a central government employee or pensioner pays. For the financial year 2026-27 the new regime is the default under Section 202(1) of the Income-tax Act, 2025 and taxes nothing up to a salary of Rs. 12.75 lakh, while the old regime must be positively chosen by exercising the option under Section 202(4) and keeps the full catalogue of deductions at higher rates.

For most employees the answer is the new regime, and the reason is arithmetic rather than preference. The old regime overtakes it only once deductions other than the standard deduction reach a break-even that peaks at Rs. 7,25,000 on a gross salary of Rs. 12.75 lakh and settles at exactly Rs. 8,00,000 on any gross salary above Rs. 24.75 lakh. Below a gross salary of Rs. 12.75 lakh the new regime cannot be beaten at all, because the tax there is nil and no quantity of deductions improves on nil.

The financial year 2026-27 is the first tax year governed by the Income-tax Act, 2025, which repealed the Income-tax Act, 1961 from 1 April 2026 by Section 536(1). Nothing a government employee pays changed: the Finance Act 2026 left both slab tables, the rebate, the standard deduction, the surcharge and the cess exactly where they stood. What changed is where the provisions sit, and this article cites the 2025 Act and the Income-tax Rules, 2026 throughout, naming the familiar 1961 number alongside only where the older form is what orders and circulars still use.

What follows is the slab table of each regime and the different statute each one sits in, the standard deduction and the Section 156 rebate with its marginal relief, the cess and the surcharge, a sub-clause by sub-clause account of what Section 202(2) withdraws and what it leaves standing, the break-even quantum of deductions at nine salary levels, worked examples on both sides of the crossover, and the pensioner and high-earner cases. For the wider computation see income tax for government employees; for the individual reliefs see the standard deduction, the Section 87A rebate and the house rent allowance articles.

The two regimes at a glance

The new regime taxes a larger base at lower rates and the old regime taxes a smaller base at higher rates. Every other difference follows from that one, and the table below sets out the whole comparison for the financial year 2026-27.

The single line to carry away is that the new regime leaves a salaried employee or pensioner with two deductions worth having, the standard deduction at serial 2 of the Section 19(1) Table and the employer’s National Pension System contribution under Sections 124(1) and 124(2), and prices that loss into the slab table.

Governing statute and where each set of rates is written

The financial year 2026-27 is governed by the Income-tax Act, 2025, not the Income-tax Act, 1961. 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 by Section 536(1). It cuts 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.

Both regimes survive the change, and Section 3(2)(b) of the Finance Act 2026 names them as two alternative sets of rates. What is easy to miss is that the two sets are no longer written in the same place. The new-regime slab rates 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 Finance Act carried every rate. Paragraph A of Part I-B of the First Schedule to the Finance Act 2026 carries the old-regime rates and the age-based exemptions instead. The Finance Act supplies the surcharge under Section 3(4), marginal relief on the surcharge under Section 3(5) and the cess under Section 3(15) for both regimes; the Act itself supplies the default slabs.

That split matters in practice. A reader who looks up the Finance Act 2026 for the new-regime slabs will not find them, and a reader who looks up the Income-tax Act, 2025 for the old-regime slabs will not find those either.

The section numbers moved, and the familiar ones no longer resolve against the bare Act. The mapping that matters to a salaried employee or pensioner choosing a regime is this.

One transition rule catches anyone filing during 2026. 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, which Section 536(2)(c) keeps in force for that year. The 2025 Act applies only to income earned from 1 April 2026 onward. A return filed in July 2026 is therefore a 1961 Act return and correctly cites Section 115BAC and Section 87A.

How the two regimes came about

The two-regime system is six years old. 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 of the Income-tax Act, 1961 as an optional low-rate structure without most 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 Rs. 50,000 standard deduction to it, and raised its rebate to cover a total income of Rs. 7 lakh. The Finance Act 2025 went further, widening the slabs to seven bands and lifting the rebate so that a total income of Rs. 12 lakh became tax-free, and raising the new-regime standard deduction to Rs. 75,000.

Each step pulled more taxpayers across. The new regime today is not the bare-bones option it was in 2020: it has been made deliberately attractive, and the old regime now survives on the strength of a specific deduction profile rather than on habit. The Income-tax Act, 2025 completed the shift in drafting terms by moving the default slabs into the Act and leaving the old-regime slabs in the annual Finance Act.

The slabs for the financial year 2026-27

The new regime runs seven bands from a nil rate up to Rs. 4 lakh to 30% above Rs. 24 lakh, and the old regime runs four bands from a nil rate up to Rs. 2.5 lakh to 30% above Rs. 10 lakh. The Finance Act 2026 left both unchanged from the previous year.

The Table to Section 202(1) of the Income-tax Act, 2025 sets the new-regime rates on total income.

Serial 1 of that Table gives a single basic exemption of Rs. 4 lakh to every individual and attaches no age condition. There is no higher slab for a senior citizen, which is the point that matters most to a pensioner weighing the two. Section 202(1) also applies to a Hindu undivided family, an association of persons, a body of individuals and an artificial juridical person, so the default is not confined to individuals.

Paragraph A of Part I-B of the First Schedule to the Finance Act 2026 sets the old-regime rates, for an individual below 60.

Items (II) and (III) of that Paragraph keep the age-based basic exemption: 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 jump from 5% to 20% at Rs. 5 lakh, and to 30% at Rs. 10 lakh, is what makes the old regime expensive on a mid-level government salary once the deductions run out.

Standard deduction and the Section 156 rebate

The standard deduction is Rs. 75,000 under the new regime and Rs. 50,000 under the old, and the rebate is up to Rs. 60,000 under the new regime and up to Rs. 12,500 under the old. Together these two decide the tax at the lower end of both tables, and together they produce the Rs. 12.75 lakh figure that dominates the comparison.

Serial 2 of the Table to Section 19(1) of the Income-tax Act, 2025 states both figures in one entry: Rs. 75,000 or the salary, whichever is less, where income-tax is computed under Section 202(1), and Rs. 50,000 or the salary, whichever is less, in any other case. The predecessor was Section 16(ia) of the 1961 Act. It applies to salary and to a service pension alike, because Section 15(2) makes a former employer an employer, and it is granted automatically with no proof and no declaration. It is not available against a family pension, which is charged as income from other sources and carries its own deduction under Section 93(1)(d). Applying the Rs. 75,000 figure under the old regime, where it is Rs. 50,000, is the most common single error in this comparison.

Section 156 carries both rebates in one section, and the sub-sections do different jobs. Section 156(1), the successor to Section 87A, allows a resident individual 100% of the income-tax payable or Rs. 12,500, whichever is less, where total income does not exceed Rs. 5,00,000; that is a gross salary of Rs. 5.5 lakh after the Rs. 50,000 standard deduction. Section 156(2)(a) applies only where the total income is chargeable under Section 202(1), and allows 100% of the tax or Rs. 60,000, whichever is less, up to a total income of Rs. 12 lakh, at which point the slab tax is exactly Rs. 60,000. Combined with the Rs. 75,000 standard deduction, a salaried employee or pensioner pays nothing up to a gross salary or pension of Rs. 12.75 lakh.

Two limits sit on the rebate. Section 156(3) provides that the deduction under Section 156(2) shall not exceed the income-tax payable at the Section 202(1) rates, and because Section 156(2) is framed against income chargeable under Section 202(1) it does not reach income taxed at a special rate, such as long-term capital gains under Section 198 of the Income-tax Act, 2025, formerly Section 112A.

Marginal relief above Rs. 12 lakh

Section 156(2)(b) caps the tax at the amount by which total income exceeds Rs. 12 lakh, so that crossing the rebate limit by a rupee does not cost Rs. 60,000. At a total income of Rs. 12,10,000 the slab tax under Section 202(1) would be 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 excess over Rs. 12 lakh is Rs. 10,000, so Section 156(2)(b) allows a deduction of Rs. 51,500 and the tax is Rs. 10,000 before the 4% cess.

The relief tapers out at a total income of Rs. 12,70,588, the point at which the slab tax and the excess over Rs. 12 lakh are both Rs. 70,588. Above that figure the ordinary slab tax applies in full and the relief does nothing. The marginal relief article works the taper through in detail, and a separate marginal relief operates at each surcharge threshold under Section 3(5) of the Finance Act 2026.

The band between a gross salary of Rs. 12.75 lakh and Rs. 13.46 lakh is where the comparison misbehaves, and it does so in the opposite direction to the usual assumption. Within that band each additional rupee of salary raises the new-regime tax by exactly one rupee, because the tax is held to the excess over Rs. 12 lakh. To keep pace, the old-regime taxable income has to rise by five rupees for every one rupee of extra salary, since the marginal rate there is 20%. The deductions the old regime needs therefore fall as salary rises through the band, from Rs. 7,25,000 at a gross of Rs. 12.75 lakh to about Rs. 5,05,000 where the relief runs out. An employee whose salary sits in that band should compute both ways rather than read a rule of thumb.

Cess and surcharge

A Health and Education Cess of 4% is charged under Section 3(15) of the Finance Act 2026 on the tax as increased by any surcharge, in both regimes. Because the rate is identical on both sides it never shifts the choice between them. It is charged on the tax, not on income, and it is computed after marginal relief, and it carries no marginal relief of its own.

The surcharge does shift the choice, but only above a total income of Rs. 50 lakh, which is above essentially every serving central government employee and pensioner. 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. Paragraph F of Part I-B of the First Schedule, Table 1, serial 1, carries the old-regime surcharge for an individual and runs all four bands including 37% above Rs. 5 crore.

The familiar claim that the new regime caps the surcharge at 25% is right about the outcome and wrong about the mechanism. No cap is imposed anywhere. Serial 10 simply has no Rs. 5 crore row and no 37% rate, so the top band was never written for the default regime. With a 30% top slab, a 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 taxed under Sections 196, 197, 198 and 210 of the Income-tax Act, 2025, formerly Sections 111A, 112, 112A and 115AD(1)(b), at 15% whichever band the rest of the income falls in. The surcharge on income tax article carries the full rate table.

What Section 202(2) withdraws

Section 202(2)(a) is the operative provision, and it works by naming the entries it removes rather than by listing what survives. Reading it sub-clause by sub-clause is the only reliable way to answer the question, because the surviving items are scattered across three different parts of the Act.

Sub-clause (i) removes Schedule III Table serials 5, 6, 7, 8, 11 and 17. Serials 5, 6 and 7 are the daily and constituency allowances of members of Parliament and of a State Legislature. Serial 8 is the leave travel concession. Serial 11 is the house rent allowance exclusion. Serial 17 is the Rs. 1,500 exemption for the income of a minor child includible under Section 99(1)(c).

Sub-clause (ii) removes Schedule III Table serials 12 and 13, the prescribed allowances, “other than those as may be prescribed for this purpose”. Rule 280(3) of the Income-tax Rules, 2026 supplies that prescription and preserves rule 280(1)(a) to (d) and serial 10 of the rule 280(2) table, which is a narrower survivor list than the older articles on this subject assumed.

Sub-clause (iv) removes serial 1 of the Section 19(1) Table, the professional tax paid under article 276(2) of the Constitution. Sub-clause (v) removes the deduction for housing-loan interest under Section 22(1)(b) in respect of properties referred to in Section 21(6), which are the self-occupied ones, leaving the interest on a let-out house deductible against its rental income in both regimes.

Sub-clause (xii) is the largest. It removes the whole of Chapter VIII other than Sections 124(1), 124(2), 125(2) and 146. Chapter VIII holds the deductions a salaried taxpayer thinks of as the old regime: Section 123 with Schedule XV, which is the Rs. 1.5 lakh savings basket; Section 124(3), the additional Rs. 50,000 of the employee’s own National Pension System contribution; Section 126, the health insurance premium; Section 133, donations; Section 134, rent paid where no house rent allowance is drawn; Section 153, deposit interest; and Section 154, the deduction for a person with a disability. Section 124(1) and 124(2) are the employer’s National Pension System contribution and Section 125(2) is the Central Government’s contribution to the Agniveer Corpus Fund, so those two survive. Section 146, the deduction for additional employee cost, is a business provision and does not reach a salaried taxpayer.

Sub-clause (iii) is now blank. It read “section 144” until the Finance Act 2026 omitted it with effect from 1 April 2026, restoring the Special Economic Zone entrepreneur deduction to the default regime. That is a business change and does not touch a government salary.

Two further limbs apply beyond the deduction list. Section 202(2)(b)(ii) bars setting a loss under the head income from house property against any other head, which is what stops a let-out property loss reducing salary income in the new regime. Section 202(2)(c) refuses any exemption or deduction for an allowance or perquisite provided under any other law in force, which closes the argument that a departmental rule or a service regulation can create tax relief the Act does not.

What Section 202(2) does not withdraw

Several reliefs a government employee or pensioner cares about are untouched by the default regime, and the article-level mistake is to assume that anything absent from the six or so widely quoted survivors is gone.

Every retirement receipt keeps its relief. Gratuity, commuted pension and leave encashment moved out of the Section 10(10) family of exemptions and into the Table to Section 19(1) as deductions from salary: serial 3 for a government death-cum-retirement gratuity read with Section 19(2)(g), which names the CCS (Pension) Rules 2021; serial 4 for a defence retiring gratuity; serial 7 for commutation of pension under the Civil Pensions (Commutation) Rules; and serials 13 and 14 for leave encashment. Because Section 202(2)(a)(iv) removes only serial 1 of that Table, every one of these survives in the default regime. The rupee outcome is what it always was, and a retiring employee gains nothing by switching regime in the year of retirement to protect it. The mechanism changed, not the money, so the correct sentence for the financial year 2026-27 is that the entire amount is deductible under the Section 19(1) Table, not that it is exempt under Section 10(10).

Provident fund accumulations are untouched as well. The exclusions sit in the Schedule II Table, at serial 3 for a fund to which the Provident Funds Act, 1925 applies, which covers the General Provident Fund, and at serial 4 for the accumulated balance of a recognised provident fund. Section 202(2) withdraws no Schedule II entry at all, so both hold in the default regime, subject in each case to the condition against the serial that interest attributable to contributions above Rs. 5,00,000 where the employer contributes nothing, or above Rs. 2,50,000 in other cases, made on or after 1 April 2021, is taxable. Rule 277 of the Income-tax Rules, 2026 carries the split-account machinery.

Three more entries survive in both regimes. Schedule III serial 4 excludes a partial withdrawal from the National Pension System Trust up to 25% of the employee’s own contributions. Serial 14 excludes the pension of a Param Vir Chakra, Maha Vir Chakra or Vir Chakra holder, serial 15 the family pension of that person’s family, and serial 16 the family pension of the widow, children or nominated heirs of a member of the armed forces or paramilitary forces who died in the course of operational duties, on the circumstances rule 281 prescribes. None of these appears in the Section 202(2)(a)(i) list.

What the choice turns on for a serving employee

Four points decide the regime for a serving central government employee, and the first of them is the one most often got wrong.

The employer’s National Pension System contribution is neutral, not an advantage. The employer contributes 14% of basic pay plus dearness allowance to the employee’s National Pension System account, that amount is added to salary as a perquisite under Section 16(k), and it is then deducted under Section 124(1)(a) in both regimes because Section 202(2)(a)(xii) carves Sections 124(1) and 124(2) out of the Chapter VIII withdrawal. Since the deduction is available either way, it reduces the taxable base equally on both sides and cancels out of the comparison. It should be excluded from any break-even calculation, and counting it as an old-regime deduction is the fastest way to reach the wrong answer.

The employee’s own contributions are old-regime only. The employee’s share of the National Pension System under Schedule XV paragraph 1(y), the additional Rs. 50,000 under Section 124(3), and the whole Rs. 1.5 lakh of Section 123 that a General Provident Fund subscription feeds through Schedule XV paragraph 1(d) are allowed only where the Section 202(4) option has been exercised. For an employee in the Old Pension Scheme, the compulsory General Provident Fund subscription of at least 6% of emoluments is a real deduction that exists only on the old side. Section 124(5) bars the same rupee being counted under both Section 123 and Section 124(3).

The house rent allowance exemption is old-regime only, and it is usually the item that decides the case. For an employee paying high rent in an X-class city the exemption computed under rule 279 can run past Rs. 2 lakh, which on its own is a quarter of the way to the break-even. An employee in government accommodation draws a licence fee instead of house rent allowance and therefore has no exemption to claim, which makes the new-regime case for that employee close to automatic. The city classification for HRA and the HRA exemption calculator work the exemption out.

The entertainment allowance deduction has left the ledger entirely from the tax year 2026-27. Section 16(ii) of the Income-tax Act, 1961 had allowed a government employee, and nobody else, the least of Rs. 5,000, one-fifth of basic salary or the amount actually received, and the Income-tax Act, 2025 enacts no counterpart to it: the Table in Section 19(1) runs from professional tax at serial 1 to the standard deduction at serial 2 and then into the gratuity, commutation and leave encashment entries, with no entertainment allowance row anywhere. It was never large enough to decide the regime question, but it no longer sits on the old-regime side at all. The entertainment allowance article covers the abolition.

The allowances that survive the default regime

Section 202(2)(a)(ii) removes Schedule III Table serials 12 and 13 “other than those as may be prescribed for this purpose”, and rule 280(3) of the Income-tax Rules, 2026 is the prescription. It entitles the employee to exemption only in respect of the allowances at rule 280(1)(a) to (d) and at serial 10 of the rule 280(2) table.

That leaves four limbs of the serial 12 list standing in the default regime: travel on tour or transfer, the sum paid for packing and transporting personal effects on transfer, daily allowance, and conveyance in the performance of duties where no free conveyance is provided. It removes the other three, being the helper allowance at rule 280(1)(e), the academic, research and training allowance at rule 280(1)(f), and the uniform allowance at rule 280(1)(g). From the serial 13 list it leaves only the transport allowance for a blind, deaf and dumb or orthopaedically handicapped employee, which is serial 10 of the rule 280(2) table at Rs. 15,000 plus dearness allowance a month in metro cities and Rs. 8,000 plus dearness allowance elsewhere.

Everything else in that table is old-regime only, including Children Education Allowance at Rs. 3,000 a month a child for two children, hostel expenditure at Rs. 9,000, the Special Compensatory (Remote Locality) Allowance bands, Compensatory Field Area at Rs. 13,500, counter-insurgency at Rs. 22,000, high altitude, underground allowance and Siachen Allowance at Rs. 42,500. For an employee drawing several of these the old regime carries more than the headline deduction list suggests, because rule 280 raised nearly every cap to the notified allowance rate from 1 April 2026, so most of them are now exempt in full on the old side rather than partly.

One drafting point is worth flagging. Rule 280(3) grants the survivors to an employee “who has exercised an option under section 202(4)”, which read literally attaches the restriction to the old regime and is the wrong way round, since Section 202(2)(a)(ii) puts the restriction on the Section 202(1) computation. Section 202(2)(a)(ii) is the operative provision and rule 280(3) supplies the survivor list.

What each regime allows

The table below lists the items a central government employee or pensioner actually claims, with the amount available on each side for the financial year 2026-27 and the provision of the Income-tax Act, 2025 that governs it.

The deductions allowed in the new tax regime article covers the survivors in detail.

Break-even deductions by salary

The break-even is the quantum of old-regime deductions, excluding the standard deduction, at which the two regimes produce the same tax. The table below is a salary-calculator.in computation, derived by setting the old-regime tax equal to the new-regime tax at each gross salary and solving for the deductions, for an individual below 60 with no income other than salary and no surcharge.

Three features of that table are worth stating plainly, because none of them is obvious.

The break-even does not rise steadily with salary. It climbs to a peak of Rs. 7,25,000 at a gross salary of Rs. 12.75 lakh, drops sharply to about Rs. 5,05,000 at Rs. 13.46 lakh, and only then begins climbing again. The rule of thumb that the old regime gets relatively better as income falls is the wrong way round anywhere below Rs. 13.46 lakh.

The peak sits exactly at the tax-free ceiling. At a gross salary of Rs. 12.75 lakh the new regime pays nothing, so the old regime must also pay nothing, which requires driving total income down to Rs. 5,00,000 and therefore Rs. 7,25,000 of deductions. That is more than the Rs. 5,43,750 needed at a gross salary of Rs. 15 lakh. The Section 156(2)(a) rebate makes the new regime hardest to beat at precisely the point where it stops applying.

The break-even stops rising at Rs. 8,00,000. Once the new-regime taxable income clears Rs. 24 lakh and the old-regime taxable income clears Rs. 10 lakh, both regimes tax the marginal rupee at 30% and every further rupee of salary cancels out of both sides of the equation. Above a gross salary of Rs. 24.75 lakh the crossover is a flat Rs. 8,00,000 of deductions regardless of how high the salary goes, up to the Rs. 50 lakh surcharge threshold where the absence of a Rs. 5 crore band begins to favour the new regime again. An officer on Rs. 30 lakh and an officer on Rs. 45 lakh face the same target.

The 4% cess is charged at the same rate in both regimes, so it scales both sides equally and does not move any figure in the table. The tax regime break-even guide and the income tax calculator apply the same computation to a specific salary and deduction profile.

Worked example where the old regime wins

An employee on a gross salary of Rs. 15,00,000 with Rs. 5,70,000 of old-regime deductions pays Rs. 92,040 against the new regime’s Rs. 97,500, so the old regime wins by Rs. 5,460. The margin is thin because Rs. 5,70,000 is only Rs. 26,250 past the Rs. 5,43,750 break-even at that salary, and that excess is worth 20% in tax plus cess.

The deductions in that example are the full slate: Rs. 1,50,000 under Section 123 read with Schedule XV from the General Provident Fund and other savings, Rs. 50,000 under Section 124(3) for additional National Pension System contributions, Rs. 25,000 under Section 126 for health insurance, Rs. 2,00,000 of home-loan interest on a self-occupied house under Section 22(2)(a), and a house rent allowance exclusion of Rs. 1,45,000 under Schedule III serial 11. With the Rs. 50,000 standard deduction on top, total income falls to Rs. 8,80,000, on which the old-regime tax is Rs. 12,500 on the second slab plus 20% of Rs. 3,80,000, that is Rs. 88,500, or Rs. 92,040 with the 4% cess.

The advantage is fragile. Strip out the home-loan interest alone, leaving Rs. 3,70,000 of deductions, and total income rises to Rs. 10,80,000, the old-regime tax rises to Rs. 1,36,500, or Rs. 1,41,960 with cess, and the new regime is ahead by Rs. 44,460. The old regime rewards a specific financial life: a home loan on a self-occupied house, a full savings basket, and a real rent outgo. For an employee who rents modestly, has no home loan, and saves nothing beyond the compulsory provident fund subscription, the new regime wins at every income level.

Two conditions attach to the housing side of that example. An employee claiming a house rent allowance exclusion and a self-occupied home-loan interest deduction at the same time must be able to justify both, which requires the house on which the loan is taken to be genuinely unoccupied or in a different city from the place of posting. Section 21(7)(a) allows the nil annual value to be taken for two such houses, and Section 22(5) caps the aggregate deduction across them at Rs. 2,00,000.

The Finance Act 2026 narrowed that cap in one respect from 1 April 2026. Section 22(2) previously limited only the current-year interest under Section 22(1)(b); the Finance Act 2026 substituted the reference so that it now reads “sub-section (1)(b) and (c)”, bringing the five annual instalments of pre-construction interest inside the same Rs. 2,00,000 ceiling. An employee who borrowed during construction and is claiming both limbs will find the old-regime deduction smaller than it was, and the break-even correspondingly harder to reach.

A pensioner’s comparison

A pensioner is better off under the new regime in almost every case, because a pension up to Rs. 12.75 lakh pays nothing at all and the two old-regime advantages are worth nothing below that ceiling. Those advantages are the age-based basic exemption in items (II) and (III) of Paragraph A of Part I-B of the First Schedule to the Finance Act 2026, Rs. 3,00,000 from age 60 and Rs. 5,00,000 from age 80 against the flat Rs. 4,00,000 at serial 1 of the Section 202(1) Table, and the Section 153(2)(b) deduction of up to Rs. 50,000 on interest from bank, co-operative bank and post office deposits.

Take a pensioner aged 65 drawing Rs. 8,00,000 of pension with Rs. 50,000 of deposit interest. Under the new regime the Rs. 75,000 standard deduction brings total income to Rs. 7,75,000, which is below Rs. 12 lakh, so the Section 156(2)(a) rebate cancels the tax entirely and the liability is nil. Under the old regime, after the Rs. 50,000 standard deduction and the full Rs. 50,000 of Section 153(2)(b), total income is Rs. 7,50,000 and the tax is Rs. 10,000 on the 5% band above the Rs. 3,00,000 senior-citizen exemption plus Rs. 50,000 on the 20% band, that is Rs. 60,000, or Rs. 62,400 with cess. The old regime costs this pensioner Rs. 62,400 for the privilege of claiming Section 153(2)(b).

Above the ceiling the age exemption is worth less than it looks. At a pension of Rs. 15,00,000 the break-even for a pensioner aged 60 to 79 is Rs. 5,31,250 of deductions, against Rs. 5,43,750 for someone below 60. The extra Rs. 50,000 of exemption is taxed at 5% in the old regime and therefore saves Rs. 2,500, no more. For a super-senior pensioner aged 80 and above the break-even falls to Rs. 4,81,250, a saving of Rs. 12,500 in tax. Section 153(2)(b) supplies at most Rs. 50,000 of the Rs. 5 lakh or so required, so the old-regime case for a pensioner rests on health insurance premiums under Section 126, a continuing home loan, and Section 123 investments outside the pension.

A family pension follows different rules again. It is charged as income from other sources, not as salary, so it gets no standard deduction in either regime. Section 93(1)(d) instead allows the lower of one-third of the family pension or Rs. 25,000 where income-tax is computed under Section 202(1), and Rs. 15,000 in any other case, which is one of the few line items where the new regime is more generous than the old in rupee terms.

Arrears, Section 157 relief and the regime choice

Relief on arrears under Section 157 of the Income-tax Act, 2025, formerly Section 89, is computed on the regime that actually applied in each earlier year, not on the regime chosen in the year of receipt. This matters to central government employees more than most, because a dearness allowance revision, a pay fixation order or a pay commission implementation routinely pays out for periods two or three years back.

The mechanism is a two-part recomputation. The tax on the total income of the year of receipt is worked out with and without the arrears, and the tax of each earlier year to which the arrears relate is worked out with and without its share; the relief is the excess of the first difference over the second. An employee who was taxed under the old regime in the financial year 2023-24 and is on the new regime now cannot recompute 2023-24 on the Section 202(1) slabs, because the relief looks at the tax that was actually payable in that year.

Section 157(1) covers arrears or advance salary, salary for more than twelve months in one tax year, a payment in the nature of profits in lieu of salary under Section 18(1), and arrears of family pension as defined in Section 93(1)(d). Section 157(2) bars the relief altogether on any income for which a deduction has been claimed at serial 12 of the Section 19(1) Table, the voluntary retirement entry, in that or any other tax year.

The form changed with the Act, and so did the deadline. Relief was claimed on Form 10E before the return under Rule 21AA of the 1962 Rules; from the tax year 2026-27 it is claimed on Form 39, which rule 73(3) of the Income-tax Rules, 2026 requires to be furnished on or before the due date specified under Section 263(1)(c), that is 31 July of the financial year following the tax year. Rule 73 is a Table of five entries rather than a set of sub-rules: the salary and family-pension computation is entry 1, gratuity splits at fifteen years of service across entries 2 and 3, termination compensation is entry 4 and commutation is entry 5. For the financial year 2025-26 return filed during 2026, Form 10E remains the correct form. The Section 157 relief article and the how to fill Form 10E guide cover the computation and the filing.

Declaring the regime to the employer

The declaration made to the office fixes only the monthly tax deducted at source under Section 392, and it does not bind the regime chosen in the return. An employee tells the Drawing and Disbursing Officer which regime to apply and declares the deductions being claimed on Form No. 124, prescribed by rule 205 of the Income-tax Rules, 2026 under Section 392(5)(b) and replacing Form 12BB, so that the deduction each month approximates the final liability. Particulars of other salary and of income under other heads go on Form No. 122 under rule 204(1).

The final choice is made at filing, and it may differ. An employee who declared the new regime to the office in April and finds at filing that the old regime is cheaper simply files under the old regime and claims a refund of the excess deducted. The reverse also works, though it produces a balance payable along with interest under Sections 424 and 425, so the mismatch is cheaper in one direction than the other.

The sensible course is to run both regimes once early in the financial year, declare the one that fits, and check again before filing. A mid-year change in rent, the sanction of a home loan, or a large arrears payment can move the answer by more than the margin between the two.

Exercising the option under Section 202(4)

The new regime is the default, so a government employee who does nothing is taxed under Section 202(1). Reaching the old regime means exercising the option under Section 202(4), and the machinery for doing so changed completely 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 the deduction profile changes. The due date is 31 July of the financial year succeeding the tax year, at serial 4 of the Section 263(1)(c) Table, which is the residual entry for any other assessee. The how to switch tax regime guide sets out the four dates in that Table and the belated-return consequence under Section 263(4).

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 tax year other than the year of exercise, and after withdrawal the person can never exercise it again unless the business or professional income ceases, at which point the Section 202(4)(b) route reopens. A government employee with consultancy or professional receipts on the side falls into this category and loses the annual freedom to switch, which is a reason to compute carefully before opting out the first time.

Form 10-IEA is gone. The Income-tax Rules, 2026 prescribe no equivalent, which makes rule 136 the whole of the procedure, and 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).

Common errors

• Applying the Rs. 75,000 standard deduction under the old regime, where serial 2 of the Section 19(1) Table gives Rs. 50,000.
• Counting the employer’s National Pension System contribution as an old-regime deduction. Sections 124(1) and 124(2) are carved out of the Section 202(2)(a)(xii) withdrawal and apply in both regimes, so the item cancels out of the comparison entirely.
• Assuming the additional Rs. 50,000 of the employee’s own National Pension System contribution survives in the new regime. Section 124(3) sits inside the Chapter VIII withdrawal; only Sections 124(1) and 124(2) escape it.
• Reading the Rs. 12 lakh figure as the first Rs. 12 lakh being exempt. Section 156(2)(a) is a rebate: at a total income of Rs. 12,00,001 it is lost and, subject to Section 156(2)(b), tax applies from Rs. 4 lakh upward.
• Assuming senior citizens get a higher basic exemption in the new regime. Serial 1 of the Section 202(1) Table attaches no age condition, and the Rs. 3 lakh and Rs. 5 lakh exemptions in Paragraph A of Part I-B are worth Rs. 2,500 and Rs. 12,500 of tax respectively.
• Filing Form 10-IEA for the tax year 2026-27. The form belongs to the repealed 1961 Act and its last year of use is assessment year 2026-27; the option is now exercised in the return under rule 136.
• Assuming the house rent allowance exemption is available in the new regime. Section 202(2)(a)(i) names serial 11 of the Schedule III Table, so it is old-regime only.
• Treating every prescribed allowance as withdrawn in the new regime, or as surviving in it. Rule 280(3) preserves rule 280(1)(a) to (d) and serial 10 of the rule 280(2) table, and nothing else.
• Describing gratuity, commuted pension or leave encashment as exempt under Section 10(10). They are deductions in the Table to Section 19(1) from 1 April 2026, and Section 202(2)(a)(iv) removes only serial 1 of that Table, so all of them survive the default regime.
• Confusing the Rs. 12 lakh rebate threshold, which is total income, with the Rs. 12.75 lakh tax-free ceiling, which is gross salary before the standard deduction.
• Assuming the standard deduction applies to a family pension. It does not; Section 93(1)(d) gives Rs. 25,000 or one-third where tax is computed under Section 202(1) and Rs. 15,000 or one-third in any other case.
• Treating the regime declared to the Drawing and Disbursing Officer as final. It governs only the tax deducted at source under Section 392; the return under Section 263(1) settles the regime.
• Citing Section 115BAC or Section 87A as current law for the financial year 2026-27. Both belong to an Act repealed on 1 April 2026 by Section 536(1); the operative provisions are Sections 202 and 156.

Related Articles

• Rebate, deduction, and exemption: the difference
• Tax regime break-even: when the old regime wins
• Income tax slabs for AY 2027-28
• Section 115BAC
• Section 202 of the Income-tax Act 2025
• New tax regime
• Old tax regime
• Deductions allowed in the new tax regime
• Section 87A rebate
• Marginal relief
• Surcharge on income tax
• How to switch tax regime
• Form 10-IEA
• Income-tax Act 2025
• The tax year replaces the previous year and assessment year
• HRA exemption under Section 10(13A)
• NPS tax benefits
• Section 80TTB
• Entertainment allowance
• Agniveer Corpus Fund
• TDS on salary (Section 192)
• Advance tax
• Form 12BB
• Leave Travel Concession
• Income tax for government employees
• Income tax for pensioners
• Standard deduction
• Professional tax
• Section 157 relief
• How to fill Form 10E
• House-rent allowance
• City classification for HRA
• Dearness allowance
• Transport allowance
• Pay fixation
• 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
• India Code, bare Acts
• The Gazette of India
• Department of Expenditure
• Press Information Bureau

References

1. Income-tax Act, 2025 (Act No. 30 of 2025), assented 21 August 2025 and in force from 1 April 2026: Section 202(1) and its Table (the default regime and its seven slab rates), Section 202(2)(a) sub-clauses (i), (ii), (iv), (v) and (xii) (the exemptions and deductions withdrawn), Section 202(2)(b)(ii) and (c), 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: sub-section (1), the rebate of up to Rs. 12,500 on a total income up to Rs. 5,00,000; sub-section (2)(a), the rebate of up to Rs. 60,000 on a total income up to Rs. 12,00,000 where tax is computed under Section 202(1); sub-section (2)(b), marginal relief; and sub-section (3), the cap on that deduction. Renumbering Section 87A of the Income-tax Act, 1961.
3. Income-tax Act, 2025, Table to Section 19(1): serial 1, professional tax under article 276(2) of the Constitution, excluded from the default regime by Section 202(2)(a)(iv); serial 2, the standard deduction of Rs. 75,000 or the salary whichever is less where tax is computed under Section 202(1) and Rs. 50,000 or the salary whichever is less in any other case; serials 3, 4 and 7, the entire amount of a government death-cum-retirement gratuity, a defence retiring gratuity and commutation of pension; and serials 13 and 14, leave encashment. The Act enacts no counterpart to the Section 16(ii) entertainment allowance deduction.
4. 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, with no Rs. 5 crore band), Section 3(5) (marginal relief on surcharge), Section 3(15) (the 4% health and education cess), First Schedule Part I-B Paragraph A with items (II) and (III) (the old-regime slabs and age-based exemptions) and Paragraph F Table 1 serial 1 (the old-regime surcharge including the 37% band).
5. Income-tax Act, 2025, Chapter VIII: Section 123 with Schedule XV (the Rs. 1.5 lakh savings basket, including paragraph 1(d) for the General Provident Fund and paragraph 1(y) for the employee’s National Pension System contribution), Section 124(1), (2), (3) and (5) (the National Pension System deductions), Section 125(1) and (2) (the Agniveer Corpus Fund), Section 126 (health insurance), Section 133 (donations) and Section 153(2)(a) and (b) (savings and deposit interest), renumbering Sections 80C, 80CCD, 80CCH, 80D, 80G, 80TTA and 80TTB of the Income-tax Act, 1961.
6. Central Board of Direct Taxes, Notification No. 22/2026 [F. No. 370142/41/2025-TPL], G.S.R. 198(E), dated 20 March 2026, notifying the Income-tax Rules, 2026 with effect from 1 April 2026: rule 136 serial 4 (the Section 202(4) option exercised in the return), rule 279 (the house rent allowance limits at serial 11 of the Schedule III Table), rule 280(1), (2) and (3) (the prescribed allowances and the survivor list for the default regime), rule 204(1) and rule 205 (Form No. 122 and Form No. 124) and rule 73 (Form 39).
7. Income-tax Act, 2025, Section 93(1)(d): the family-pension deduction, one-third or Rs. 25,000 whichever is less where income-tax is computed under Section 202(1), and one-third or Rs. 15,000 whichever is less in any other case, renumbering Section 57(iia) of the Income-tax Act, 1961.
8. Income-tax Act, 2025, Sections 21(6), 21(7), 22(1)(b), 22(1)(c), 22(2) and 22(5): the nil annual value for up to two self-occupied houses and the Rs. 2,00,000 aggregate cap on housing-loan interest, as amended by the Finance Act 2026 with effect from 1 April 2026 to bring pre-construction interest under Section 22(1)(c) inside that cap. Renumbering Section 24(b) of the Income-tax Act, 1961.
9. Income-tax Act, 2025, Section 536(1) (repeal of the Income-tax Act, 1961 from 1 April 2026), Section 536(2)(c) (the 1961 Act continuing to govern assessment year 2026-27) and Section 536(2)(f) (an option exercised under the repealed Act deemed exercised under the corresponding provision).
10. Income-tax Act, 2025, Section 157(1) and (2), renumbering Section 89: relief on arrears of salary and family pension, computed under rule 73 of the Income-tax Rules, 2026 and claimed on Form 39 by the rule 73(3) deadline, being the due date under Section 263(1)(c), replacing Form 10E under Rule 21AA of the Income-tax Rules, 1962.