Old vs New Tax Regime for Salaried Employees: Which to Pick

Choosing between the old vs new tax regime is the biggest tax decision a salaried employee makes each year, and payroll teams have to act on that choice when computing monthly TDS. Since the new regime became the default and the Income-tax Act, 2025 took effect from 1 April 2026 (introducing the term "tax year" in place of "previous year" and "assessment year"), the question is no longer "should I switch?" but "do my deductions justify opting out of the default?" This comparison explains the rules, shows the numbers at three salary levels, and gives payroll teams a checklist for handling the declaration.

The Rules in Brief

The figures below are the slabs and limits that applied from FY 2025-26 and, to our understanding, continue for tax year 2026-27. Verify against the current Finance Act before relying on them.

New regime slabs (default)

Taxable income	Rate
Up to ₹4,00,000	Nil
₹4,00,001 to ₹8,00,000	5%
₹8,00,001 to ₹12,00,000	10%
₹12,00,001 to ₹16,00,000	15%
₹16,00,001 to ₹20,00,000	20%
₹20,00,001 to ₹24,00,000	25%
Above ₹24,00,000	30%

Residents with taxable income up to ₹12,00,000 get a rebate of up to ₹60,000, which makes their tax nil. Just above ₹12 lakh, marginal relief limits the tax to the income in excess of ₹12 lakh. The standard deduction for salaried employees is ₹75,000, so salary up to ₹12,75,000 is effectively tax-free if there is no other income.

Old regime slabs (individuals below 60)

Taxable income	Rate
Up to ₹2,50,000	Nil
₹2,50,001 to ₹5,00,000	5%
₹5,00,001 to ₹10,00,000	20%
Above ₹10,00,000	30%

The old regime offers a rebate up to taxable income of ₹5,00,000 and a standard deduction of ₹50,000. Health and education cess of 4% applies under both regimes, and surcharge applies above ₹50 lakh.

Deductions: What Survives in Each Regime

Item	Old regime	New regime
Standard deduction	₹50,000	₹75,000
HRA exemption	Yes	No
LTA exemption	Yes	No
Professional tax deduction	Yes	No
80C investments (PF, PPF, ELSS, life insurance, principal repayment), up to ₹1.5 lakh	Yes	No
Health insurance (80D)	Yes	No
Home loan interest on self-occupied house, up to ₹2 lakh	Yes	No
Additional NPS by employee (80CCD(1B)), up to ₹50,000	Yes	No
Employer NPS contribution (80CCD(2))	Up to 10% of basic plus DA	Up to 14% of basic plus DA
Gratuity, leave encashment on retirement exemptions	Yes	Yes

The section numbers above are the familiar ones from the 1961 Act. The Income-tax Act, 2025 renumbered them; the concepts carry over, but payroll documents should use the current references.

Example 1: ₹12 Lakh Salary with Modest Deductions

Gross salary ₹12,00,000. Deductions available under the old regime: 80C ₹1,50,000, 80D ₹25,000, HRA exemption ₹1,00,000.

New regime

Taxable: ₹12,00,000 minus ₹75,000 = ₹11,25,000. Tax before rebate: ₹20,000 (4 to 8 lakh) + ₹32,500 (10% of ₹3,25,000) = ₹52,500. Rebate of ₹52,500 applies. Tax: nil.

Old regime

Taxable: ₹12,00,000 minus ₹50,000 minus ₹1,50,000 minus ₹25,000 minus ₹1,00,000 = ₹8,75,000. Tax: ₹12,500 + 20% of ₹3,75,000 (₹75,000) = ₹87,500. Cess ₹3,500. Tax: ₹91,000.

The new regime wins by ₹91,000. At this income level, almost nobody benefits from the old regime.

Example 2: ₹15 Lakh Salary with Typical Deductions

Gross ₹15,00,000. Old-regime deductions: 80C ₹1,50,000, 80D ₹25,000, HRA exemption ₹1,20,000.

New regime

Taxable: ₹14,25,000. Tax: ₹20,000 + ₹40,000 + 15% of ₹2,25,000 (₹33,750) = ₹93,750. Cess ₹3,750. Tax: ₹97,500.

Old regime

Taxable: ₹15,00,000 minus ₹50,000 minus ₹1,50,000 minus ₹25,000 minus ₹1,20,000 = ₹11,55,000. Tax: ₹12,500 + ₹1,00,000 + 30% of ₹1,55,000 (₹46,500) = ₹1,59,000. Cess ₹6,360. Tax: ₹1,65,360.

New regime saves ₹67,860.

Example 3: ₹30 Lakh Salary with Heavy Deductions

Gross ₹30,00,000. Old-regime deductions: standard deduction ₹50,000, 80C ₹1,50,000, 80D ₹25,000, HRA exemption ₹3,00,000, home loan interest ₹2,00,000, NPS 80CCD(1B) ₹50,000. Total ₹7,75,000.

New regime

Taxable: ₹29,25,000. Tax: ₹20,000 + ₹40,000 + ₹60,000 + ₹80,000 + ₹1,00,000 = ₹3,00,000 up to ₹24 lakh, plus 30% of ₹5,25,000 (₹1,57,500) = ₹4,57,500. Cess ₹18,300. Tax: ₹4,75,800.

Old regime

Taxable: ₹22,25,000. Tax: ₹12,500 + ₹1,00,000 + 30% of ₹12,25,000 (₹3,67,500) = ₹4,80,000. Cess ₹19,200. Tax: ₹4,99,200.

Even with ₹7.75 lakh of deductions, the new regime is ₹23,400 cheaper here. The old regime starts winning only when deductions are larger still, for example a high HRA exemption in a metro plus full home-loan interest.

Example 4: When the Old Regime Wins

Gross ₹20,00,000. The employee rents in Mumbai and claims HRA exemption of ₹3,60,000, 80C ₹1,50,000, 80D ₹50,000 (self and parents), NPS 80CCD(1B) ₹50,000, and interest of ₹2,00,000 on a home loan for a flat in another city.

New regime

Taxable: ₹19,25,000. Tax: ₹20,000 + ₹40,000 + ₹60,000 + 20% of ₹3,25,000 (₹65,000) = ₹1,85,000. Cess ₹7,400. Tax: ₹1,92,400.

Old regime

Taxable: ₹20,00,000 minus ₹50,000 minus ₹3,60,000 minus ₹1,50,000 minus ₹50,000 minus ₹50,000 minus ₹2,00,000 = ₹11,40,000. Tax: ₹12,500 + ₹1,00,000 + 30% of ₹1,40,000 (₹42,000) = ₹1,54,500. Cess ₹6,180. Tax: ₹1,60,680.

The old regime saves ₹31,720. The deciding factors are the large metro HRA exemption and the home-loan interest; 80C alone would not have tipped the balance. Remove the home-loan interest and the new regime wins again (old regime tax would rise by ₹62,400 to ₹2,23,080).

Beyond the Tax Number

The cheaper regime on paper is not always the better choice:

• Liquidity: old-regime savings often depend on locked-in products (PPF, ELSS, insurance). An employee who would not otherwise invest is effectively choosing lower liquidity for tax.
• Paperwork: the old regime requires declarations, proofs and landlord PAN, and a missed proof leads to higher TDS in the last quarter.
• Stability of deductions: HRA disappears if the employee moves into their own home; home-loan interest falls as the loan amortises. Re-check every year.
• Employer NPS: asking the employer to restructure part of salary as employer NPS (up to 14% of basic plus DA under the new regime) is one of the few planning levers that works in the default regime.

Finding Your Break-Even

A quick method for payroll teams and employees:

1. Compute tax under the new regime on gross minus ₹75,000.
2. Add up every old-regime deduction and exemption the employee can actually prove.
3. Compute old-regime tax on gross minus ₹50,000 minus those deductions.
4. Pick the lower figure, but factor in that old-regime deductions require locked-in investments and proof submission.

Broadly, with the current slabs, employees earning under about ₹13 to ₹15 lakh rarely benefit from the old regime. Above that, the answer depends on HRA and home-loan interest more than on 80C.

How Payroll Handles the Regime Choice

Declaration at the start of the year

The employer asks each employee to declare the intended regime. If an employee does not declare, the employer must deduct TDS under the new (default) regime.

Switching at return filing

A salaried employee without business income can choose the regime afresh each year when filing the return, regardless of what was declared to the employer. If the employer deducted under the new regime and the employee later opts for the old regime, any excess tax comes back as a refund.

Mid-year changes

Employer policies vary on whether an employee can change the declared regime mid-year. Many allow one change before investment proofs are collected. Document the rule.

Once the regime is set, monthly TDS follows the method in our guide on how to calculate TDS on salary.

Common Mistakes

• Allowing HRA or 80C in the TDS computation for an employee on the new regime.
• Forgetting marginal relief just above ₹12 lakh, which over-deducts TDS.
• Ignoring other income declared by the employee, such as interest, when estimating whether the rebate applies.
• Treating employer NPS as allowed only in the old regime (it is allowed in both, with a higher limit in the new).
• Assuming last year's slabs still apply without checking the Finance Act.

What Changed With the Income-tax Act, 2025

From 1 April 2026, the Income-tax Act, 2025 replaced the 1961 Act. For salaried employees choosing a regime, the practical changes are mostly about vocabulary and references, not the comparison itself:

• Tax year: the single term "tax year" replaces "previous year" and "assessment year". Tax year 2026-27 runs from 1 April 2026 to 31 March 2027.
• Section numbers: the familiar 80C, 80D, 87A, 10(13A) and 192 have new numbers. Employee communications and declaration forms should be updated so they do not cite repealed sections.
• Forms: declaration and certificate forms have been renumbered. Use the forms currently notified on the e-filing portal.
• Default regime: the new regime remains the default, and employees still choose through their employer for TDS and finally at return filing.

Rates and limits are set each year by the Finance Act, so recheck slabs and the rebate threshold every April before rolling payroll into the new year.

Regime Selection in Fininvo Payroll

Fininvo Payroll supports TDS management and investment declarations, so TDS follows each employee's declared regime and the computation appears in the salary certificate. See India payroll features.

Frequently Asked Questions

Which tax regime is better for salaried employees?

For most employees earning under about ₹15 lakh, the new regime gives lower tax. Above that, compare actual deductions; heavy HRA and home-loan interest can make the old regime cheaper.

Is income up to ₹12 lakh tax-free?

Under the new regime, a resident's taxable income up to ₹12 lakh attracts nil tax after rebate. With the ₹75,000 standard deduction, salary up to ₹12.75 lakh is tax-free if there is no other income. Special-rate income such as capital gains is treated differently.

Can I switch regimes every year?

Salaried individuals without business income can choose each year at return filing.

What happens if I do not tell my employer?

The employer deducts TDS under the new regime by default.

Is this tax advice?

No. This is general information as of late 2026. Slabs, rebates and deductions should be verified for the current tax year with a qualified adviser.