Introduction:
As FY 2025-26 nears its end, taxpayers face a critical phase where accurate TDS deductions, advance tax payments, and final submission of tax declarations to their employer companies must be completed without error. At this juncture, the choice between the Old Tax Regime and the New Tax Regime becomes decisive, as it directly influences your tax liability for Assessment Year 2026-27. While the New Regime is now the default option, employees still have the flexibility to opt for the Old Regime if it proves more beneficial.
Let’s understand the differences, benefits, and key factors while choosing tax regime!
Tax Rates:
| New Tax regime u/s 115BAC | Old tax regime (non senior citizen) | ||
| Income Tax Slabs | Tax rates | Income Tax Slabs | Tax rates |
| Up to Rs. 4 lakh | Nil | Up to 2,50,000 | Nil |
| Rs. 4 lakh to Rs. 8 lakh | 5% | 2,50,001 – 5 lakh | 5% |
| Rs. 8 lakh to Rs. 12 lakh | 10% | 5 lakh – 10 lakh | 20% |
| Rs. 12 lakh to Rs. 16 lakh | 15% | Above 10 lakh | 30% |
| Rs. 16 lakh to Rs. 20 lakh | 20% | ||
| Rs. 20 lakh to Rs. 24 lakh | 25% | ||
| Above Rs. 24 lakh | 30% | ||
Allowances and deductions available:
| Allowance / Deduction | Section of IT Act | New Regime Allowed? | Old Regime Allowed? |
| Leave Travel Allowance (LTA) | Sec 10(5) | ❌ | ✅ |
| House Rent Allowance (HRA) | Sec 10(13A) | ❌ | ✅ |
| Standard Deduction (Salary/Pension) | Sec 16(ia) | ✅ Rs. 75,000 | ✅ Rs. 50,000 |
| Entertainment Allowance (Govt. employees) | Sec 16(ii) | ❌ | ✅ |
| Professional Tax | Sec 16(iii) | ❌ | ✅ |
| Interest on Housing Loan (Self-occupied property) | Sec 24(b) | ❌ | ✅ Rs. 2,00,000 |
| Interest on Housing Loan (Rented property) | Sec 24(b) | ✅ | ✅ |
| Deduction for Investments (LIC, PPF, ELSS, etc.) | Sec 80C | ❌ | ✅ |
| NPS (Employer Contribution) | Sec 80CCD(2) | ✅ | ✅ |
| NPS (Employee Contribution) | Sec 80CCD(1B) | ❌ | ✅ |
| Health Insurance Premium | Sec 80D | ❌ | ✅ |
| Education Loan Interest | Sec 80E | ❌ | ✅ |
| Donations to Charitable Institutions | Sec 80G | ❌ | ✅ |
| Savings Interest (up to ₹10,000) | Sec 80TTA | ❌ | ✅ |
| Senior Citizens – Savings Interest (up to ₹50,000) | Sec 80TTB | ❌ | ✅ |
| Additional Depreciation (Plant & Machinery) | Sec 32(1)(iia) | ❌ | ✅ |
| SEZ Unit Deduction | Sec 10AA | ❌ | ✅ |
| Rebate | Sec 87A | ✅ Available if Income upto Rs. 12 Lakhs- Maximum rebate Rs. 60,000 | ✅ Available if Income upto Rs. 5 Lakhs- Maximum rebate Rs. 12,500 |
Key points to be noted while choosing tax regime:
- Choose new regime if:
- You have limited or no deductions
- You want simpler tax filing
- You prefer higher take-home salary
- You are early in your career or have fewer financial commitments
- Choose old regime if:
- You claim HRA, LTA, and home loan benefits
- Your 80C, 80D, and other deductions exceed ₹3- 4 lakh
- You prefer structured tax planning
- You have significant long-term investments
- Switching tax regime allowed:
- Default tax regime is new tax regime. You can switch to old regime.
- For switching the tax regime from new regime to old regime, you have to file Form 10IEA before due date. However, if you do not have business income, the form is not compulsory. Tax regime can be changed at the time of filing ITR.
- Salaried persons with no business income can select different tax regimes each year. However, if there is business income, switching is allowed only once in lifetime.
- Old regime can be selected only if the return is filed before due date. For belated returns, only new regime can be chosen.
Conclusion:
The decision between the Old and New Tax Regime is not one-size-fits-all; it depends on your income structure, deductions, and long-term financial planning. The New Regime offers simplicity and higher rebates, making it attractive for those with fewer exemptions, while the Old Regime continues to reward structured tax planning and significant investments. Before filing your return for AY 2026-27, evaluate both regimes with your actual deductions and income profile. A timely, well-informed choice will not only optimize your tax liability but also ensure smooth compliance with employer submissions and year-end obligations.