As the financial year 2025-26 begins, Indian taxpayers face a critical decision: should you opt for the new tax regime under Section 115BAC or stick with the old tax regime? With the enhanced Section 87A rebate making income up to ₹12 lakh tax-free under the new regime and the old regime still offering popular deductions like Section 80C and HRA, the choice isn't always straightforward. This comprehensive guide breaks down the latest tax slabs, compares both regimes with real examples, and helps you determine which option maximizes your tax savings for FY 2025-26 (AY 2026-27).
- Section 87A rebate increased to ₹60,000 for new regime, making income up to ₹12 lakh tax-free
- Standard deduction for salaried: ₹75,000 (new regime) vs ₹50,000 (old regime)
- Section 80C, 80D, HRA exemptions NOT available under new tax regime
- ITR filing due date for FY 2025-26 (AY 2026-27) is July 31, 2026
Understanding the Two Tax Regimes: New vs Old for FY 2025-26
The new tax regime under Section 115BAC is the default regime for FY 2025-26, but taxpayers retain the flexibility to choose the old regime if it offers better savings. The fundamental difference lies in the trade-off: the new regime offers lower slab rates with fewer deductions and exemptions allowed in return.
The Income Tax Act 2025 was introduced in the previous budget to replace the decades-old Income Tax Act 1961 and will come into effect from April 1, 2026. However, Budget 2026 announced no changes to tax slabs for FY 2026-27, meaning existing tax slabs and rates apply as-is under both regimes.
What is Section 115BAC?
Budget 2020 introduced Section 115BAC - a new tax regime with lower tax rates but fewer exemptions and deductions. The new regime is the optional tax regime under Section 115BAC of the Income-tax Act, 1961, offering lower slab rates with fewer deductions and exemptions allowed, though salaried individuals get the standard deduction as per later amendments.
Latest Income Tax Slabs for FY 2025-26 (AY 2026-27)
New Tax Regime Slabs (Section 115BAC)
The income tax slabs under the new regime for FY 2025-26 (AY 2026-27) are: income up to ₹4,00,000 is tax-free; ₹4,00,001 to ₹8,00,000 is taxed at 5%; ₹8,00,001 to ₹12,00,000 at 10%; ₹12,00,001 to ₹16,00,000 at 15%; ₹16,00,001 to ₹20,00,000 at 20%; ₹20,00,001 to ₹24,00,000 at 25%; and income above ₹24,00,000 is taxed at 30%.
| Income Slab (₹) | New Regime Rate | Old Regime Rate |
|---|---|---|
| 0 - 4,00,000 | 0% | 0% (up to 2.5L only) |
| 4,00,001 - 8,00,000 | 5% | 5% (on 2.5-5L), 20% (on 5-8L) |
| 8,00,001 - 12,00,000 | 10% | 20% |
| 12,00,001 - 16,00,000 | 15% | 30% |
| 16,00,001 - 20,00,000 | 20% | 30% |
| 20,00,001 - 24,00,000 | 25% | 30% |
| Above 24,00,000 | 30% | 30% |
According to Union Budget 2025, the basic exemption limit increased from ₹3 lakh to ₹4 lakh under the new tax regime, and the highest surcharge rate reduced from 37% to 25%.
Old Tax Regime Slabs
For FY 2025-26 (AY 2026-27), the income tax slabs under the old regime remain unchanged. The old regime continues with basic exemption of ₹2.5 lakh for individuals below 60 years, ₹3 lakh for senior citizens (60-80 years), and ₹5 lakh for super senior citizens (above 80 years).
Section 87A Rebate: The Game-Changer for FY 2025-26
The rebate under Section 87A for the new tax regime has been increased from ₹25,000 to ₹60,000, meaning individuals with taxable income up to ₹12 lakh will have no tax liability under the new regime. The rebate for the old tax regime remains unchanged at ₹12,500.
For salaried taxpayers, after factoring in the standard deduction of ₹75,000, the tax-free income ceiling may extend up to ₹12.75 lakh. This makes the new regime extremely attractive for middle-income salaried individuals. Calculate your exact liability using the Income Tax Calculator to see which regime works better for your specific situation.
Deductions Allowed: New Regime vs Old Regime
Deductions Under New Tax Regime (Section 115BAC)
One can claim a few selective deductions under the new tax regime, such as standard deduction of ₹75,000, interest on home loan u/s 24b on let-out property, employer's contribution to NPS u/s 80CCD, contributions to Agniveer Corpus Fund u/s 80CCH, and deduction on family pension income (lower of 1/3rd of actual pension or ₹25,000).
Key deductions NOT allowed in new regime:
- Section 80C deductions (PPF, ELSS, LIC, NSC, tuition fees)
- Section 80D health insurance premiums
- HRA (House Rent Allowance) exemption
- Section 80E education loan interest
- Section 24b home loan interest for self-occupied property
- Leave Travel Allowance (LTA)
- Professional tax
Deductions Under Old Tax Regime
Under the old regime, common deductions include Section 80C items (PF, ELSS, life insurance premiums, tuition fees), Section 80D medical insurance premium, HRA exemption (where eligible), and home loan interest (subject to rules).
If you're claiming HRA exemption, use the HRA Calculator to determine your exact exemption amount based on actual rent paid, salary, and city of residence.
Standard Deduction for Salaried Employees
The standard deduction for salaried individuals for FY 2025-26 is ₹75,000 under the new tax regime, which increases the effective tax-free income threshold. The old regime continues to offer a standard deduction of ₹50,000.
This ₹25,000 difference in standard deduction is automatic and requires no documentation, making the new regime administratively simpler for salaried taxpayers with minimal investments.
Real Examples: Which Regime Saves More Tax?
Example 1: Salaried Employee with ₹10 Lakh Income (Minimal Deductions)
Mr. Rahul earns ₹10 lakh annually with no major investments or deductions.
New Regime Calculation:
Gross Income: ₹10,00,000
Less: Standard Deduction: ₹75,000
Taxable Income: ₹9,25,000
Tax Calculation:
₹0-4L: ₹0
₹4-8L: ₹20,000 (5% of ₹4L)
₹8-9.25L: ₹12,500 (10% of ₹1.25L)
Total Tax: ₹32,500
Less: Section 87A Rebate: ₹32,500 (since income under ₹12L)
Final Tax: ₹0
Old Regime Calculation:
Gross Income: ₹10,00,000
Less: Standard Deduction: ₹50,000
Less: Section 80C (assume minimal): ₹50,000
Taxable Income: ₹9,00,000
Tax: ₹2.5-5L at 5% = ₹12,500; ₹5-9L at 20% = ₹80,000
Total Tax: ₹92,500
Add: 4% Cess: ₹3,700
Final Tax: ₹96,200
Winner: New Regime saves ₹96,200
Example 2: Salaried Employee with ₹15 Lakh Income (High Deductions)
Ms. Priya earns ₹15 lakh with ₹1.5L in Section 80C, ₹25,000 in Section 80D, and ₹2 lakh home loan interest.
New Regime:
Taxable Income after ₹75,000 standard deduction: ₹14,25,000
Tax liability: ₹97,500 (after applying slabs)
Add 4% cess: ₹101,400
Final Tax: ₹1,01,400
Old Regime:
Gross: ₹15,00,000
Less: Standard Deduction ₹50,000 + 80C ₹1.5L + 80D ₹25,000 + Home Loan ₹2L = ₹4,25,000
Taxable: ₹10,75,000
Tax: ₹1,70,000
Add cess: ₹1,76,800
Final Tax: ₹1,76,800
Winner: New Regime saves ₹75,400
For employees with property income, calculate your home loan benefits properly using specialized tools. Track your Form 26AS / TDS Fetch Tool to ensure all TDS credits are captured correctly during ITR filing.
Example 3: High-Income Earner with ₹25 Lakh (Maximum Deductions)
Mr. Anban for FY 2025-26 has salary of ₹25 lakh with HRA exemption ₹4 lakh and other deductions totaling ₹3 lakh under old regime.
In this case, by opting for new tax regime he can save ₹70,200 in taxes, however many deductions and exemptions are not allowed under the new tax regime. High earners should run detailed calculations considering all available deductions before choosing the regime.
Who Should Choose Which Regime?
Choose New Tax Regime If:
- Your annual income is up to ₹12.75 lakh (salaried) - you pay ZERO tax
- You have minimal or no investments in 80C instruments
- You don't claim HRA or live in own house
- You prefer simple tax filing without documentation hassles
- You're a young professional without home loan
Choose Old Tax Regime If:
- You have substantial Section 80C investments (₹1.5 lakh annually)
- You pay significant HRA or home loan interest
- You claim Section 80D health insurance for self and parents
- You have education loan interest (Section 80E)
- Total deductions exceed ₹2.5-3 lakh annually
Which tax regime is better depends on the deductions and exemptions allowed to the taxpayer; the new tax regime offers lower tax slab rates but disallows most deductions, while the old tax regime has higher tax slab rates but lets you reduce taxable income through significant deductions and exemptions.
How to Switch Between Regimes for FY 2025-26
Salaried employees can choose to file under new regime in one year and old regime in the next year or vice versa, while taxpayers with income from business or profession (non-salaried) cannot opt-in and opt-out of the new tax regime every year.
Taxpayers can opt out and still file taxes under the old tax regime if beneficial by filing Form 10-IEA. Only if you have business income, you are mandatorily required to file Form 10-IEA if you want to opt for old regime; in other cases, it is not required.
Important: The choice made by the employee at the beginning of FY is only for TDS deduction purposes and is changeable while filing the return in July 2026. This gives you flexibility to optimize after seeing your actual income and deductions for the year.
Special Provisions and Additional Benefits
Surcharge Rates
Under the new tax regime, the highest surcharge rate has been reduced from 37% to 25%, whereas the maximum surcharge payable under the old tax regime for AY 2025-26 is 37%. This significantly benefits taxpayers earning above ₹5 crore annually.
TDS Changes for FY 2025-26
The 2025 Budget increased the TDS threshold for interest earned by senior citizens (excluding interest from securities) from ₹50,000 to ₹1,00,000, meaning no TDS will be deducted on interest from fixed deposits and savings accounts if total interest doesn't exceed ₹1,00,000, effective from April 1, 2025.
Verify your TDS credits regularly using the TDS Fetch Tool to ensure accurate tax calculation and timely refunds.
Marginal Relief Provision
To prevent unfair outcomes, the government introduced marginal tax relief for FY 2025-26, ensuring that if your income marginally exceeds the ₹12 lakh threshold, you only pay tax roughly equal to the extra income over ₹12 lakh, keeping your take-home virtually the same as someone at the threshold.
Key Deadlines for FY 2025-26 (AY 2026-27)
The due date to file ITR for FY 2025-26 (AY 2026-27) is July 31, 2026. Belated returns can be filed by December 31, 2026 with applicable penalties.
Missing the deadline can result in:
- Late filing fee up to ₹5,000 under Section 234F
- Interest on tax dues under Section 234A
- Loss of carry-forward of certain losses
- Inability to file revised return
Tax Planning Tips for Maximum Savings
- Calculate Both Ways: Use the Income Tax Calculator to compare tax liability under both regimes before making your choice
- Optimize Salary Structure: If choosing new regime, ask your employer to restructure CTC to maximize tax-free components like NPS contribution
- Time Your Investments: If sticking with old regime, ensure Section 80C investments are completed before March 31
- Track TDS: Regularly verify Form 26AS and Annual Information Statement (AIS) for accuracy
- Consider Future Income: If expecting salary hike or bonus, plan regime choice accordingly
- Review Annually: Salaried employees can switch regimes every year - don't assume last year's choice still applies
For investors dealing with equity, track your gains accurately using the Stock Profit Calculator and Capital Gain Calculator to understand tax implications on your investment income.
Frequently Asked Questions
Which tax regime is better for FY 2025-26 - new or old?
The better regime depends on your deductions. The new tax regime suits taxpayers with minimal investments, offering lower tax rates and up to ₹12 lakh tax-free income. The old regime benefits those claiming substantial deductions under Section 80C (₹1.5L), 80D, HRA, and home loan interest. Salaried individuals earning ₹12.75L or less benefit most from the new regime due to the ₹75,000 standard deduction and ₹60,000 rebate under Section 87A.
What is the income limit for zero tax in FY 2025-26?
Under the new tax regime for FY 2025-26, income up to ₹12 lakh is completely tax-free due to the enhanced Section 87A rebate of ₹60,000. For salaried individuals, the effective tax-free limit is ₹12.75 lakh after claiming the standard deduction of ₹75,000. Under the old regime, only income up to ₹5 lakh qualifies for the ₹12,500 rebate, making it less beneficial for lower-income taxpayers.
Can I claim Section 80C deductions under the new tax regime?
No, Section 80C deductions for investments in PPF, ELSS, NSC, and life insurance premiums are not allowed under the new tax regime introduced via Section 115BAC. The new regime also disallows HRA exemption, LTA, Section 80D health insurance deductions, and home loan interest for self-occupied property. However, it allows standard deduction of ₹75,000, employer's NPS contribution under Section 80CCD(2) up to 14% of salary, and Agniveer Corpus Fund deductions under Section 80CCH.
How do I switch between old and new tax regime for FY 2025-26?
Salaried individuals can switch between regimes annually while filing their Income Tax Return by July 31, 2026, without any restrictions. The new regime under Section 115BAC is the default regime for FY 2025-26. To opt for the old regime, simply select it in your ITR form. However, taxpayers with business or professional income must file Form 10-IEA before the ITR due date to switch regimes, and they can switch back to the new regime only once in their lifetime.
What are the new tax slabs under Section 115BAC for FY 2025-26?
Under the new tax regime for FY 2025-26 (AY 2026-27), tax slabs are: ₹0-4L (0%), ₹4-8L (5%), ₹8-12L (10%), ₹12-16L (15%), ₹16-20L (20%), ₹20-24L (25%), and above ₹24L (30%). The basic exemption limit is ₹4 lakh. A 4% health and education cess applies on total tax. The maximum surcharge under the new regime is capped at 25%, compared to 37% in the old regime, benefiting high-income earners.
Conclusion: Make an Informed Decision for FY 2025-26
The choice between new and old tax regime for FY 2025-26 isn't one-size-fits-all. Choosing between the old and new regime depends on your income structure and eligible deductions, so evaluate both carefully before filing your return.
The new regime's enhanced Section 87A rebate making ₹12 lakh (₹12.75 lakh for salaried) completely tax-free is a game-changer for middle-income taxpayers. However, if you have substantial deductions exceeding ₹2.5-3 lakh annually through investments, home loans, and HRA, the old regime may still deliver better savings despite higher tax rates.
Key Action Steps:
- Calculate tax under both regimes using actual income and deduction figures
- Review your investment portfolio and insurance payments
- Inform your employer about regime choice for accurate TDS deduction
- Remember you can switch annually (salaried) before filing ITR
- Maintain all investment proofs if choosing old regime
Ready to file your taxes with confidence? Explore TaxFetch Tools for comprehensive tax calculators, TDS verification, HRA calculations, and more to ensure you maximize your tax savings for FY 2025-26. Our automated platform simplifies complex tax calculations, helping you make the smartest choice between new and old regime based on your unique financial situation.