PROSPERR.IO

For salaried taxpayers in India, one of their most significant financial decisions is going to be determining whether they want to utilise the Old Tax Regime or the New Tax Regime when filing their taxes for the assessment year of 2026-27. Ever since the implementation of a concessional tax structure under section 115BAC, taxpayers now have access to two independent systems of taxation, one providing lower tax rates with little allowable deductions, while the other permits multiple exemptions/deductions, but is subject to higher slab rates.

Beginning with the financial year 2023-24, taxpayers in the New Tax regime will have this as their default method of calculating income taxes. This means that unless action is taken by the taxpayer, he/she will have his/her tax liability computed according to the New Tax Regime. However, just because it is now the "default" way does not mean that it is the best or only correct way to prepare your tax return.

Which tax regime is right for you can be determined by factors, including:

• Your level of income
• Your use of investment accounts
• The number and amount of deductions you claim (for example, Section 80C, Section 80D, HRA or mortgage interest)
  

The existence of income that is subject to preferential treatment (for example, capital gains tax). If you select the wrong tax regime, you will end up costing yourself thousands of dollars in additional taxes owed. If you select the right tax regime for your situation, you will be able to legally reduce your tax liability, thus improving your overall financial planning.

In this comprehensive guide to taxes for assessing the return period of 2026, we will help you determine which tax regime will be the most beneficial to you by breaking down the differences between the Old & New Tax Regimes, tax rates, rebate rules, and case studies and examples from people's lives.

What Is the Old Tax Regime?

Before the introduction of the concessional income tax regime under Section 115BAC of the Income Tax Act, the Old Tax Regime was the form of taxation that individuals paid their tax under before it was replaced by the new, lower cost of doing business. The Old Tax Regime would essentially pay higher amounts of tax than the New Tax Regime because it had higher taxes corresponding directly to the tax rates. However, many exemptions and deductions still existed under the Old Version of the Tax Code, so taxpayers could reduce their combined taxable income.

Features of the Old Tax Regime (AY 2026–27) Include:

1. Basic Limits on Exemptions

This amount will be ₹2.50 lakhs for individuals under the age of 60 years. Higher exemption for senior citizens

2. Higher Slab Rates

• 5%
• 20%
• 30%

(Applicable after the basic exemption limit)

3. Encourages Tax Planning

The regime is ideal for individuals who have a home loan, and people who invest heavily in tax-saving instruments, along with people who pay high insurance premiums and people who claim HRA benefits.

4. Section 87A Tax Rebate

Individuals residing with a total annual income of (less than) ₹500,000 can receive a rebate against the amount owed in taxes due to the exemption; there are some types of losses you cannot deduct from your income when calculating your tax liability.

5. Multiple Types of Exemptions and Deductions

The old tax system provides many opportunities to reduce your tax liability through a variety of deductions and exemptions. Some examples of exempted or deductible expenses include:

• Sec. 80C (Public Provident Fund (PPF), Employee Provident Fund (EPF), Life Insurance Company (LIC), Equity Linked Saving Scheme (ELSS), tuition costs, etc.)
• Sec. 80D (medical insurance)
• Sec. 80E (interest incurred on student loans)
• Sec. 24(b) (interest on a loan for your primary residence)
• HRA exempt under Sec. 10(13A)
• Leave/travel allowance
  

Who Typically Benefits From the Old Regime?

The old regime generally works better for:

• Salaried individuals with significant deductions
• Taxpayers claiming home loan interest
• Those investing ₹1.5 lakh or more under 80C
• Individuals with medical insurance and education loans
  

What Is the New Tax Regime in 2026?

The New Tax Regime was introduced to simplify income tax by offering lower slab rates in exchange for giving up most exemptions and deductions. It operates under Section 115BAC and, from FY 2023–24 onward, has been made the default tax regime.

This means that unless you actively opt for the old regime while filing your return under Section 139, your taxes will automatically be calculated under the new system.

Key Features of the New Tax Regime (AY 2026–27)

1️. Higher Basic Exemption Limit

The basic exemption limit under the new regime is ₹3,00,000, which is ₹50,000 higher than the old regime for individuals below 60 years.

2️. More Slabs, Lower Rates

The new regime follows a more gradual slab structure with lower rates compared to the old regime. Instead of jumping quickly to 20% and 30%, the tax increases in smaller increments.

This structure benefits individuals who:

• Do not claim many deductions
• Prefer simplicity over investment-linked tax planning
• Want predictable, lower rates without documentation burden

3️. Higher Rebate Under Section 87A

Under Section 87A, resident individuals with total income up to ₹7,00,000 can claim a rebate, making their tax liability effectively zero (subject to conditions). However, remember, If your income includes capital gains taxed at special rates, the rebate calculation may not eliminate your entire tax liability.

4️. Limited Deductions Allowed

Under the new regime, most deductions are not allowed, including:

• Section 80C (PPF, LIC, ELSS, etc.)
• Section 80D (health insurance)
• HRA exemption
• LTA
• Home loan interest (self-occupied property)

However, some benefits are still available:

• Standard deduction (for salaried individuals and pensioners)
• Employer’s contribution to NPS under Section 80CCD(2)
• Deduction for the employment of new employees (for businesses)

5️. Designed for Simplicity

The new regime removes the need to:

• Track multiple investment proofs
• Submit Form 12BB declarations
• Lock money into tax-saving instruments solely for deductions

It is structured for individuals who prefer:

• Higher take-home salary
• Fewer compliance requirements
• Straightforward tax calculation

Old vs New Tax Regime 2026: Side-by-Side Comparison

Now that we’ve understood both systems individually, let’s compare them directly. This will help you quickly identify which structure aligns better with your financial situation.

Detailed Tax Slab Comparison for 2026

Understanding the exact tax slabs under both regimes is critical to knowing which option saves you more. Let’s break it down for Assessment Year 2026–27 (FY 2025–26).

1️. Old Tax Regime Slabs (Below 60 Years)

2️. New Tax Regime Slabs (Below 60 Years)

3️. Comparing Tax for Key Income Levels

Case Study 1: Priya, A Salaried Employee With No Major Deductions

Case Study 2: Rakesh – Salaried Employee With Significant Deductions

Break-Even Analysis: When Does Each Regime Win?

Who Should Choose Which Tax Regime in 2026?

Important Things to Remember Before Filing ITR in 2026

1️. The New Tax Regime is the default for the salary income as applicable for the financial year 2023-24.

In case you select the old regime instead of defaulting to new, you will be required to opt for it, Encroachment (if applicable) through your employer via Form 12BB/Declaration Or while filing your ITR under Section 139(1)

2️. You Can Switch at Filing

Even if you selected the new regime with your employer, you can change to the old regime when filing your return.

This flexibility allows you to compare tax liability under both regimes before finalising.

3️. Don’t Assume “No Tax” Automatically

Total income below ₹5 lakh (old regime) or ₹7 lakh (new regime) does not always mean zero tax.

Special rate incomes like STCG (15%), LTCG on equity (10%) and LTCG on other assets (20%) can still generate tax liability despite rebates.

4️. Document Deductions Correctly

For the old regime, maintain proofs of HRA, LTA, and rent receipts, home loan interest certificates and insurance and investment statements. For the new regime, documentation is minimal (mostly standard deduction & employer NPS contribution).

5️. Recheck Tax Calculations

Compute your tax under both regimes, especially if your: Income > ₹10 lakh, Exemptions/deductions > ₹3 lakh, there are capital gains involved, and a wrong assumption can cost ₹20,000–₹50,000 or more.

Book a Free Tax assessment call with us today! 

Frequently Asked Questions

1️. Can I switch tax regimes every year?

Yes. Even if you choose the new regime with your employer, you can opt for the old regime while filing your ITR under Section 139(1). However, once you select a regime for the year, all income for that year must follow that choice.

2️. Is the new tax regime always better for low-income earners?

Usually, yes. The higher exemption limit (₹3 lakh) and lower early slabs benefit incomes below ₹7–8 lakh. But if you have special incomes taxed at different rates (like capital gains), some tax may still be payable.

3️. Are deductions under 80C, 80D, and HRA allowed in the new regime?

No. Most deductions are removed in the new regime. Only a few exceptions remain: standard deduction and the employer’s contribution to NPS (Section 80CCD(2)).

4️. Does the Section 87A rebate apply automatically?

Yes, if your total income (excluding special rate incomes) is within:

• ₹5 lakh for the old regime
• ₹7 lakh for the new regime
  

But special rate incomes like STCG/LTCG may reduce the benefit.