Old vs new tax regime: how to choose, with worked examples

The new law, briefly

From 1 April 2026, the Income-tax Act, 1961 was replaced by the Income-tax Act, 2025. It uses a single "tax year" instead of separate financial and assessment years, and many section numbers changed. The choice between the old and new regimes, and their slabs, carried over; Budget 2026 did not change the slab rates. Familiar names such as 80C and 80D are used below because they are still how most people know these deductions.

New regime: slabs and what it allows

At the time of writing, the new regime is the default. Its slabs are: nil up to ₹4 lakh, 5% from ₹4 to 8 lakh, 10% from ₹8 to 12 lakh, 15% from ₹12 to 16 lakh, 20% from ₹16 to 20 lakh, 25% from ₹20 to 24 lakh and 30% above ₹24 lakh. A rebate means no tax is payable if taxable income is up to ₹12 lakh, and salaried people get a standard deduction of ₹75,000, so a salary of up to ₹12.75 lakh effectively pays no income tax.

Almost no other deductions are allowed: no 80C, no 80D, no HRA exemption and no home loan interest on a self-occupied home. The employer's contribution to NPS is one of the few that remain.

Old regime: slabs and deductions

The old regime's slabs are: nil up to ₹2.5 lakh, 5% from ₹2.5 to 5 lakh, 20% from ₹5 to 10 lakh and 30% above ₹10 lakh, with higher basic exemptions for senior and super senior citizens. A smaller rebate makes tax nil for taxable income up to ₹5 lakh, and the standard deduction for salaried people is ₹50,000.

• 80C: up to ₹1.5 lakh for PPF, EPF, ELSS, life insurance premiums, home loan principal, children's tuition fees, tax-saver FDs and more.
• 80D: health insurance premiums for yourself, family and parents, with separate limits.
• HRA exemption if you pay rent and receive house rent allowance.
• Interest on a home loan for a self-occupied house, up to a limit.
• Additional NPS contributions, education loan interest, donations and others.

Worked example 1: a ₹15 lakh salary with typical deductions

New regime: ₹15 lakh minus the ₹75,000 standard deduction gives taxable income of ₹14.25 lakh. Tax is ₹20,000 on the 4 to 8 lakh slab, ₹40,000 on 8 to 12 lakh and ₹33,750 on the remaining ₹2.25 lakh at 15%, a total of ₹93,750, or about ₹97,500 with the 4% cess.

Old regime with ₹1.5 lakh of 80C, ₹25,000 of 80D and the ₹50,000 standard deduction: taxable income is ₹12.75 lakh. Tax is ₹12,500 plus ₹1,00,000 plus ₹82,500, a total of ₹1,95,000, or about ₹2,02,800 with cess. Here the new regime saves about ₹1,05,000.

Worked example 2: the same salary with rent and a home loan

Now add an HRA exemption of ₹2 lakh and home loan interest of ₹2 lakh to the deductions above, for a total of ₹6.25 lakh. Under the old regime, taxable income falls to ₹8.75 lakh and tax is ₹12,500 plus ₹75,000, ₹87,500, or about ₹91,000 with cess. The new regime is unchanged at about ₹97,500, so the old regime now saves about ₹6,500.

The pattern is clear: the old regime wins only when your deductions are large. For most people with only 80C and a health insurance policy, the new regime costs less.

A simple way to decide

• List every deduction you will actually claim this year, with amounts, not ones you might make.
• Work out your tax both ways, using the Income Tax Department's calculator, your employer's payroll tool or a tax calculator.
• If the old regime saves only a little, the new regime's simplicity may be worth more than the difference.
• Do not buy insurance or investments you do not need just to create deductions; the tax saved is less than the money spent.

Switching between regimes

Salaried people without business income can generally choose either regime each year when filing their return, even if they told their employer something different for TDS purposes. People with business or professional income have stricter limits on switching back and forth. Tell your employer your choice at the start of the year so the right amount of tax is deducted from your salary, and confirm it when you file.

Things people often miss

• Marginal relief: in the new regime, if your taxable income is just above ₹12 lakh, marginal relief limits the tax so that it does not exceed the income above that level, which avoids a sudden jump.
• Pensioners get the standard deduction too, on pension received from a former employer.
• Your employer's contribution to NPS, within limits, is deductible even in the new regime, so it is worth asking whether your employer offers it as part of your salary structure.
• Capital gains on shares and mutual funds have their own rates in both regimes and are not covered by the slab examples above.
• Surcharge applies at higher incomes, and its rates differ between the two regimes.
• Health and education cess of 4% is added to the tax in both regimes.

Quick answers

Is the new regime compulsory? No. It is the default, but you can choose the old regime if it suits you better, subject to the rules for your type of income.

Does the new regime allow HRA? No. HRA exemption is available only in the old regime.

If my income is ₹12 lakh, do I pay tax? In the new regime, taxable income up to ₹12 lakh pays no tax after the rebate, at the time of writing, though some special-rate income such as certain capital gains can be treated differently.

Should I stop investing in PPF or ELSS if I choose the new regime? Not necessarily. They can still be good investments; you just lose the tax deduction.

The bottom line

The new regime suits most people with modest deductions; the old regime suits those with large ones such as HRA and home loan interest. Calculate both with your real numbers each year, and check the current rules, because tax law changes. This guide is general information, not tax or financial advice; consult a tax professional for your situation.