New Tax Regime vs Old Regime 2026: Which to Choose — Section 115BAC Post-Budget 2025
Quick Answer
For FY 2025-26 (AY 2026-27), the new tax regime under Section 115BAC is the default regime, with significantly revised slabs announced in Union Budget 2025 — the basic exemption limit is now Rs.4 lakhs, the highest slab (30%) kicks in only above Rs.24 lakhs, and individuals with income up to Rs.12 lakhs (Rs.12.75 lakhs for salaried persons after standard deduction) pay zero tax through the enhanced Section 87A rebate. The old regime continues to offer deductions under Sections 80C, 80D, HRA exemption, and home loan interest under Section 24(b) — making it potentially beneficial for taxpayers with high deductions. At Virtual Auditor, we provide personalised regime comparison models for salaried individuals, professionals, and business owners — the optimal choice depends on your specific deduction profile, salary structure, and income composition.
Definition — New Tax Regime (Section 115BAC): Introduced by the Finance Act, 2020 and made the default regime from FY 2023-24, Section 115BAC provides a concessional tax rate structure with lower slab rates but with the trade-off that most exemptions and deductions (including Section 80C, 80D, HRA, LTA, home loan interest under Section 24(b) for self-occupied property) are not available. The regime was further liberalised by Union Budget 2025 with wider slabs and an enhanced Section 87A rebate.
Definition — Old Tax Regime: The original income tax slab structure (Sections 2(2) and the First Schedule to the Finance Act) with three slabs — up to Rs.2.5 lakhs (Nil), Rs.2.5-5 lakhs (5%), Rs.5-10 lakhs (20%), and above Rs.10 lakhs (30%) — that allows the full range of exemptions under Chapter III (HRA, LTA, etc.) and deductions under Chapter VI-A (80C, 80D, 80E, etc.) and Section 24(b) home loan interest.
Union Budget 2025: Key Changes to the New Tax Regime
Revised Tax Slabs Under Section 115BAC (FY 2025-26)
The Finance Act, 2025 (Union Budget 2025) introduced the most significant revision to Section 115BAC since its inception. The revised slab structure for FY 2025-26 (AY 2026-27) is:
| Income Slab | Tax Rate (New Regime FY 2025-26) |
|---|---|
| Up to Rs.4,00,000 | Nil |
| Rs.4,00,001 to Rs.8,00,000 | 5% |
| Rs.8,00,001 to Rs.12,00,000 | 10% |
| Rs.12,00,001 to Rs.16,00,000 | 15% |
| Rs.16,00,001 to Rs.20,00,000 | 20% |
| Rs.20,00,001 to Rs.24,00,000 | 25% |
| Above Rs.24,00,000 | 30% |
Enhanced Section 87A Rebate: Rs.12 Lakhs Tax-Free
The Union Budget 2025 enhanced the rebate under Section 87A for the new regime from Rs.25,000 to Rs.60,000. This means individuals with total income (after standard deduction) up to Rs.12 lakhs get a full rebate of the tax computed on such income. The effective result: individuals earning up to Rs.12,00,000 (or Rs.12,75,000 for salaried individuals including the Rs.75,000 standard deduction) pay zero income tax under the new regime.
The Section 87A rebate calculation for the new regime:
- Total income up to Rs.12 lakhs: Tax on Rs.12,00,000 = (Rs.4,00,000 x 0%) + (Rs.4,00,000 x 5%) + (Rs.4,00,000 x 10%) = Rs.60,000. Rebate under Section 87A = Rs.60,000. Net tax = Nil.
- Total income of Rs.12,10,000: The rebate is not available (it applies only if total income does not exceed Rs.12 lakhs). Tax = Rs.61,000. This creates a marginal rate anomaly at the Rs.12 lakh threshold.
Marginal Relief at the Rs.12 Lakh Threshold
The Budget 2025 includes a marginal relief provision to address the anomaly where earning Rs.10,000 above Rs.12 lakhs results in a disproportionate tax increase. Under marginal relief, the tax payable by an individual whose income exceeds Rs.12 lakhs but is close to the threshold shall not exceed the amount by which the income exceeds Rs.12 lakhs. This ensures that a person earning Rs.12,10,000 pays a maximum tax of Rs.10,000 (the excess over Rs.12 lakhs), not the full Rs.61,000 computed under slabs.
Expert Insight — CA V. Viswanathan, FCA, ACS, CFE (IBBI/RV/03/2019/12333)
The Budget 2025 changes have fundamentally shifted the breakeven analysis between the two regimes. With the Rs.12 lakh tax-free threshold and wider slabs, the new regime is now more attractive for a much larger segment of taxpayers than before. At Virtual Auditor, we have observed that the old regime remains beneficial primarily for taxpayers with aggregate deductions exceeding Rs.4-5 lakhs — typically those with a combination of home loan interest (Rs.2 lakhs under Section 24(b)), significant HRA exemption, Section 80C (Rs.1.5 lakhs), and Section 80D (Rs.25,000-Rs.1 lakh). For taxpayers without a home loan or in metro cities with high rental costs where actual HRA exemption is limited, the new regime is almost always the better choice post-Budget 2025.
Old Tax Regime: Slabs and Available Deductions
Old Regime Tax Slabs (FY 2025-26)
The old regime slabs remain unchanged from previous years:
| Income Slab | Tax Rate (Old Regime) |
|---|---|
| Up to Rs.2,50,000 | Nil |
| Rs.2,50,001 to Rs.5,00,000 | 5% |
| Rs.5,00,001 to Rs.10,00,000 | 20% |
| Above Rs.10,00,000 | 30% |
The old regime provides a standard deduction of Rs.50,000 (compared to Rs.75,000 under the new regime) and a Section 87A rebate of Rs.12,500 (for total income up to Rs.5 lakhs).
Key Deductions Available Only Under the Old Regime
The following deductions and exemptions are available under the old regime but not under the new regime:
| Section | Deduction | Maximum Amount |
|---|---|---|
| 80C | PPF, ELSS, LIC, NSC, tuition fees, home loan principal, Sukanya Samriddhi | Rs.1,50,000 |
| 80CCD(1B) | Additional NPS contribution (self) | Rs.50,000 |
| 80D | Health insurance premium (self + family) | Rs.25,000 (Rs.50,000 for senior citizens); additional Rs.25,000/50,000 for parents |
| 80E | Education loan interest | No limit (for 8 years from start of repayment) |
| 80G | Donations to specified funds/charities | 50% or 100% of donation (subject to limits) |
| 80TTA | Savings account interest (non-senior citizens) | Rs.10,000 |
| 80TTB | Interest income (senior citizens) | Rs.50,000 |
| Section 10(13A) | HRA exemption | Least of: actual HRA, 50%/40% of salary, or rent paid minus 10% of salary |
| Section 10(5) | Leave Travel Allowance (LTA) | Actual travel costs (economy class fare, twice in 4 years) |
| Section 24(b) | Home loan interest (self-occupied property) | Rs.2,00,000 |
Deductions Available Under Both Regimes
Certain deductions and exemptions remain available under the new regime as well:
- Standard deduction: Rs.75,000 (new regime) vs Rs.50,000 (old regime)
- Section 80CCD(2): Employer’s contribution to NPS — up to 14% of salary (Central Govt employees) or 10% of salary (others)
- Section 80JJAA: Deduction for new employee cost
- Section 57(iia): Family pension deduction — 1/3rd of pension or Rs.15,000, whichever is less
- Section 10(10C): Voluntary retirement compensation up to Rs.5 lakhs
- Section 10(10): Gratuity exemption
- Section 10(10AA): Leave encashment on retirement
- Section 80CCH: Agniveer Corpus Fund contribution (for Agniveers)
Regime Comparison: Detailed Breakeven Analysis
Scenario 1 — Salaried Individual, Rs.10 Lakhs Gross Salary, No Major Deductions
| Particulars | New Regime | Old Regime |
|---|---|---|
| Gross salary | 10,00,000 | 10,00,000 |
| Standard deduction | (75,000) | (50,000) |
| Section 80C (PPF/ELSS/LIC) | Not available | (1,50,000) |
| Section 80D (health insurance) | Not available | (25,000) |
| Taxable income | 9,25,000 | 7,75,000 |
| Tax computed | 32,500 | 67,500 |
| Section 87A rebate | Not applicable (income > Rs.12L threshold applies to total, not slab-level) | Not applicable (income > Rs.5L) |
| Cess @ 4% | 1,300 | 2,700 |
| Total tax payable | 33,800 | 70,200 |
Result: New regime saves Rs.36,400. Even with Rs.1.75 lakhs in deductions under the old regime (80C + 80D), the new regime is significantly cheaper for this income level.
Scenario 2 — Salaried Individual, Rs.20 Lakhs Gross Salary, HRA + Home Loan + Full Deductions
| Particulars | New Regime | Old Regime |
|---|---|---|
| Gross salary | 20,00,000 | 20,00,000 |
| Standard deduction | (75,000) | (50,000) |
| HRA exemption (Section 10(13A)) | Not available | (2,40,000) |
| Home loan interest (Section 24(b)) | Not available | (2,00,000) |
| Section 80C | Not available | (1,50,000) |
| Section 80CCD(1B) — NPS | Not available | (50,000) |
| Section 80D | Not available | (50,000) |
| Taxable income | 19,25,000 | 12,60,000 |
| Tax computed | 2,77,500 | 1,80,000 |
| Cess @ 4% | 11,100 | 7,200 |
| Total tax payable | 2,88,600 | 1,87,200 |
Result: Old regime saves Rs.1,01,400. With total deductions of Rs.6.90 lakhs (HRA + home loan + 80C + NPS + 80D), the old regime is substantially cheaper. However, this requires the taxpayer to actually make these investments and payments — the deduction is not automatic.
Breakeven Deduction Amount
The breakeven amount — the total deductions under the old regime at which both regimes produce equal tax — varies by income level. As a general guide for FY 2025-26:
| Gross Salary | Approximate Breakeven Deductions (Old Regime) |
|---|---|
| Rs.10 lakhs | Rs.3.75 lakhs+ (including HRA, 80C, 80D) |
| Rs.15 lakhs | Rs.4.25 lakhs+ (including HRA, 80C, 80D, home loan) |
| Rs.20 lakhs | Rs.4.75 lakhs+ (including HRA, 80C, 80D, home loan) |
| Rs.30 lakhs | Rs.5.50 lakhs+ (including HRA, 80C, 80D, home loan) |
| Rs.50 lakhs | Rs.6 lakhs+ (including HRA, 80C, 80D, home loan, 80G) |
Note: These are approximate breakeven figures. The actual breakeven depends on the specific salary structure (basic salary, HRA received, other allowances) and the composition of deductions. A personalised computation is always recommended.
Expert Insight — CA V. Viswanathan, FCA, ACS, CFE (IBBI/RV/03/2019/12333)
The common misconception is that having Rs.1.5 lakhs in 80C investments automatically makes the old regime better. Post-Budget 2025, this is rarely true. The new regime’s wider slabs (5% up to Rs.8 lakhs, 10% up to Rs.12 lakhs) and higher standard deduction (Rs.75,000 vs Rs.50,000) offset moderate deductions. At Virtual Auditor, we build personalised models that factor in not just the current year’s tax but also the opportunity cost of locked-in investments — Rs.1.5 lakhs in PPF yields approximately 7.1% but is locked for 15 years, whereas the same amount invested in equities (which do not qualify for 80C) may yield higher returns. The regime decision is not just a tax question — it is an investment allocation question.
How to Opt for the Old Regime
For Salaried Employees
Since the new regime is the default, salaried employees who wish to opt for the old regime must:
- Intimate the employer: Inform the employer (typically HR/payroll department) at the beginning of the financial year that you wish to opt for the old regime. This ensures the employer deducts TDS based on old regime slabs, factoring in declared deductions (80C, 80D, HRA, etc.).
- Submit investment declarations: Provide the employer with details of proposed investments and deductions under the old regime for TDS computation.
- Confirm at ITR filing: The final regime choice is confirmed when filing the income tax return. The choice made with the employer is for TDS purposes only — the taxpayer can switch at the time of filing ITR.
Salaried employees can switch between regimes every year. There is no lock-in or restriction on annual switching for persons with salary income only (no business/professional income).
For Business/Professional Income Earners
For assessees with business or professional income, the regime switch is more restricted:
- The new regime (Section 115BAC) is the default.
- To opt for the old regime, the assessee must file Form 10-IEA before the due date of filing the return of income.
- Once the assessee opts out of the new regime (i.e., chooses the old regime) and subsequently wants to return to the new regime, the option to switch back to the new regime is available only once. After switching back, the assessee cannot opt for the old regime again.
Specific Deductions: Detailed Analysis
HRA Exemption (Section 10(13A))
HRA exemption is one of the most significant deductions available only under the old regime. The exemption is computed as the least of:
- Actual HRA received from the employer
- 50% of salary (basic + DA) for metro cities (Delhi, Mumbai, Kolkata, Chennai) or 40% for non-metro cities
- Rent paid minus 10% of salary (basic + DA)
For a salaried individual in Chennai with basic salary of Rs.6,00,000, HRA received of Rs.3,00,000, and actual rent paid of Rs.25,000 per month (Rs.3,00,000 per year):
- (a) Actual HRA = Rs.3,00,000
- (b) 50% of salary = Rs.3,00,000
- (c) Rent paid minus 10% of salary = Rs.3,00,000 – Rs.60,000 = Rs.2,40,000
- HRA exemption = Rs.2,40,000 (least of the three)
Section 24(b): Home Loan Interest
The deduction for interest on housing loan for a self-occupied property is capped at Rs.2,00,000 per financial year under the old regime. This deduction is not available under the new regime for self-occupied property. However, for let-out property, the entire interest is deductible under both regimes (against rental income, with the set-off of loss from house property limited to Rs.2 lakhs against other income under Section 71(3A)).
Section 80C: Investment-Linked Deductions
Section 80C allows a deduction of up to Rs.1,50,000 for investments in specified instruments. The most common 80C investments include:
- Public Provident Fund (PPF) — current interest rate 7.1% p.a.
- Employee Provident Fund (EPF) — employee’s contribution portion
- Equity Linked Savings Scheme (ELSS) — 3-year lock-in, equity market-linked returns
- Life insurance premium (for policies with sum assured >= 10x annual premium)
- National Savings Certificate (NSC)
- 5-year fixed deposit with bank or post office
- Sukanya Samriddhi Account (for girl child)
- Tuition fees for children (up to 2 children)
- Home loan principal repayment
Senior Citizens and Super Senior Citizens
Under the old regime, senior citizens (age 60-80) have a higher basic exemption limit of Rs.3,00,000, and super senior citizens (age 80+) have Rs.5,00,000. Under the new regime, the basic exemption is Rs.4,00,000 for all individuals regardless of age, which is higher than the old regime’s Rs.2,50,000 for non-seniors but lower than the super senior citizen exemption of Rs.5,00,000.
Senior citizens also benefit from higher Section 80D limits (Rs.50,000 vs Rs.25,000), Section 80TTB (Rs.50,000 deduction on all interest income vs Rs.10,000 under 80TTA for savings interest only), and exemption from advance tax (under the old regime, if they do not have business/profession income). These benefits are available only under the old regime.
Expert Insight — CA V. Viswanathan, FCA, ACS, CFE (IBBI/RV/03/2019/12333)
For senior citizens with significant interest income and medical expenses, the old regime is almost always beneficial. The combination of Section 80TTB (Rs.50,000 interest deduction), Section 80D (Rs.50,000 for self + Rs.50,000 for parents if super senior), and the higher basic exemption creates a substantial deduction base. At Virtual Auditor, we have seen cases where senior citizens with pension income of Rs.8-10 lakhs and interest income of Rs.3-4 lakhs pay zero tax under the old regime after utilising all available deductions, while the new regime would result in a tax liability of Rs.40,000-60,000. The regime analysis for senior citizens must always be conducted individually.
Impact on Tax Planning and Investment Behaviour
Should You Stop 80C Investments?
Choosing the new regime does not mean stopping investments altogether. The question is whether to invest in 80C-eligible instruments (which offer no tax benefit under the new regime) or in non-80C instruments that may offer better returns or liquidity:
- EPF: Mandatory for salaried employees — no choice involved. The employer’s contribution remains tax-free under both regimes (Section 80CCD(2) for NPS, Section 10(12) for EPF).
- PPF: Still an excellent debt instrument (tax-free interest at 7.1%), but the lock-in of 15 years may not suit all investors. Under the new regime, the tax-free interest is the only benefit — there is no upfront deduction.
- ELSS: The 3-year lock-in and equity exposure make ELSS attractive primarily for the 80C deduction. Without the deduction, a regular diversified equity mutual fund with no lock-in may be preferable.
- Term insurance: Term insurance should be purchased for risk coverage regardless of tax regime — the 80C deduction should not be the primary reason for buying insurance.
Salary Restructuring Under the New Regime
Under the new regime, since HRA exemption, LTA, and most allowances are not tax-free, employees may consider restructuring their salary to maximise the tax-free components that remain available:
- Increase employer NPS contribution: Section 80CCD(2) allows employer NPS contribution up to 14% (Central Govt) or 10% (others) of salary — this deduction is available under both regimes.
- Ensure gratuity provisioning: Section 10(10) exemption remains available under both regimes.
- Reimbursements: Genuinely incurred expense reimbursements (not fixed allowances) may not form part of taxable salary even under the new regime — though this depends on the nature and documentation of the reimbursement.
Summary — Choosing Your Tax Regime for FY 2025-26
- New regime favours: Taxpayers with limited deductions (below Rs.3.75-5 lakhs depending on income), those without home loans, young professionals without significant 80C commitments, and individuals earning up to Rs.12.75 lakhs (zero tax after standard deduction).
- Old regime favours: Taxpayers with high HRA exemption + home loan interest + full 80C + 80D utilisation (aggregate deductions exceeding Rs.4.5-5.5 lakhs), senior citizens with significant interest and medical expenses, and individuals with education loan interest (80E has no cap).
- Budget 2025 impact: Wider slabs (30% only above Rs.24 lakhs) and the Rs.12 lakh tax-free threshold make the new regime significantly more attractive than previous years.
- Default: New regime is default — opt-out through Form 10-IEA for business/professional income; annual choice for salaried employees.
- At Virtual Auditor, we provide a personalised regime comparison covering your specific salary structure, investments, and deduction profile. Contact us or see our pricing for advisory fees.
Frequently Asked Questions
1. Can I switch between old and new regime every year?
If you are a salaried employee with no business or professional income, you can switch between old and new regime every year at the time of filing your ITR. There is no lock-in or restriction. However, if you have business or professional income, the switch from new regime to old regime requires filing Form 10-IEA, and a return to the new regime after opting out is permitted only once — after which you cannot opt for the old regime again.
2. I have both salary income and rental income — which regime is better?
Rental income computation does not differ significantly between regimes — the standard deduction of 30% of net annual value (Section 24(a)) is available under both. The key difference is the deduction of home loan interest on the let-out property — the full interest is deductible against rental income under both regimes. However, the set-off of loss from house property against other income (salary) is limited to Rs.2 lakhs under both regimes. The regime choice depends primarily on your salary-side deductions (HRA, 80C, 80D). If you live in a rented house (HRA exemption) and pay interest on a home loan for a let-out property, the old regime may be doubly beneficial.
3. What happens if I do not choose any regime?
If you do not actively opt for the old regime, you are taxed under the new regime by default. This means no HRA exemption, no LTA, no 80C, no 80D, and no home loan interest deduction for self-occupied property. The new regime slabs with the Rs.75,000 standard deduction and Section 87A rebate (if income <= Rs.12 lakhs) will apply automatically.
4. Can I claim HRA exemption under the new regime?
No. HRA exemption under Section 10(13A) is explicitly not available under the new tax regime (Section 115BAC). If you receive HRA as part of your salary and opt for the new regime, the entire HRA forms part of your taxable salary income. You also cannot claim deduction under Section 80GG (rent paid by individuals not receiving HRA) under the new regime.
5. Is the new regime mandatory for everyone from FY 2025-26?
No. The new regime is the default, not mandatory. You retain the option to choose the old regime by actively opting for it. Salaried employees can intimate their employer; business/professional assessees must file Form 10-IEA. The government has made the new regime the default to encourage its adoption, but the old regime continues to operate for those who opt in.
6. How does the new regime affect home loan buyers?
Under the new regime, the deduction of home loan interest under Section 24(b) for self-occupied property (limited to Rs.2 lakhs per year) is not available. This is one of the most significant deductions lost under the new regime. Home loan principal repayment (claimed under Section 80C up to Rs.1.5 lakhs) is also not available. For a home buyer paying Rs.2 lakhs annual interest and Rs.1 lakh principal, the total lost deduction under the new regime is Rs.3 lakhs. Whether this makes the old regime better depends on the total deduction profile — at income levels above Rs.15 lakhs, losing Rs.3 lakhs in deductions typically makes the old regime more beneficial, but only when combined with other deductions (80C, 80D, HRA).
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