Pallavi Joshi (an illustrative profile) is 35, works in Pune and earns a salary of ₹18 lakh. She pays ₹2 lakh a year in home loan interest, fills the ₹1.5 lakh savings deduction through EPF and PPF, puts ₹50,000 into NPS and pays ₹25,000 for family health insurance. Her colleagues say the new regime is always better. Her father says never give up your deductions.
Both cannot be right for everyone. FY 2026-27 is also the first year under a brand-new Income-tax Act, which has left many people unsure whether the old rules still apply. This chapter explains what changed, then works through Pallavi's numbers under both regimes so you can do the same with yours.
In this chapter
- What the Income-tax Act, 2025 changed, and what it did not
- The slab rates and key deductions under each regime
- A full side-by-side calculation, and how to find your break-even
- The rebate trap that catches investors with capital gains
A new Act, mostly familiar rules
The Income-tax Act, 2025 came into force on 1 April 2026, replacing the Act of 1961. It uses simpler language, replaces the old "previous year" and "assessment year" pair with a single tax year, and renumbers almost every section. Familiar labels such as "80C" and "80D" now sit under new section numbers.
For most investors, the substance carried over, and Budget 2026 left the slab rates unchanged. The rates below apply to FY 2026-27. Returns filed during 2026 for FY 2025-26 were still governed by the old Act.
The two regimes side by side
A slab rate is the rate that applies to each band of income; only the income inside a band is taxed at that band's rate. A rebate is a reduction in the tax itself, which can bring it to nil below a set income. The new regime is the default unless you choose the old one.
| New regime slab | Rate | Old regime slab (below 60) | Rate |
|---|---|---|---|
| Up to ₹4 lakh | Nil | Up to ₹2.5 lakh | Nil |
| ₹4–8 lakh | 5% | ₹2.5–5 lakh | 5% |
| ₹8–12 lakh | 10% | ₹5–10 lakh | 20% |
| ₹12–16 lakh | 15% | Above ₹10 lakh | 30% |
| ₹16–20 lakh | 20% | ||
| ₹20–24 lakh | 25% | ||
| Above ₹24 lakh | 30% |
The new regime gives salaried people a ₹75,000 standard deduction (a flat allowance against salary) and keeps a few items such as the employer's NPS contribution within limits. The old regime has higher rates but allows deductions: up to ₹1.5 lakh for specified savings (EPF, PPF, ELSS, life premiums, home loan principal, children's tuition fees), an extra ₹50,000 for your own NPS contribution, health insurance premiums, home loan interest on a self-occupied house up to ₹2 lakh, HRA, and a ₹50,000 standard deduction.
Worked example: Pallavi's tax both ways
Inputs: salary ₹18 lakh; deductions as described above; no other income. Figures include 4% cess.
- New regime taxable income: ₹18 lakh − ₹75,000 = ₹17.25 lakh.
- New regime tax: ₹20,000 (4–8 lakh) + ₹40,000 (8–12 lakh) + ₹60,000 (12–16 lakh) + ₹25,000 (₹1.25 lakh at 20%) = ₹1,45,000; with cess, ₹1,50,800.
- Old regime deductions: ₹50,000 standard + ₹1.5 lakh savings + ₹50,000 NPS + ₹25,000 health + ₹2 lakh home loan interest = ₹4.75 lakh.
- Old regime taxable income: ₹18 lakh − ₹4.75 lakh = ₹13.25 lakh.
- Old regime tax: ₹12,500 (2.5–5 lakh) + ₹1,00,000 (5–10 lakh) + ₹97,500 (₹3.25 lakh at 30%) = ₹2,10,000; with cess, ₹2,18,400.
- Result: despite ₹4.75 lakh of deductions, the new regime saves Pallavi about ₹67,600.
| New regime | Old regime | Old regime + ₹2.4 lakh HRA | |
|---|---|---|---|
| Deductions | ₹75,000 | ₹4.75 lakh | ₹7.15 lakh |
| Taxable income | ₹17.25 lakh | ₹13.25 lakh | ₹10.85 lakh |
| Tax with cess | ₹1,50,800 | ₹2,18,400 | ₹1,43,520 |
| Cheaper option | Yes | No | Yes, by about ₹7,300 |
The last column shows when the old regime wins: if Pallavi also lived in rented housing and claimed ₹2.4 lakh of HRA exemption, her total deductions would be ₹7.15 lakh and the old regime would be slightly cheaper. At an ₹18 lakh salary, the break-even is roughly ₹6.5 lakh of deductions beyond the ₹50,000 standard deduction. Few people reach that without both a home loan and HRA.
The rebate trap for investors
The new-regime rebate applies only to income taxed at slab rates. Capital gains taxed at special rates, such as equity long-term gains at 12.5% or short-term gains at 20%, sit outside it. Suppose a salaried person earns ₹12.75 lakh and also books ₹3 lakh of long-term equity gains. The salary remains tax-free, but the gains above the ₹1.25 lakh exemption, ₹1.75 lakh, are taxed at 12.5%: ₹21,875, or ₹22,750 with cess. Just above ₹12 lakh, marginal relief also limits how sharply tax rises on slab income.
How to decide
- Calculate tax under both regimes with your actual income and the deductions you already claim.
- If the old regime wins only because of a product bought purely to save tax, ask whether you need that product anyway.
- Recheck every year. Salaried taxpayers can choose each year when filing; those with business income have far more limited switching rights.
Common mistakes to avoid
- Assuming the old regime is better because you have deductions: as Pallavi shows, ₹4–5 lakh of deductions is often not enough.
- Buying insurance or ELSS just to justify the old regime: the product must make sense on its own.
- Forgetting capital gains are outside the rebate: a large redemption can create tax even on a "tax-free" salary.
- Quoting old section numbers in documents: from tax year 2026-27, refer to the new Act's provisions.
- Not telling your employer your choice: TDS on salary may be too high or too low, leading to refunds or dues.
Try this yourself: Write down your gross salary and the deductions you already claim, then follow Pallavi's six steps for both regimes. You can cross-check the result with the tax calculator on the Income Tax Department website. If the gap is small, prefer the simpler regime that does not lock you into products.
Frequently asked questions
Which tax regime is better for a ₹15 lakh salary in FY 2026-27?
For most people at that level the new regime is cheaper, unless deductions such as home loan interest, HRA, the savings deduction and NPS together come close to ₹5 lakh or more. Run both calculations with your own numbers; the answer turns on deductions, not salary alone.
Did the new Income-tax Act change tax rates?
No. The Act mainly rewrote and renumbered the law and introduced the single "tax year". Budget 2026 also left the slab rates unchanged, so FY 2026-27 rates are the same as FY 2025-26.
Am I stuck with the regime I declared to my employer?
No, if you have no business income. The declaration only decides how much TDS your employer deducts from salary; you make the final choice when you file. If the regime you file under differs, you simply pay the balance or claim a refund, so declare the one you expect to use to avoid a large gap.
Is equity mutual fund gain covered by the ₹12 lakh rebate?
No. Equity gains are taxed at special rates and the rebate does not apply to them. Long-term gains up to ₹1.25 lakh a year are exempt on their own terms, and anything above is taxed at 12.5%.
For a family-level view, read tax planning for salaried families. The next chapter covers how each asset's gains are taxed, and Money n Wealth offers tax consultation if your situation is complex.