A side-by-side guide to deductions under the old and new tax regimes for FY 2026-27 ā when each regime wins and how to plan around the default new regime.
Deductions under old & new tax regime
For FY 2026-27 (Assessment Year 2027-28), India's new tax regime is the default ā meaning your employer deducts TDS at new-regime rates unless you actively opt out in writing before April payroll. The new regime offers zero income tax on gross salary up to roughly ā¹12.75 lakh, once you count the standard deduction and Section 87A rebate. But it strips away nearly every deduction you may have spent years planning around. The old regime preserves Section 80C, 80D, HRA, home loan interest, and more ā but only beats the new regime if your total eligible deductions clear a specific threshold. This guide gives you the numbers to work that out.
Why the FY 2026-27 decision is more consequential than ever
The new regime became the default in FY 2023-24, but Union Budget 2025 restructured it significantly: it widened the nil-tax slab, raised the standard deduction to ā¹75,000, and extended the Section 87A rebate to cover the entire tax liability on incomes up to ā¹12 lakh. Those three changes combined make the new regime genuinely competitive across a broad range of incomes ā not just for fresh graduates with minimal investments.
Meanwhile, the old regime's deduction toolkit has not materially changed. Section 80C still caps at ā¹1.5 lakh; Section 24(b) still allows ā¹2 lakh on home loan interest; HRA remains the single largest deduction most salaried employees claim. For anyone already maximising these, the old regime can still deliver a lower absolute tax bill.
The operational catch: you must communicate your regime choice to your employer before April payroll. Your employer defaults to the new regime. If you miss the window, your payroll runs on new-regime TDS all year and you can only course-correct at ITR filing ā which does not undo monthly over-deduction, meaning your money sits as a refund claim for months.
Verify specific slab rates and rebate thresholds against the latest Finance Act applicable to FY 2026-27 at incometax.gov.in before finalising your decision, as Union Budget 2026 may have introduced adjustments.
Deductions that exist only in the old regime
Opting for the new regime means every deduction listed below is surrendered. That is the explicit trade-off you accept in exchange for lower marginal rates.
Section 80C: the ā¹1.5 lakh cornerstone
Section 80C of the Income-tax Act 1961 allows a deduction of up to ā¹1,50,000 per year across a basket of investments and expenditures:
- PPF (Public Provident Fund) ā 15-year lock-in, EEE (exempt-exempt-exempt) status
- ELSS (Equity Linked Savings Scheme) ā shortest lock-in at three years, market-linked returns
- Life insurance premiums ā for self, spouse, and children (term or endowment)
- Principal repayment on home loan ā only the principal component of your EMI
- Tuition fees ā full-time education of up to two children at any Indian institution
- NSC (National Savings Certificates) ā government-backed, 5-year tenor
- Tax-saving fixed deposits ā 5-year lock-in, interest is fully taxable
- Employee's own EPF contribution ā counted within the ā¹1.5 lakh ceiling
The ceiling is shared across all instruments. If your annual EPF contribution alone crosses ā¹1.5 lakh, you have already exhausted the deduction ā additional PPF or ELSS does not add further relief.
Section 80D: health insurance premiums
| Insured persons | Deduction limit |
|---|---|
| Self + spouse + children (all below 60) | ā¹25,000 |
| Self + family, self is senior citizen (60+) | ā¹50,000 |
| Parents below 60 (additional) | ā¹25,000 |
| Parents who are senior citizens (additional) | ā¹50,000 |
A 45-year-old paying ā¹25,000 for a family floater and ā¹50,000 for senior-citizen parents can claim ā¹75,000 under Section 80D alone. Preventive health check-up expenses up to ā¹5,000 are included within these limits, not in addition to them.
Home loan interest: Section 24(b)
If you own and occupy a residential property and service a home loan, you can deduct annual interest paid up to ā¹2,00,000 under Section 24(b). For a let-out property there is no cap on deduction, but the set-off of resulting losses against other income heads is capped at ā¹2 lakh per year; the remainder is carried forward for eight assessment years.
This is the highest per-rupee-impact deduction at mid-to-high income levels, because every rupee flows through the 20% or 30% bracket in the old regime.
HRA exemption under Section 10(13A)
HRA (House Rent Allowance) exemption is calculated as the least of:
- Actual HRA received from employer (annual)
- 50% of basic salary if you live in Mumbai, Delhi, Chennai, or Kolkata; 40% for all other cities
- Actual annual rent paid minus 10% of basic salary
Quick illustration: An employee in Bengaluru (non-metro) draws basic salary ā¹8 lakh per year, receives HRA ā¹3 lakh, and pays rent ā¹30,000/month (ā¹3.6 lakh/year):
- Actual HRA: ā¹3,00,000
- 40% of basic: ā¹3,20,000
- Rent ā 10% of basic: ā¹3,60,000 ā ā¹80,000 = ā¹2,80,000
HRA exempt = ā¹2,80,000 (the least). This vanishes entirely under the new regime.
Other notable old-regime deductions
- Section 80CCD(1B) ā an additional NPS (National Pension System) Tier-I contribution by the individual up to ā¹50,000, entirely separate from and above the 80C ceiling. This deduction is not available in the new regime.
- Section 80E ā full deduction on education loan interest for up to eight consecutive assessment years after the year repayment begins. There is no rupee cap.
- Section 80G ā donations to approved funds and charitable institutions; 50% or 100% depending on the institution, with or without a 10%-of-adjusted-gross-income qualifying limit.
- Section 80TTA / 80TTB ā ā¹10,000 on savings account interest for non-senior citizens (80TTA); ā¹50,000 on all interest income for senior citizens (80TTB).
- LTA under Section 10(5) ā exemption on actual domestic travel cost, available twice in a four-calendar-year block. Documentary proof (tickets, boarding passes) is required.
- Professional tax under Section 16(iii) ā state-levied professional tax (maximum ā¹2,500 per year) is deductible from salary income.
What the new regime actually gives you
The new regime is not entirely bare. These reliefs survive the switch:
Standard deduction: ā¹75,000 flat
Every salaried employee and pensioner receives a ā¹75,000 standard deduction from gross salary income. No investment, no documentation, no employer declaration ā it is automatic.
Section 80CCD(2): the employer NPS deduction that crosses regimes
This is the most powerful deduction available in the new regime and the one most employees fail to negotiate. Your employer's contribution to your NPS Tier-I account is deductible under Section 80CCD(2) up to 14% of (basic salary + dearness allowance). Critically, this limit applies in both regimes.
If your employer restructures your cost-to-company to route a portion of salary as NPS contribution ā for example, ā¹1.8 lakh annually ā you reduce taxable income in the new regime with no reduction in take-home, because the restructuring replaces a taxable allowance component with a deductible employer contribution.
Section 87A rebate: zero tax up to ā¹12 lakh
Under the new regime, if total income after the standard deduction does not exceed ā¹12,00,000, the entire tax liability is rebated under Section 87A. Combined with the ā¹75,000 standard deduction, a salaried employee with gross income up to ā¹12,75,000 pays zero income tax in the new regime.
Important caveat on the "cliff": If your taxable income is ā¹12,00,001, the rebate no longer covers the full liability ā you owe tax on the full ā¹12,00,001, not just on the marginal rupee. This creates a sharp notch effect near the threshold. Taxpayers near this level should time bonuses and performance pay carefully.
In the old regime, Section 87A still exists ā but it only rebates up to ā¹12,500 for taxpayers whose total income does not exceed ā¹5 lakh.
Other new-regime allowances
- Section 80CCH ā contributions to the Agniveer Corpus Fund (for Agnipath scheme enrollees)
- Family pension standard deduction ā one-third of pension or ā¹25,000, whichever is lower, for family pension recipients
- Employer's EPF and NPS contributions ā remain excluded from salary income under Section 17(1) in both regimes
The break-even: how much old-regime deduction do you need?
At a gross salary of ā¹10 lakh, the new regime generates a tax liability of roughly ā¹33,800 (after standard deduction, before 80CCD(2)). The old regime needs approximately ā¹3.5ā4 lakh of deductions to match that number. A disciplined taxpayer with 80C at ā¹1.5L + 80D ā¹25K + standard deduction ā¹75K = ā¹2.5L falls short; add HRA of ā¹1L or a home loan and the old regime pulls ahead.
At ā¹15 lakh, the new regime generates roughly ā¹97,500 in tax. You need approximately ā¹6.5ā7.5 lakh of deductions for the old regime to match ā achievable with a home loan, full HRA, 80C, and 80D, but not automatic.
At ā¹25 lakh, the break-even is around ā¹8.5ā9 lakh of deductions, and the employer 80CCD(2) NPS route in the new regime introduces a strong counter-argument.
Worked example: three taxpayers, two regimes
Case 1 ā Ravi, ā¹8 lakh gross salary, no home loan, renting at ā¹10,000/month
New regime: Gross ā¹8,00,000 ā standard deduction ā¹75,000 ā taxable ā¹7,25,000 Tax: ā¹4Lā7.25L at 5% = ā¹16,250 Section 87A rebate: full (taxable income ā¤ ā¹12L) Total tax: ā¹0
Old regime (80C ā¹1.5L + 80D ā¹25,000 + standard deduction ā¹75,000): Total deductions: ā¹2,50,000 ā taxable ā¹5,50,000 Tax: ā¹12,500 (2.5Lā5L at 5%) + ā¹10,000 (5Lā5.5L at 20%) = ā¹22,500 No 87A rebate (taxable income > ā¹5L); cess: ā¹900 Total tax: ā¹23,400
Verdict: New regime saves Ravi ā¹23,400. The zero-tax benefit of 87A makes the old regime impossible to beat at this income, regardless of 80C discipline.
Case 2 ā Priya, ā¹15 lakh gross salary, home loan, full HRA, senior citizen parents
Priya rents in Chennai, pays ā¹30,000/month rent, services a home loan with ā¹2L annual interest, covers ā¹50,000 in health insurance (family + senior parents), maximises 80C (ā¹1.5L) and 80CCD(1B) NPS (ā¹50,000).
Old regime deductions:
| Deduction | Amount |
|---|---|
| Standard deduction | ā¹75,000 |
| HRA exempt (Section 10(13A) formula) | ā¹3,00,000 |
| Home loan interest ā Section 24(b) | ā¹2,00,000 |
| Section 80C | ā¹1,50,000 |
| Section 80D | ā¹50,000 |
| Section 80CCD(1B) NPS | ā¹50,000 |
| Total | ā¹8,25,000 |
Taxable income: ā¹6,75,000 Tax: ā¹12,500 + ā¹35,000 = ā¹47,500; cess: ā¹1,900; Total: ā¹49,400
New regime: Standard deduction ā¹75,000 ā taxable ā¹14,25,000 Tax: ā¹20,000 + ā¹40,000 + ā¹33,750 = ā¹93,750; cess: ā¹3,750; Total: ā¹97,500
Verdict: Old regime saves Priya ā¹48,100 ā more than ā¹4,000 every month in net terms. This is the profile where the old regime still dominates decisively.
Case 3 ā Arjun, ā¹25 lakh gross salary, home loan, employer NPS at 14% of ā¹15L basic
Old regime (standard + HRA ā¹3.6L + 24(b) ā¹2L + 80C ā¹1.5L + 80D ā¹50K + 80CCD(1B) ā¹50K = ā¹8,85,000 deductions): Taxable: ā¹16,15,000 Tax: ā¹12,500 + ā¹1,00,000 + ā¹1,84,500 = ā¹2,97,000; cess: ā¹11,880; Total: ā¹3,08,880
New regime with employer NPS under 80CCD(2) at 14% Ć ā¹15L = ā¹2,10,000: Standard deduction ā¹75,000 + 80CCD(2) ā¹2,10,000 = ā¹2,85,000 total deductions Taxable: ā¹22,15,000 Tax: ā¹20,000 + ā¹40,000 + ā¹60,000 + ā¹80,000 + ā¹53,750 = ā¹2,53,750; cess: ā¹10,150; Total: ā¹2,63,900
Verdict: New regime (with optimised employer NPS) saves Arjun ā¹44,980. The 80CCD(2) lever alone swings the decision. If Arjun's employer does not offer NPS restructuring, the old regime wins by ā¹10,000ā15,000 at this income ā worth checking both scenarios.
Life-stage framework: matching regime to where you are now
Early career (ā¹5ā10 lakh income, renting, no major loans): The new regime is almost always better. The zero-tax outcome under 87A is structurally unbeatable when your investment corpus is still building. Direct the tax savings into an emergency fund or liquid mutual fund rather than locking into 80C instruments for a deduction that no longer helps.
Home-loan entry phase (ā¹10ā20 lakh, active high-interest EMI, city HRA): This is where the old regime's counter-offensive begins. Section 24(b)'s ā¹2 lakh interest deduction, full HRA in a metro, and 80C (often partially funded by EPF automatically) regularly combine to breach the ā¹6ā8 lakh deduction threshold. Recalculate every April as the interest component of your EMI shrinks each year.
Mid-career peak (ā¹20ā40 lakh, loan partially repaid, employer flexibility on CTC): As home loan interest falls and HRA may reduce when you shift to owned accommodation, the arithmetic can flip back to the new regime. The 80CCD(2) NPS restructuring is most accessible and most impactful at this stage ā negotiate it during your annual appraisal rather than at year-end.
Pre-retirement and retirement (pension, family pension, fixed-income interest): Senior citizens retain Section 80TTB (ā¹50,000 on all interest income) and the higher basic exemption limit under the old regime. Family pension recipients in the new regime get the lesser of one-third of pension or ā¹25,000. Run a separate simulation for each income head ā the result varies significantly with the mix of salary, pension, and investment income.
Making the regime choice: your step-by-step April exercise
Complete this before the first payroll cycle of April. It takes under two hours if your documents are in order.
- Pull your salary structure ā offer letter or last Form 16 to identify basic, HRA, LTA, and special allowances separately.
- Project full-year rent ā if renting, apply the Section 10(13A) formula using your annual basic, city tier, and expected rent.
- Confirm your 80C contributions ā EPF is auto-deducted; add any committed PPF SIP, ELSS SIP, LIC renewal, and home loan principal repayment from your loan amortisation schedule.
- Note your health insurance premiums ā use your policy renewal document for self, spouse, children, and parents; apply 80D limits.
- Check home loan interest ā download the annual statement from your bank's net-banking portal; the interest column gives your Section 24(b) figure.
- Add 80CCD(1B) ā if you contribute to NPS Tier-I voluntarily, cap this at ā¹50,000.
- Ask HR about 80CCD(2) ā find out if your employer contributes to NPS and at what percentage. This is available in both regimes and could change your calculation.
- Run both calculations on the income-tax portal's official tax calculator at incometax.gov.in ā enter the same gross salary twice and vary the deductions.
- Submit Form 12BB to your payroll team if you opt for the old regime ā this declaration lists your HRA, LTA, home loan interest, and other Chapter VI-A investments. For the new regime, simply inform HR in writing; no Form 12BB is required.
- Diary a January review ā if a major life event between April and January (new loan drawdown, medical emergency, change in HRA) shifts your deduction base, speak to your CA before January payroll to revise your TDS estimate.
Common mistakes that cost real money
Accepting the default without calculating. At ā¹15 lakh with a home loan, failing to declare the old regime can mean ā¹40,000ā50,000 in excess TDS every year ā refundable, but locked up for six to eight months while your refund processes.
Projecting 80C investments you will not actually make. If your March tax-saving ELSS investment does not happen because of a cash-flow crunch, the old-regime advantage you calculated in April disappears. Plan 80C through automatic SIPs, not lump-sum promises.
Missing 80CCD(2) in the new regime. Many employees assume the new regime gives them nothing beyond the standard deduction. The employer NPS route under 80CCD(2) ā up to 14% of basic ā is available in both regimes and is frequently the single best tax-saving lever at mid-to-senior income levels.
Switching regimes at ITR filing without adjusting advance tax. If you chose the new regime with your employer in April but switch to the old regime while filing your ITR, the TDS already deducted stays as TDS ā but you may face a liability for advance tax shortfall plus interest under Sections 234B and 234C. Regime decisions belong in April, not July.
Claiming HRA while living with parents without documentation. You can pay rent to a parent and claim HRA exemption ā this is legal ā but the parent must own the property, the rent must be paid by account transfer, and the parent must declare rental income in their ITR. Undocumented cash claims attract scrutiny in assessments.
Overclaiming Section 24(b) on under-construction property. Interest paid during the pre-possession period is not deductible in the year of payment. It is accumulated and then allowed as a deduction in five equal instalments from the year of possession. Many first-home buyers miss this and claim it incorrectly.
Using unverified online calculators. Many freely shared spreadsheets and social media tools still carry outdated Budget 2024 or 2025 parameters. Always use incometax.gov.in or a verified CA-prepared model for your final number.
Key takeaways
- New regime is the default for FY 2026-27; you must opt for the old regime explicitly, in writing, before April payroll ā silence means new regime.
- Zero tax up to approximately ā¹12.75 lakh (gross salary with standard deduction of ā¹75,000) under Section 87A makes the new regime unbeatable for early-career taxpayers with modest deduction bases.
- The old regime typically wins when total deductions from standard deduction + 80C + 80D + Section 24(b) + HRA exceed roughly ā¹6ā8 lakh ā achievable for anyone servicing a home loan in a metro with full 80C and family health insurance.
- Section 80CCD(2) is the highest-leverage tool available in the new regime ā negotiate employer NPS contributions up to 14% of basic salary; it reduces taxable income without reducing take-home.
- The break-even threshold shifts every year as your home loan matures, HRA changes, and income grows; recalculate in April, not once a decade.
- Watch the ā¹12 lakh 87A cliff in the new regime ā at taxable income marginally above ā¹12 lakh, the full slab-on-total-income tax kicks in, not just tax on the marginal amount; time variable pay accordingly.
- Submit Form 12BB to payroll (old regime) or a written intimation (new regime) by the first week of April ā consistent TDS through the year avoids interest exposure under Sections 234B and 234C and speeds up any resulting refund.
