Recap of the income tax rules effective 1 April 2023 ā new regime default, Section 87A rebate, debt MF taxation and how they apply in FY 2026-27.
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New Income Tax Rules w.e.f 1st April 2023
The Finance Act 2023 fundamentally restructured personal income tax in India, effective 1 April 2023. The new tax regime under Section 115BAC became the default for individuals, HUFs and associations; the Section 87A rebate was enhanced to cover income up to ā¹7 lakh; surcharge on the highest earners was capped at 25%; debt mutual funds lost their indexation advantage; and leave encashment limits for private-sector employees nearly tripled. These are not historical footnotes ā in FY 2026-27 (AY 2027-28), every one of these provisions shapes your TDS, your ITR, your investment portfolio and your tax liability. Here is a complete, practical breakdown.
Why 1 April 2023 Is Still the Date That Matters in 2026
Most taxpayers assume they need to follow only the "latest" Finance Act. That is partially true ā Finance Act 2026 has updated slab boundaries, raised the standard deduction to ā¹75,000, and revised several TDS thresholds. But the 1 April 2023 amendments created structural changes that operate as permanent cut-off dates, particularly for:
- Debt mutual fund purchases: units bought on or after 1 April 2023 are taxed at slab rates regardless of holding period
- Life insurance policies: aggregate annual premium above ā¹5 lakh triggers taxability of maturity proceeds for policies issued on or after 1 April 2023
- Market-linked debentures (MLDs): short-term capital gains rules apply regardless of holding period for MLDs acquired after 1 April 2023
If you own any of these assets, the 1 April 2023 cut-off determines your tax treatment at redemption ā even in 2028 or 2030. Understanding the original 2023 provisions is not optional.
Section 115BAC: New Regime as the Default ā What This Means Practically
The Legal Position
From 1 April 2023, Section 115BAC(1A) made the new tax regime the default. If you do nothing ā file a return without explicitly opting out ā the system treats you as a new-regime taxpayer. This is a reversal of the pre-2023 position where the old regime was the default.
What You Must Do to Stay in the Old Regime
For salaried employees:
- Submit a declaration to your employer in Form 12BB at the start of the financial year indicating you are opting for the old regime
- Your employer adjusts TDS accordingly
- You must still confirm this choice in your ITR ā the old-regime option must be exercised in Form 10-IEA before the due date of filing
For business income taxpayers:
- You must file Form 10-IE before the return due date
- Once you opt out of the new regime, you cannot switch back and forth freely ā specific restrictions apply under the proviso to Section 115BAC
For salary-only taxpayers (no business income):
- You can switch regime every year ā there is no lock-in
- The decision is made annually, and you can change it even at return filing stage, provided TDS has been managed with the employer during the year
Practical Risk: Missing the Opt-Out Window
If you intend to claim deductions under Sections 80C, 80D, HRA (Section 10(13A)) or home loan interest (Section 24(b)), and you forget to inform your employer through Form 12BB, your TDS will be computed under the new regime. You will get no credit for those deductions in TDS. You can correct this at ITR filing, but you may face a large tax demand and interest under Section 234B/234C if advance tax was not paid.
Section 87A Rebate: The ā¹7 Lakh Threshold in Detail
The Enhancement from 1 April 2023
Before FY 2023-24, the Section 87A rebate was ā¹12,500 for income up to ā¹5 lakh under both regimes. From 1 April 2023:
| Regime | Rebate Amount | Income Ceiling |
|---|---|---|
| New regime | ā¹25,000 | ā¹7 lakh |
| Old regime | ā¹12,500 | ā¹5 lakh |
This means a taxpayer with gross income of ā¹7 lakh or below under the new regime pays zero tax ā even before the standard deduction of ā¹75,000 (as updated by Finance Act 2026) is applied. The standard deduction brings the effective no-tax threshold for a salaried individual to ā¹12.75 lakh under the new regime in FY 2026-27 (subject to slab computation confirming tax liability does not exceed ā¹60,000, after which marginal relief applies).
Worked Example ā Rebate for a Salaried Employee
> Anita, a marketing executive, has gross salary of ā¹7,00,000 in FY 2026-27. > > Under the new regime (AY 2027-28): > - Gross salary: ā¹7,00,000 > - Less: Standard deduction (Finance Act 2026): ā¹75,000 > - Taxable income: ā¹6,25,000 > > Tax on ā¹6,25,000 under new regime slabs: > - Nil on ā¹0āā¹4,00,000 > - 5% on ā¹4,00,001āā¹6,25,000 = 5% Ć ā¹2,25,000 = ā¹11,250 > > Section 87A rebate: ā¹11,250 (since taxable income is below ā¹7 lakh, full tax is rebated) > Net tax payable: ā¹0
Anita pays no income tax despite earning ā¹7 lakh. This is the direct, practical impact of the 1 April 2023 amendment that remains fully operative in FY 2026-27.
Standard Deduction Extended to New Regime ā and Subsequently Enhanced
From 1 April 2023, the standard deduction of ā¹50,000 (previously available only under the old regime) was extended to salaried individuals and pensioners under the new regime. Finance Act 2026 has since raised this to ā¹75,000 for FY 2026-27 onwards. Family pension recipients continue to get a deduction of ā¹25,000 (increased from ā¹15,000) under the new regime.
This is significant because it was the single largest reason many salaried taxpayers avoided the new regime earlier ā the absence of standard deduction made the comparison unfair. That gap is now fully closed.
Surcharge Capped at 25%: Impact on High-Income Individuals
Under the old regime, the surcharge rate on individuals with income above ā¹5 crore is 37%, bringing the effective marginal rate (including 4% health and education cess) to approximately 42.74%.
From 1 April 2023, the new regime caps surcharge at 25% for all income levels, including income above ā¹5 crore. The effective top marginal rate under the new regime is approximately 39%.
Worked Example ā Surcharge Saving for an HNI
> Ramesh, a senior professional, has net taxable income of ā¹6 crore in FY 2026-27. > > Old regime: > - Base tax on ā¹6 crore (approximate): ā¹2,10,12,500 > - Surcharge at 37%: ā¹77,74,625 > - Health & Education Cess at 4%: ā¹11,51,485 > - Total tax: ~ā¹2,99,38,610 > > New regime: > - Base tax on ā¹6 crore (at new regime slabs): ā¹1,79,00,000 (approximate) > - Surcharge at 25%: ā¹44,75,000 > - H&E Cess at 4%: ā¹8,95,000 (on tax + surcharge) > - Total tax: ~ā¹2,32,70,000 > > Approximate annual saving: ā¹66+ lakh ā purely from the surcharge cap, before considering deduction comparisons.
For high-income individuals with few eligible deductions, the new regime's surcharge cap makes it clearly superior.
Debt Mutual Fund Taxation: The 1 April 2023 Cut-Off
What Changed
Before 1 April 2023, debt mutual funds held for more than 36 months qualified for Long-Term Capital Gains (LTCG) tax at 20% with indexation. This made them among the most tax-efficient fixed-income instruments in India.
From 1 April 2023, Section 50AA was introduced: gains from "specified mutual funds" (those investing less than 65% in domestic equity) purchased on or after 1 April 2023 are taxed at slab rates, regardless of holding period. No LTCG treatment. No indexation. The holding period is irrelevant.
What This Means for Your Existing Portfolio
- Units purchased before 1 April 2023: Continue to be governed by the pre-amendment rules, subject to prevailing Finance Act provisions. LTCG with indexation (if held for 36+ months) may still apply ā verify against Finance Act 2026 amendments to indexation rules
- Units purchased on or after 1 April 2023: Taxed at slab rates on redemption, no matter how long you hold them
- Systematic Investment Plans (SIPs): Each SIP instalment is a separate purchase. SIP instalments from April 2023 onwards are fully under the new regime
What Should You Do Now
If you are redeeming a debt fund in FY 2026-27, identify the purchase date of each unit using your account statement from the AMC or CAMS/KFintech. Separate pre-April 2023 units from post-April 2023 units and compute gains accordingly. Do not apply a blanket slab rate to the entire redemption if you have pre-2023 units ā you may be over-paying tax.
Leave Encashment: ā¹25 Lakh Exemption for Private Employees
The Change
Section 10(10AA)(ii) provides an exemption on leave encashment received by non-government employees at the time of retirement or resignation. Before FY 2023-24, this limit was a paltry ā¹3 lakh ā unchanged since 1998. From 1 April 2023, this was raised to ā¹25 lakh.
Worked Example ā Leave Encashment at Retirement
> Sunita, a private-sector employee, retires in June 2026 with 45 days of accumulated earned leave. Her last drawn salary (for leave encashment calculation) is ā¹2 lakh per month. > > Leave encashment received: 45 days Ć (ā¹2,00,000 / 30) = ā¹3,00,000 > > Exempt under Section 10(10AA): Min of: > - Actual leave encashment: ā¹3,00,000 > - 10 months' average salary: 10 Ć ā¹2,00,000 = ā¹20,00,000 > - Cash equivalent of leave entitlement at retirement: ā¹3,00,000 > - Statutory ceiling: ā¹25,00,000 > > Entire ā¹3,00,000 is exempt. No tax liability on leave encashment.
Had the old ā¹3 lakh ceiling applied and her leave encashment exceeded that, the excess would have been taxable. The enhanced limit protects mid-to-senior-level private employees who accumulate significant leave balances.
Life Insurance Policy Proceeds: Taxability Above ā¹5 Lakh Premium
From 1 April 2023, Section 10(10D) was amended. Maturity proceeds from non-ULIP, non-term life insurance policies are taxable as income from other sources if the aggregate annual premium across all such policies issued on or after 1 April 2023 exceeds ā¹5 lakh.
Key points:
- Death claims remain fully exempt regardless of premium amount
- ULIP taxation (policies where annual premium exceeds 10% of sum assured) was already covered by the 2021 amendment
- This 2023 amendment targets high-premium traditional endowment and money-back policies used as tax shelters
Action step: If you have multiple life insurance policies, aggregate their annual premiums. If the total crosses ā¹5 lakh for policies issued after 1 April 2023, plan redemption timing carefully and account for the income in your ITR under "Income from Other Sources."
Common Mistakes Taxpayers Make With the 2023 Rules
1. Assuming the old regime is still the default Many taxpayers ā and even some payroll systems ā have not fully updated to the new-regime-as-default framework. If your Form 16 shows TDS computed under the new regime and you file under the old regime without Form 10-IEA, your ITR may face processing errors.
2. Applying indexation to post-April 2023 debt fund units This is the most expensive mistake. Gains on post-April 2023 debt fund purchases are at slab rates, full stop. There is no indexation to claim. Filing with indexation on these units will trigger a demand notice.
3. Treating the ā¹7 lakh rebate as a flat exemption The Section 87A rebate applies to tax computed on income up to ā¹7 lakh ā it does not mean income up to ā¹7 lakh is exempt. If your income is ā¹7,05,000 under the new regime (after standard deduction), the rebate does not apply and you pay tax on the entire amount from the first slab. The cliff-edge effect is real ā plan your income and deductions carefully.
4. Not reconciling AIS / TIS before filing Your Annual Information Statement (AIS) and Taxpayer Information Summary (TIS) on the income tax portal capture debt fund redemptions, life insurance payouts, interest credits and more. If your ITR does not reconcile with these figures, you will receive a defective return notice or a scrutiny assessment. Download and review before filing for AY 2027-28.
5. Missing the Form 10-IEA deadline for old-regime opt-out If you have business or professional income and want the old regime, Form 10-IEA must be filed before the return due date. Filing it late is not permitted ā you will be locked into the new regime for that year.
Step-by-Step: Choosing Your Regime for FY 2026-27 (AY 2027-28)
- List your gross income from all sources (salary, business, capital gains, other sources)
- Identify your deductions ā 80C (up to ā¹1.5 lakh), 80D, HRA, home loan interest (Section 24), NPS (80CCD), LTA, etc.
- Compute tax under both regimes using the prevailing slabs for FY 2026-27 (verify updated slabs for Finance Act 2026 on the CBDT website or income tax portal)
- Apply standard deduction: ā¹75,000 under new regime; ā¹50,000 under old regime for salaried individuals
- Check Section 87A ā if net taxable income under new regime is ā¹7 lakh or below, tax is nil
- Compare net tax payable ā the lower number wins, but factor in compliance cost (maintaining HRA proofs, 80C receipts, home loan certificates)
- Inform your employer via Form 12BB at the start of the year if you choose the old regime
- File Form 10-IEA (business income) or select the regime in ITR (salaried) before the due date
- Download AIS/TIS from the income tax portal and reconcile before submitting your return
Key Takeaways
- New regime is the default from 1 April 2023 ā opting for the old regime requires an active, documented choice through Form 12BB (employer) and Form 10-IEA (business income) or ITR selection (salaried)
- Section 87A rebate of ā¹25,000 eliminates tax for income up to ā¹7 lakh under the new regime; combined with the ā¹75,000 standard deduction, effectively no tax up to ā¹12.75 lakh for salaried individuals in FY 2026-27 (subject to marginal relief mechanics)
- Surcharge capped at 25% under the new regime for all income levels, reducing the effective top marginal rate by approximately 3.7 percentage points versus the old regime ā a major advantage for income above ā¹5 crore
- Debt mutual funds purchased on or after 1 April 2023 are taxed at slab rates on all gains ā no LTCG, no indexation ā irrespective of holding period; verify purchase dates before filing
- Leave encashment exemption for private employees is now ā¹25 lakh ā up from ā¹3 lakh ā for amounts received at retirement or resignation
- Life insurance maturity proceeds are taxable where aggregate annual premium on non-ULIP, non-term policies issued post 1 April 2023 exceeds ā¹5 lakh; death claims remain fully exempt
- Always reconcile AIS, TIS and Form 26AS before filing for AY 2027-28 ā discrepancies between portal data and your ITR are the single largest driver of defective return notices and demand assessments
