Overview of the New Tax Regime

Overview of the New Tax Regime

The new tax regime under Section 115BAC of the Income-tax Act, 1961 is the default personal income tax structure for individuals and HUFs for FY 2026-27 (Assessment Year 2027-28). It offers lower, flatter slab rates in exchange for giving up most deductions. If you are salaried with no active home loan and limited deductions, the new regime almost certainly saves you money. If you carry a large housing loan, active HRA, health insurance premiums, and consistently max out Section 80C, you must run both calculations — the difference regularly exceeds ₹60,000 to ₹1,00,000 for mid-income earners.

What Section 115BAC Actually Does — and Why the Default Matters

Section 115BAC was inserted by the Finance Act 2020 as an optional alternative. The Finance Act 2023 changed the architecture fundamentally: from FY 2023-24 onwards, the new regime applies automatically unless you opt out. Budget 2026 retained this default status and the broad slab structure.

The practical consequence: if you are a salaried taxpayer who never filed any choice declaration, you are already in the new regime. Your employer deducted TDS on new regime assumptions unless you submitted a declaration to the contrary.

The regime applies to:

• Resident and non-resident individuals of all ages
• Hindu Undivided Families (HUFs)
• Associations of Persons (AOPs) and Bodies of Individuals (BOIs)
• Artificial Juridical Persons

It does not cover firms, companies, LLPs, or cooperative societies — those entities have separate tax rate provisions.

Slab Structure for FY 2026-27 (AY 2027-28)

The new regime uses a six-slab structure, with the nil band extending to ₹3 lakh:

Add applicable surcharge and 4% Health and Education Cess on total tax (including surcharge).

Surcharge Comparison — New vs Old Regime

The cap at 25% is exclusive to the new regime and is transformational for incomes above ₹5 crore — more on this in the worked examples.

Old regime slabs for reference (individual below 60 years of age):

• Up to ₹2.5 lakh: Nil
• ₹2.5 lakh – ₹5 lakh: 5%
• ₹5 lakh – ₹10 lakh: 20%
• Above ₹10 lakh: 30%

Senior citizens (60–80 years) get a nil band up to ₹3 lakh; very senior citizens (above 80) get nil up to ₹5 lakh under the old regime.

Deductions and Reliefs You Still Get Under Section 115BAC

The new regime is often described as a "no deductions" structure. That is an oversimplification. The following remain available:

For Salaried Taxpayers and Pensioners

• Standard deduction — ₹75,000. Available for salaried employees and pensioners. This was enhanced and brought into the new regime framework to make it competitive with the old regime's ₹50,000 standard deduction.
• Family pension deduction — The lower of ₹15,000 or one-third of pension received. This applies to recipients of family pension after the death of a government employee.

Retirement and Employer-Funded Benefits

• Section 80CCD(2) — employer's NPS contribution. Deductible up to 14% of basic salary plus dearness allowance (DA). This is the most powerful deduction left standing under the new regime. If your employer contributes ₹1,20,000 annually to your NPS Tier-I account and your basic salary is ₹10 lakh, you can still deduct ₹1,00,000 (capped at 10% of ₹10L in this illustration, or up to 14% if available). At a 30% marginal rate, that is ₹30,000 in annual tax saved — inside the new regime.
• Section 80CCH — Contributions to the Agniveer Corpus Fund are fully exempt.
• Gratuity under Section 10(10) within statutory limits remains tax-free.
• Leave encashment on retirement under Section 10(10AA) continues to be exempt.
• NPS partial withdrawal under Section 10(12B) remains exempt.

House Property

• Interest on let-out property under Section 24(a) is deductible against rental income. The restriction under the new regime applies only to Section 24(b) — interest on a self-occupied property. If you own a rented-out property and carry a loan against it, that interest still reduces your rental income under the new regime.

Tax Rebate

• Section 87A rebate — full rebate on tax payable for total income up to ₹7 lakh. Effectively produces zero tax liability up to that threshold. Marginal relief kicks in for income between ₹7 lakh and approximately ₹7.25 lakh — covered in detail below.

What the New Regime Takes Away — The Full Deductions List

Most of the old regime's planning ecosystem disappears under Section 115BAC. Memorise this list before making your regime choice:

Chapter VI-A deductions — not available:

• Section 80C (₹1.5 lakh) — EPF, PPF, ELSS, life insurance premiums, NSC, Sukanya Samriddhi, home loan principal, ULIP, tuition fees
• Section 80CCC — pension fund contributions
• Section 80CCD(1) and 80CCD(1B) — your own NPS contributions (employee's share is gone; only employer's share under 80CCD(2) survives)
• Section 80D — health insurance premiums for self, spouse, children, parents
• Section 80DD / 80DDB — expenses for differently-abled dependants or specified critical illnesses
• Section 80E — interest on education loan
• Section 80EEA — additional home loan interest for affordable housing (₹1.5 lakh)
• Section 80G — donations to PM CARES, approved trusts and institutions
• Section 80GG — rent deduction for non-HRA employees
• Section 80TTA / 80TTB — savings account interest (₹10,000 / ₹50,000 for senior citizens)

Salary-head exemptions — not available:

• HRA exemption under Section 10(13A) — even if you are actually paying rent
• LTA (Leave Travel Allowance) under Section 10(5)
• Children's education allowance and hostel allowance
• Most other allowances (other than a narrow set including transport allowance for specially-abled employees)

House property:

• Section 24(b) — interest on home loan for self-occupied property (up to ₹2 lakh under old regime) is not available under the new regime. This is one of the two biggest losses, alongside HRA, for urban salaried taxpayers.

Set-off:

• Brought-forward losses from house property cannot be set off against salary or other income under the new regime.

Three Worked Examples: When Each Regime Wins

Example 1 — Salaried, No Home Loan, Basic 80C Investments

Profile: Salaried individual, age 36, gross salary ₹15 lakh. No home loan, no HRA exemption. 80C investments of ₹1.5 lakh (PPF, ELSS).

New regime calculation:

• Taxable income: ₹15,00,000 – ₹75,000 (standard deduction) = ₹14,25,000
• Tax: Nil + ₹20,000 (5% on ₹4L) + ₹30,000 (10% on ₹3L) + ₹30,000 (15% on ₹2L) + ₹45,000 (20% on ₹2.25L) = ₹1,25,000
• 4% cess: ₹5,000
• Total tax: ₹1,30,000

Old regime calculation:

• Deductions: ₹75,000 (standard deduction) + ₹1,50,000 (80C) = ₹2,25,000
• Taxable income: ₹15,00,000 – ₹2,25,000 = ₹12,75,000
• Tax: Nil + ₹12,500 (5% on ₹2.5L) + ₹1,00,000 (20% on ₹5L) + ₹82,500 (30% on ₹2.75L) = ₹1,95,000
• 4% cess: ₹7,800
• Total tax: ₹2,02,800

Verdict: New regime saves ₹72,800. The 80C investments continue to build wealth in PPF and ELSS — they just no longer influence your tax regime choice.

Example 2 — Salaried With HRA, Home Loan, Full 80C and 80D

Profile: Salaried individual, age 40, gross salary ₹15 lakh. HRA received and fully exempt (Section 10(13A)): ₹3 lakh. Home loan interest on self-occupied property (Section 24(b)): ₹2 lakh. 80C: ₹1.5 lakh. 80D (health insurance): ₹25,000.

New regime calculation:

• Taxable income: ₹14,25,000 (unchanged — none of the above deductions apply)
• Total tax: ₹1,30,000 (same as Example 1)

Old regime calculation:

• Deductions: ₹75,000 SD + ₹3,00,000 HRA + ₹2,00,000 Section 24(b) + ₹1,50,000 80C + ₹25,000 80D = ₹7,50,000
• Taxable income: ₹15,00,000 – ₹7,50,000 = ₹7,50,000
• Tax: Nil + ₹12,500 (5% on ₹2.5L) + ₹50,000 (20% on ₹2.5L) = ₹62,500
• 4% cess: ₹2,500
• Total tax: ₹65,000

Verdict: Old regime saves ₹65,000. This profile — common among mid-career professionals in metro cities — is exactly where old regime planning remains worthwhile.

Example 3 — Very High Income and the Surcharge Story

Profile: Business owner with ₹6 crore total income, no significant deductions available.

Under the new regime, surcharge on income above ₹5 crore is capped at 25%. Under the old regime, surcharge on the same income bracket is 37%.

Approximate tax on ₹6 crore total income (simplified):

• Basic tax at 30% on the bulk of the income ≈ ₹1,76,90,000 (new) / ₹1,78,12,500 (old)
• Surcharge at 25% (new) ≈ ₹44,22,500 vs surcharge at 37% (old) ≈ ₹65,90,625
• 4% cess applied on post-surcharge total

Total estimated tax: ~₹2.30 crore (new regime) vs ~₹2.54 crore (old regime).

Surcharge-driven saving alone: ₹20–25 lakh per year. At this income level, the regime calculation must be done before any other tax planning — the surcharge differential dwarfs the benefit of most deductions.

Section 87A Rebate and Marginal Relief — Understanding the ₹7 Lakh Threshold

How the Section 87A Rebate Works

Section 87A grants a rebate equal to the actual tax payable, subject to a maximum of ₹25,000, for individuals with total income not exceeding ₹7 lakh under the new regime.

The slab tax on ₹7 lakh (new regime) is:

• Nil on ₹3L + 5% on ₹4L = ₹20,000

The 87A rebate wipes out this ₹20,000 entirely. Net tax: zero.

For a salaried employee, the standard deduction of ₹75,000 means gross salary up to ₹7,75,000 produces a total income at or below ₹7 lakh, making the effective zero-tax salary ceiling ₹7,75,000.

Marginal Relief — There Is No Cliff

If your income is ₹7,10,000 — just above the ₹7 lakh threshold — the 87A rebate does not apply in full. Without protection, you would owe ₹21,840 (tax ₹21,000 + ₹840 cess) on just ₹10,000 of extra income. That would be punishing and irrational.

Marginal relief resolves this: the tax payable is capped at the amount by which your income exceeds ₹7 lakh.

• Income over ₹7 lakh: ₹10,000
• Tax payable after marginal relief: ₹10,000 (not ₹21,840)

The ITR filing utility on the income-tax portal at www.incometax.gov.in computes marginal relief automatically. You do not need to manually calculate or claim it. But understanding it prevents the bad behaviour of voluntarily deferring income or making last-minute tax-saving investments purely to get below ₹7 lakh when you are already protected.

How to Opt Out of the New Regime — Form 10-IEA, Due Dates, and the One-Switch Rule

The procedure for opting out differs fundamentally between salaried taxpayers and those with business or professional income.

Salaried Taxpayers and Pensioners

No separate form is required. At the time of filing your ITR (ITR-1 or ITR-2), select the old regime under the "Tax Regime" option in the personal information section. You can switch between regimes every year — there is no lock-in, no form to file, and no restriction on how many times you change.

Practical steps for AY 2027-28:

1. Compute tax under both regimes before filing.
2. Open ITR-1 or ITR-2 on the e-filing portal (www.incometax.gov.in).
3. In Part A — General Information, select "Old Tax Regime" or "New Tax Regime."
4. File before the due date — typically July 31 for non-audit salaried taxpayers.
5. If you discover an error after filing, you can revise the ITR (including regime choice) up to December 31 of the relevant assessment year.

Taxpayers With Business or Professional Income (PGBP)

The rules are far stricter. If any income falls under the head Profits and Gains of Business or Profession, you must file Form 10-IEA to opt out of the new regime.

Step-by-step procedure for Form 10-IEA:

1. Log in to www.incometax.gov.in using your PAN and password.
2. Go to e-File → Income Tax Forms → File Income Tax Forms.
3. Search for and select Form 10-IEA.
4. Choose Assessment Year 2027-28 for FY 2026-27 returns.
5. Fill in PAN, name, and declare that you are opting out of Section 115BAC for the current year.
6. Digitally verify using DSC (Digital Signature Certificate) or EVC (Electronic Verification Code via Aadhaar OTP, net banking, or bank ATM).
7. Note the acknowledgment number — this is your evidence of timely filing.
8. File your ITR after Form 10-IEA is successfully submitted. Do not reverse this sequence.

Deadline: Form 10-IEA must be filed on or before the ITR due date under Section 139(1):

• Non-audit cases: July 31
• Tax audit cases: October 31
• Transfer pricing cases: November 30

Filing after the due date forfeits your right to the old regime for that year.

The one-switch rule: A business income taxpayer who opts out and later re-enters the new regime can do so exactly once in a lifetime. After that single re-entry, the new regime applies permanently — you cannot switch back to the old regime again. This makes the decision effectively irreversible for most business owners and professionals. Think through the five-year implication, not just the current year's calculation.

Common Mistakes That Cost Taxpayers Real Money

1. Not Running Both Calculations Before Filing

The most prevalent and expensive mistake. Choosing a regime based on instinct or what a colleague chose costs many taxpayers ₹40,000 to ₹1,00,000 or more per year. Every year, before you file, spend 30 minutes running both computations.

2. Assuming Employer NPS Contribution Is Gone

Many employees believe all NPS-related deductions are unavailable under the new regime. Section 80CCD(2) — the employer's contribution — survives. An employee whose employer contributes ₹1 lakh to NPS (within the 14% limit of basic + DA) saves ₹31,200 in tax at a 30% rate plus cess. This is also an argument to negotiate a higher employer NPS contribution as part of your cost-to-company restructuring.

3. Conflating the Salaried and Business Income Opt-Out Rules

A freelancer who files ITR-3 and casually ticks "old regime" without filing Form 10-IEA will find the old regime selection invalid. The income-tax department processes TDS and self-assessment under the new regime by default. The fix involves filing a belated or revised return, which may or may not be permissible depending on timing.

4. Treating HRA as an Automatic Win for the Old Regime

Actual HRA exemption under Section 10(13A) is the minimum of: (a) actual HRA received, (b) actual rent paid minus 10% of salary, and (c) 50% of salary for metro cities (40% for others). In practice, many employees in metros pay high rent but receive a relatively small HRA component in their CTC. Do the calculation explicitly — never assume the exemption equals the HRA amount in your salary slip.

5. Ignoring the Section 24 Benefit on Rented-Out Property

Interest on loans for let-out property is deductible under the new regime. If you own a second flat that you rent out and carry an EMI on it, that interest deduction remains whether you choose old or new regime. Staying in the old regime to preserve this specific benefit is unnecessary.

6. Misjudging the Surcharge Impact at High Incomes

At incomes above ₹5 crore, taxpayers sometimes remain in the old regime to claim deductions of ₹5–7 lakh. The arithmetic rarely supports this: the surcharge differential alone saves ₹20 lakh or more. Always compute the post-surcharge-and-cess effective rate under both regimes before any other analysis.

Key Takeaways

• The new regime is the default for FY 2026-27 / AY 2027-28. You are enrolled unless you affirmatively opt out — salaried taxpayers do so at ITR filing; business income taxpayers must file Form 10-IEA before the ITR due date.
• ₹75,000 standard deduction applies under the new regime for salaried and pension income, bringing the effective zero-tax gross salary ceiling to ₹7,75,000 when combined with the Section 87A rebate.
• Section 87A eliminates tax up to ₹7 lakh total income; marginal relief prevents a cliff for income between ₹7 lakh and approximately ₹7.25 lakh — the ITR utility applies this automatically.
• Section 80CCD(2) (employer NPS up to 14% of salary) is the most valuable deduction surviving under the new regime — negotiate it into your compensation structure if your employer allows flexibility.
• Business income taxpayers face a one-switch rule — opting back into the new regime after leaving it is permitted exactly once, after which the regime change is permanent. This demands multi-year financial modelling, not a single-year tax calculation.
• For incomes above ₹5 crore, the 25% surcharge cap under the new regime typically saves ₹20–25 lakh annually compared to the old regime's 37% cap — this single factor often overrides all deduction considerations.
• Run both calculations every year using the ITR utility's built-in comparison tool — a promotion, a new home loan, or a rental property in the previous year can shift the optimal regime and the tax saving by ₹50,000 or more in either direction.