Which tax regime is better for salaried employees in FY 2025-26?

Part of the Zero to One series — Chapter 2: Old vs new tax regime. This is Lesson 1. For informational purposes only — not tax advice. Verify current slab rates at incometax.gov.in.

Since FY 2023-24, every salaried employee in India makes one important tax decision at the start of the financial year: which tax regime. The default — unless you tell your employer otherwise — is the new tax regime.

Most people make this choice without calculating both options. This lesson shows you exactly how to compare, what the break-even looks like, and why the right answer depends on your specific deductions rather than a blanket rule.

The two regimes: what is different

New tax regime (default):

Lower tax rates across all income slabs. Standard deduction of ₹75,000. Almost no other deductions or exemptions — no 80C, no HRA exemption, no home loan interest, no 80D health insurance premium.

Old tax regime:

Higher rates. Standard deduction of ₹50,000. Most deductions available: 80C (up to ₹1.5L), HRA exemption, home loan interest (up to ₹2L under Section 24), 80D (health insurance), 80CCD(1B) (NPS), LTA, and more.

The trade-off is straightforward: new regime gives you lower rates; old regime gives you more deductions. The question is which benefit is larger for your income and situation.

New regime tax slabs for FY 2025-26

Section 87A rebate (new regime): If your total income is ₹12,00,000 or below (after the ₹75,000 standard deduction, meaning gross salary up to ₹12,75,000), the full tax computed is rebated — you pay zero income tax.

Old regime tax slabs for FY 2025-26

Section 87A rebate (old regime): If total income is ₹5,00,000 or below, full tax rebate applies.

The comparison method: calculate both

The only reliable way to choose is to compute your tax under both regimes.

Step 1 — New regime:

Start with gross salary. Subtract standard deduction (₹75,000). Apply new regime slabs. Subtract 87A rebate if applicable. Add 4% cess.

Step 2 — Old regime:

Start with gross salary. Subtract standard deduction (₹50,000). Subtract 80C (your actual investment, up to ₹1.5L). Subtract HRA exemption (if applicable — see Chapter 1). Subtract 80D health insurance (up to ₹25,000 for self/family). Subtract any other eligible deductions. Apply old regime slabs. Add 4% cess.

Pick whichever gives the lower tax.

Worked example: Deepika, ₹12 lakh gross salary

Deepika earns ₹12,00,000/year. She has:

• EPF contribution: ₹57,600 (qualifies as 80C)
• ELSS investment: ₹42,400 (total 80C = ₹1,00,000, below ₹1.5L cap)
• Health insurance premium: ₹18,000 (80D)
• HRA received: ₹1,80,000; rent paid: ₹1,80,000; HRA exemption: ₹72,000 (based on Chapter 1 formula)

New regime:

• Gross salary: ₹12,00,000
• Standard deduction: −₹75,000
• Taxable income: ₹11,25,000
• Tax: 0 on first ₹4L + 5% on ₹4L–₹8L (₹20,000) + 10% on ₹8L–₹11.25L (₹32,500) = ₹52,500
• 87A rebate: taxable income ₹11.25L < ₹12L → full rebate → tax = ₹0

Old regime:

• Gross salary: ₹12,00,000
• Standard deduction: −₹50,000
• 80C: −₹1,00,000
• 80D: −₹18,000
• HRA exemption: −₹72,000
• Taxable income: ₹9,60,000
• Tax: 0 on first ₹2.5L + 5% on ₹2.5L–₹5L (₹12,500) + 20% on ₹5L–₹9.6L (₹92,000) = ₹1,04,500
• Cess (4%): ₹4,180
• Total tax: ₹1,08,680

Deepika's choice: new regime — saves ₹1,08,680.

This result surprises many people who have been filing under the old regime for years. The Section 87A rebate under the new regime makes incomes up to ₹12.75L gross effectively zero-tax — which is a powerful advantage that most deductions under the old regime cannot overcome at this income level.

The break-even: when does the old regime win?

The old regime becomes better when your total deductions are large enough that they reduce your old-regime tax below your new-regime tax.

General break-even rule of thumb (for income above ₹12.75L where the 87A rebate no longer applies in full):

These are approximate. The only reliable way is to calculate both.

What pushes you toward the old regime:

• Large home loan with ₹2L interest deduction under Section 24
• HRA exemption for high-rent metro accommodation
• Full 80C utilisation (₹1.5L) + NPS under 80CCD(1B) (₹50K extra)
• 80D (health insurance for family + parents)

Combining 80C (₹1.5L) + 80CCD(1B) (₹50K) + Section 24 home loan interest (₹2L) = ₹4L of deductions beyond the standard deduction. At ₹15–20L salary, this often favours the old regime.

Can you switch regimes every year?

Salaried employees: Yes, once per year. You declare your regime choice to your employer at the start of the financial year (April), which determines TDS. When filing your ITR, you can choose the regime for that year regardless of what you told your employer — but your employer will have been deducting TDS based on the declared regime, so switching at ITR time may result in a refund or a shortfall.

Business income earners: More restricted. If you have income from a business or profession, switching is limited and the rules are different.

The practical decision

The next lesson in this chapter covers what deductions are actually available under each regime — specifically, what you lose in the new regime that you might not have realised you were claiming.

Sources: New vs old tax regime, Income Tax Department · Income tax calculator, Income Tax Department

Last verified: May 2026. New regime slabs are per Budget 2025 (effective FY 2025-26). Verify current rates at incometax.gov.in.