New tax regime FY 2025-26: complete guide for salaried employees

What is the new income tax regime in India?

The new tax regime is a simplified income tax structure that has been the default option for all taxpayers since FY 2023–24 (Section 115BAC — Income Tax Department guide, AY 2026-27). It offers lower tax rates across all slabs — but removes most deductions and exemptions in exchange.

For FY 2025–26, three Budget changes made the new regime considerably more attractive (Union Budget 2025-26 press release, PIB):

• Basic exemption limit raised to ₹4 lakh (from ₹3L)
• Section 87A rebate increased to ₹60,000 (from ₹25,000), making income up to ₹12L effectively tax-free
• Standard deduction for salaried employees increased to ₹75,000 (from ₹50,000)

The result: a salaried person with a gross salary up to ₹12,75,000 pays zero income tax under the new regime for FY 2025–26.

What are the new tax regime income tax slabs for FY 2025-26?

Source: Income Tax Department — Salaried Individuals, AY 2026–27

Important: These rates apply to taxable income — your gross salary minus the standard deduction of ₹75,000 (and any other eligible deductions). A 4% health and education cess applies on top of your final tax liability. A surcharge applies for income above ₹50 lakh.

How does the ₹12.75 lakh zero-tax limit work for salaried employees?

The "zero tax up to ₹12.75L" works through two mechanisms together: the standard deduction and the Section 87A rebate (Income Tax Department, AY 2026-27).

Step 1 — Standard deduction reduces gross salary

Gross salary: ₹12,75,000

Standard deduction (Section 16(ia)): −₹75,000

= Taxable income: ₹12,00,000

Step 2 — Tax is calculated slab by slab

Step 3 — Section 87A rebate wipes it out

Because taxable income is exactly ₹12,00,000 (within the ₹12L threshold), the Section 87A rebate of ₹60,000 applies in full. Tax after rebate: ₹0.

4% cess on ₹0 = ₹0. Net tax payable: ₹0.

What is Section 87A: A rebate under the Income Tax Act that reduces your tax liability to zero if your taxable income does not exceed ₹12,00,000 under the new regime (Income Tax Department FAQ: new vs old tax regime).

What happens to income tax just above ₹12.75 lakh? (Marginal relief explained)

A common concern: "Does earning ₹1 above ₹12.75L suddenly create a large tax bill?"

No — the Income Tax Act has marginal relief to prevent this. The rule: the tax payable cannot exceed the amount by which your taxable income exceeds ₹12 lakh (Income Tax Department — new vs old tax regime FAQs).

Example: Gross salary ₹13,00,000

Taxable income = ₹13,00,000 − ₹75,000 = ₹12,25,000

Tax before relief = ₹60,000 + 15% × ₹25,000 = ₹63,750

Section 87A doesn't apply (taxable income > ₹12L)

Marginal relief caps the tax at: ₹12,25,000 − ₹12,00,000 = ₹25,000

Plus 4% cess: ₹1,000

Net tax: ₹26,000

So earning ₹25,000 more than the ₹12.75L threshold costs ₹26,000 in tax — not ideal, but not the ₹63,750 it would be without marginal relief.

How much income tax do I pay at different salary levels under the new regime?

All figures assume salaried employee, new regime, FY 2025–26, no deductions beyond standard deduction. Illustration only — not a projection.

Taxable income = Gross salary − ₹75,000 standard deduction. Section 87A rebate applied where taxable income ≤ ₹12L. Surcharge not applicable below ₹50L.

◇ Quick check: Your monthly TDS should roughly equal (annual net tax ÷ 12). If your pay slip shows significantly more TDS being deducted, your employer may not have your correct regime declaration — submit Form 12BB to your payroll team.

Which deductions and exemptions are not available under the new tax regime?

The trade-off for lower rates is losing most of the deductions available under the old regime. The following are not available under the new tax regime (Income Tax Department — Salaried Individuals, AY 2026-27):

• Section 80C (up to ₹1.5L): EPF employee contribution, PPF, ELSS, life insurance premiums, NSC, tuition fees, home loan principal repayment
• House Rent Allowance (HRA): No HRA exemption under Section 10(13A), even if you receive it as part of salary
• Section 80D: Health insurance premiums for self, family, and parents
• Section 80CCD(1B): Your own NPS contribution (the extra ₹50,000 deduction over and above 80C)
• Leave Travel Allowance (LTA) under Section 10(5)
• Section 24(b): Home loan interest on a self-occupied property (up to ₹2L)
• Section 80E: Education loan interest
• Section 80TTA / 80TTB: Savings account or fixed deposit interest deduction
• Professional tax: Not deductible (though it still gets deducted from salary by your employer)

Which deductions can I still claim under the new tax regime?

Not everything is removed. These deductions and exemptions are still available (Income Tax Department FAQ — new vs old tax regime):

• Standard deduction: ₹75,000 for salaried employees and pensioners (Section 16(ia))
• Employer's NPS contribution under Section 80CCD(2): Up to 14% of salary for private sector employees; 14% for government employees. This is the employer's share — your own NPS contribution gets no deduction in the new regime (PFRDA — NPS overview)
• Employer's EPF + NPS + superannuation contribution: Tax-free up to ₹7.5 lakh per year combined (Section 17(2)(vii))
• Section 24(b) for let-out property: Interest on a home loan for a property you rent out is still deductible
• Section 80G: Donations to eligible funds and charitable institutions (with conditions)
• Family pension deduction: Lower of ₹25,000 or one-third of family pension received (Section 57(iia))
• Gratuity: Tax-free up to ₹20 lakh on retirement (Payment of Gratuity Amendment Act, 2018 — Ministry of Labour)
• Leave encashment: Tax-free up to ₹25 lakh on retirement (Section 10(10AA))

⚠ Common mistake: Many people assume their employer's NPS contribution gives them no benefit under the new regime. It does — under Section 80CCD(2), the employer's contribution (not your own) is fully deductible even in the new regime. Check your salary slip to see if your employer contributes to NPS on your behalf.

When is the old tax regime better than the new tax regime?

The old regime can beat the new regime when your deductions are large enough to offset the higher slab rates. The old regime tends to be better when you can claim:

• Significant HRA — if you pay high rent in a metro city and receive substantial HRA from your employer (Section 10(13A))
• Home loan on self-occupied property — the ₹2L interest deduction under Section 24(b) is only available in the old regime for self-occupied homes
• Full Section 80C basket — EPF + PPF or ELSS investments at or near ₹1.5L (Income Tax Department — Salaried Individuals, AY 2026-27)
• Section 80D health insurance premiums — for family and parents
• Own NPS contribution under Section 80CCD(1B) — the extra ₹50,000 deduction (PFRDA)

A rough guide: if your total deductions (HRA + 80C + 80D + home loan interest + NPS) exceed approximately ₹4–5 lakh, the old regime may still be worth comparing carefully. Below that threshold, the new regime is almost always better at salary levels up to ₹20L.

Run the actual numbers for your salary and deductions — do not rely on a rough rule. A CA can do this in 15 minutes, or use the Income Tax Department's own comparison tool.

How to decide which tax regime to choose: old or new?

1. List every deduction you actually claim (not what you could claim — what you do):

HRA actually received and eligible + 80C investments actually made + 80D premium paid + home loan interest + own NPS + anything else

2. Calculate your tax under both regimes on that number. The IT Department's tax calculator lets you compare both at incometax.gov.in.

3. Remember: you can switch regimes every year as a salaried employee. You are not locked in (Income Tax Department FAQ — new vs old tax regime).

4. If you have business income, switching back to the old regime after opting out has specific restrictions — consult a CA.

New tax regime FY 2025-26: key takeaways for salaried employees

• Under the new regime, salaried employees earning up to ₹12.75 lakh pay zero income tax in FY 2025–26 (Union Budget 2025-26 — PIB press release).
• The new regime is the default — you are automatically on it unless you actively opt for the old regime before your employer's April declaration deadline.
• The new regime removes HRA, 80C, 80D, own NPS, and most other deductions.
• The old regime can still be better if you have large deductions — particularly HRA + home loan + full 80C.
• You can switch regimes every year as a salaried employee. Compare both before your employer's April deadline.
• The 4% cess applies on top of all income tax. Surcharge applies on income above ₹50 lakh.

Frequently asked questions about the new tax regime

Q: Is the new tax regime mandatory from FY 2025–26?

A: No. The new regime is the default — meaning it applies automatically unless you inform your employer that you want the old regime. As a salaried employee, you can switch between regimes every financial year. Tell your employer at the start of the year; they'll deduct TDS accordingly. See Section 115BAC(6) — IT Department guide.

Q: If my salary is ₹12.75 lakh, do I still need to file an ITR?

A: Yes. Zero tax liability does not mean zero filing obligation. If your gross income exceeds the basic exemption limit, you are required to file a return. Filing also ensures any TDS deducted is properly reconciled.

Q: Can I claim HRA if I choose the new tax regime?

A: No. HRA exemption under Section 10(13A) is not available under the new tax regime. If you pay significant rent and receive HRA, factor this into your regime comparison — it can make the old regime more beneficial. See IT Department FAQ on new vs old regime.

Q: What is the deadline to declare my tax regime to my employer?

A: Most employers ask employees to declare their preferred regime at the start of the financial year (April). If you miss it, your employer defaults you to the new regime. You can correct the final regime when filing your ITR by July 31.

Q: Does the ₹12 lakh zero-tax limit apply to capital gains income too?

A: The Section 87A rebate applies to total taxable income, not just salary. However, special-rate income — such as short-term capital gains under Section 111A (15%) or long-term capital gains under Section 112A (12.5%) — is excluded from the rebate calculation. If you have significant capital gains, your effective tax may be higher even at total income below ₹12L.

Q: My employer contributes to NPS. Is that deductible in the new tax regime?

A: Yes. Employer contributions to NPS are deductible under Section 80CCD(2) up to 14% of your salary, even in the new regime. This is confirmed by the IT Department's new vs old regime FAQ. Check whether your employer offers this — it is one of the most valuable deductions available under the new regime.

Sources

• Income Tax Department — Salaried Individuals, AY 2026–27 (tax slabs, Section 87A, Section 80C, Section 80CCD(2))
• Income Tax Department — New vs Old Tax Regime FAQs (Section 80CCD(2) in new regime, switching rules)
• Union Budget 2025-26: No income tax up to ₹12 lakh under new regime — PIB Press Release
• PFRDA — National Pension System overview
• Ministry of Labour — Payment of Gratuity Amendment Act, 2018 (₹20 lakh ceiling)
• ClearTax — Income Tax Slabs FY 2025-26 (secondary reference)

Last verified: May 2026. Tax rules change with each Budget — confirm current slabs at incometax.gov.in before filing.