New Tax Regime: How It Works

What is the new tax regime?

The new tax regime is an alternative system for calculating your income tax, introduced in the Union Budget 2020 and significantly revised in Budget 2023 and Budget 2025. It offers lower, flatter tax rates but removes most of the deductions and exemptions available under the old regime.

From FY 2023-24 onwards, the new regime is the default — if you do not actively choose the old regime, your employer will deduct TDS under the new regime.

New tax regime slabs for FY 2025-26

Budget 2025 revised the slabs substantially. The current structure under Section 115BAC of the Income Tax Act, as amended by the Finance Act 2025, is:

These rates apply to individuals, HUFs, AOPs, and BOIs. The slabs are the same regardless of age — unlike the old regime, which gives higher basic exemptions to senior and super senior citizens.

Section 87A rebate: zero tax up to ₹12 lakh

The most significant benefit in the new regime is the Section 87A rebate. For FY 2025-26, the rebate equals 100% of your tax liability if your total taxable income is ₹12 lakh or less. In practical terms, this means zero income tax.

For salaried employees, the ₹75,000 standard deduction reduces gross income before applying slabs. So a salaried employee earning up to ₹12,75,000 gross pays zero income tax under the new regime. This is sourced from the Finance Act 2025 — Union Budget.

Marginal relief: protecting the ₹12L crossover

If your taxable income is slightly above ₹12 lakh — say ₹12,50,000 — the raw slab calculation would produce a tax that feels disproportionate. The Finance Act addresses this through marginal relief: your tax under the new regime cannot exceed the amount by which your income exceeds ₹12 lakh.

At ₹12,50,000 taxable income, raw tax = ₹62,500. But marginal relief caps it at ₹50,000 (₹12,50,000 − ₹12,00,000). So you pay ₹50,000 + 4% cess = ₹52,000, not ₹65,000.

Deductions available in the new regime

The new regime does not allow most deductions, but there are a few exceptions:

Allowed:

• Standard deduction — ₹75,000 for salaried employees and pensioners (added from FY 2024-25)
• Employer NPS contribution under Section 80CCD(2) — up to 14% of basic salary (10% for central government employees)
• Standard deduction for family pension — ₹25,000 or one-third of pension, whichever is less
• Transport allowance for specially-abled employees
• Conveyance and travel allowances for official duties

Not allowed:

• HRA exemption under Section 10(13A)
• 80C deductions (PPF, ELSS, LIC, EPF own contribution, home loan principal)
• 80D health insurance premium deduction
• Home loan interest deduction under Section 24(b)
• Leave Travel Allowance (LTA)
• Professional tax deduction
• Most Chapter VI-A deductions except 80CCD(2) and 80CCH

This deduction restriction is the central trade-off of the new regime. The CBDT Circular No. 4/2023 specifies how employers should handle TDS for employees who have not declared their regime preference.

Surcharge and cess

Both regimes apply surcharge and education cess on top of the base tax:

• Surcharge: 10% for income ₹50L–₹1Cr; 15% for ₹1Cr–₹2Cr; 25% for ₹2Cr–₹5Cr; 25% for above ₹5Cr in the new regime (37% in old regime above ₹5Cr — this difference was introduced in Budget 2023)
• Education cess: 4% on (tax + surcharge)

The new regime caps surcharge at 25% regardless of income level, unlike the old regime where the 37% surcharge applies above ₹5 crore. This makes the new regime notably better for very high incomes.

How to switch to the new regime

If you are a salaried employee, inform your employer at the start of the financial year. No formal form is required — a written declaration to your employer is sufficient. You must also declare your choice when filing your ITR using ITR-1 or ITR-2 by July 31.

Business owners and professionals who opted out of the new regime in a previous year can switch back, but only once. After switching back to the new regime, they cannot opt out again in subsequent years.

Is the new regime better for you?

For most salaried employees with income below ₹12.75 lakh and limited deductions, the new regime results in zero tax — clearly better. Above that threshold, it depends on your deductions. If your total deductions (HRA + 80C + 80D + home loan interest) are substantial, the old regime may save more. Use the [old vs new tax regime calculator](/tools/tax-regime-calculator) to compare with your exact numbers.

Sources

• Finance Act 2025 — Income Tax Slabs and Section 87A rebate
• Income Tax Department — ITR forms and applicability
• CBDT Circular No. 4/2023 — TDS on salary under new regime