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Old versus new tax regime for AY 2026-27: how Section 115BAC default flips the math for salaried India

By Rashim Gupta & Aniruddh Bhatia · · Income Tax

The default flip that changed the salaried India calculation

The Finance Act 2023 inserted Section 115BAC(1A) into the Income Tax Act, 1961 to make the new tax regime the default for every individual, HUF, AOP, BOI, and artificial juridical person from AY 2024-25 onward. The Finance Act 2025 refined the slab structure and enhanced the Section 87A rebate. For AY 2026-27, every salaried Indian who does not actively opt out is taxed under the new regime, and the burden has shifted from "should I opt into the new regime" to "do my deductions justify opting back into the old regime".

This is the single most consequential change in personal income tax compliance for salaried India in the last decade. The salary band of ₹7 to ₹15 lakh, which historically defaulted to the old regime because of HRA and Section 80C, is now structurally pulled toward the new regime by the wider slabs and the ₹25,000 rebate under Section 87A. The high-income band above ₹5 crore is pulled by the 25 percent surcharge cap. The middle band of ₹15 to ₹50 lakh is where the regime call still requires arithmetic.

This post walks through the new regime structure, the deductions still allowed, the break-even logic, and the Form 10-IEA election workflow for the rare cases where the old regime still wins.

Related: Income Tax Return Filing · Salary and CTC Structuring · Tax Audit Services

The new regime slab structure for AY 2026-27

The Finance Act 2025 finalised the new regime slabs for AY 2026-27 as follows.

  • Up to ₹3 lakh: nil
  • ₹3 lakh to ₹7 lakh: 5 percent
  • ₹7 lakh to ₹10 lakh: 10 percent
  • ₹10 lakh to ₹12 lakh: 15 percent
  • ₹12 lakh to ₹15 lakh: 20 percent
  • Above ₹15 lakh: 30 percent

The Section 87A rebate under the new regime is ₹25,000 for total income up to ₹7 lakh. Combined with the standard deduction of ₹75,000 against salary, the effective zero-tax salary under the new regime is ₹7.75 lakh.

For comparison, the old regime slabs remain:

  • Up to ₹2.5 lakh: nil (₹3 lakh for senior citizens, ₹5 lakh for super senior citizens)
  • ₹2.5 to ₹5 lakh: 5 percent
  • ₹5 to ₹10 lakh: 20 percent
  • Above ₹10 lakh: 30 percent

The old regime Section 87A rebate is ₹12,500 for income up to ₹5 lakh, materially less generous than the new regime equivalent.

The slab widening in the new regime is the primary driver of the structural advantage. A taxpayer earning ₹12 lakh of taxable income (after standard deduction) pays approximately ₹71,500 under the new regime versus approximately ₹1,72,500 under the old regime before deductions. To match the new regime, the old regime taxpayer needs deductions of approximately ₹3.5 lakh to bring the taxable income down to ₹8.5 lakh.

Deductions allowed and disallowed under the new regime

The trade-off for the wider slabs is the disallowance of most deductions. Under Section 115BAC(2), the deductions disallowed in the new regime include:

  • Section 80C (life insurance premium, PPF, ELSS, principal repayment of home loan, tuition fees, NSC) up to ₹1.5 lakh
  • Section 80CCC (pension fund contribution) up to ₹1.5 lakh
  • Section 80CCD(1) (NPS employee contribution) up to ₹1.5 lakh
  • Section 80CCD(1B) (additional NPS) up to ₹50,000
  • Section 80D (medical insurance) up to ₹1 lakh
  • Section 80DD, 80DDB, 80U (disability and treatment of specified diseases)
  • Section 80E (education loan interest)
  • Section 80EE, 80EEA, 80EEB (additional home loan, affordable housing, electric vehicle)
  • Section 80G (donations to approved institutions)
  • Section 80GG (rent for non-HRA cases)
  • Section 80TTA (savings interest) and 80TTB (senior citizen interest)
  • Section 10(13A) HRA exemption
  • Section 10(5) LTA exemption
  • Section 24(b) home loan interest on self-occupied property up to ₹2 lakh

The deductions that remain available under the new regime are:

  • Standard deduction of ₹75,000 against salary under Section 16(ia)
  • Employer contribution to NPS under Section 80CCD(2) up to 14 percent of salary (central government) or 10 percent (others)
  • Employer contribution to EPF (not taxed as perquisite)
  • Conveyance allowance and transport allowance for differently-abled employees
  • Daily allowance and gratuity exemption under Section 10(10)
  • Section 87A rebate (₹25,000 for income up to ₹7 lakh)
  • Section 24(b) home loan interest for let-out property (continues to be allowed against rental income with the standard 30 percent maintenance deduction)

The home loan interest on let-out property remaining deductible is a quiet win for taxpayers with rental property under the new regime.

Related: HRA and Salary Structuring · NPS Tier-1 Tax Planning

Break-even salary bands

The break-even between the old and new regime is a function of the deduction stack. The following are illustrative break-even points for a salaried taxpayer in FY 2025-26.

Salary ₹7 lakh. The new regime delivers zero tax via the ₹25,000 rebate. The old regime delivers zero tax only if Section 80C is fully utilised at ₹1.5 lakh, plus standard deduction of ₹50,000. The new regime wins on simplicity and cash flow (no deduction document maintenance).

Salary ₹10 lakh. New regime tax is approximately ₹39,000 after standard deduction. To match this under the old regime, the taxpayer needs approximately ₹1.5 lakh of Section 80C plus another ₹1 lakh of deductions (HRA or Section 80D). For a non-HRA, non-home-loan salaried taxpayer, the new regime wins.

Salary ₹15 lakh. New regime tax is approximately ₹1,30,000. To match under the old regime, the taxpayer needs approximately ₹3.5 lakh of total deductions. This is achievable for a metro-resident with HRA of ₹2.5 lakh plus Section 80C of ₹1.5 lakh, but tight for tier-2 resident without HRA.

Salary ₹25 lakh. New regime tax is approximately ₹4,50,000. The old regime can win only with a substantial HRA stack (₹4 to ₹6 lakh), Section 80C (₹1.5 lakh), Section 80D (₹50,000), home loan interest (₹2 lakh), and NPS (₹50,000) summing to approximately ₹8 to ₹10 lakh of deductions.

Salary ₹50 lakh. New regime tax is approximately ₹13 lakh. The old regime can win for metro residents claiming HRA of ₹8 to ₹12 lakh combined with home loan and Section 80C. Surcharge differential is modest at this band.

Salary above ₹5 crore. The 25 percent surcharge cap under the new regime versus 37 percent under the old regime is the dominant factor. The new regime wins almost universally at this band.

The Form 10-IEA election workflow

The election workflow depends on the taxpayer's income profile.

Salaried taxpayer without business income. The regime choice is indicated in the ITR every year. No Form 10-IEA is required. The taxpayer can switch between the regimes every assessment year based on the deduction profile of that year.

Taxpayer with business or profession income. Form 10-IEA must be filed to opt out of the default new regime and elect the old regime. The form is filed online on the Income Tax e-filing portal on or before the due date for filing the ITR under Section 139(1). Once exercised, the option to opt back to the new regime can be exercised only once in the taxpayer's lifetime, and after such reversion, the taxpayer cannot opt back to the old regime as long as the taxpayer has business or profession income.

TDS planning. Employees should inform their employer of the regime choice at the start of the financial year so that TDS is computed correctly. A switch at ITR filing stage is possible but may result in a refund or shortfall, with interest implications under Section 234B and Section 234C.

Operational checklist for AY 2026-27 ITR filing

  1. Compute the tax liability under both regimes using the projected income for FY 2025-26.
  2. Quantify all available deductions under the old regime: Section 80C, 80D, HRA, home loan interest, NPS, donations.
  3. Confirm whether the deduction stack exceeds the break-even threshold for the salary band.
  4. For salaried taxpayers, retain the choice flexibility year-on-year and choose based on the actual deductions claimed.
  5. For business taxpayers, file Form 10-IEA before the ITR due date to opt out of the new regime if the old regime is chosen.
  6. Reconcile TDS computed by the employer with the elected regime, claim refund if the employer deducted under the wrong regime.
  7. For HNIs with income above ₹5 crore, default to the new regime unless deductions are exceptional.

Talk to KAMRIT

KAMRIT's individual income tax desk runs a side-by-side regime computation for every ITR engagement at no additional charge. We have completed over 8,000 individual ITRs across the AY 2024-25 and AY 2025-26 cycle, and the regime call now drives the structuring conversation we have with every salaried client at CTC negotiation. Whether you are a metro-resident salaried executive deciding between HRA continuation and home loan exit, a business owner facing the Form 10-IEA lifetime lock, or an HNI navigating the surcharge cap, our team will model your specific deduction stack against the AY 2026-27 slabs and deliver a recommendation memo with the regime, the TDS structure, and the year-on-year switching plan. Reach out at kamrit.in for a fixed-fee individual tax engagement starting at ₹7,500.

References

  1. Income Tax Act, 1961, Section 115BAC and Section 115BAC(1A).
  2. Finance Act, 2023, insertion of default new regime.
  3. Finance Act, 2025, slab and rebate revisions for AY 2026-27.
  4. Section 87A rebate revision.
  5. Form 10-IEA, Income Tax Rules, 1962.
  6. CBDT clarifications on regime choice and TDS computation for AY 2026-27.
Author - Rashim Gupta, Managing Partner
Co-Author - Aniruddh Bhatia, Associate Partner, Direct Tax

Rashim Gupta

Managing Partner

Rashim Gupta is the Managing Partner of KAMRIT Financial Services LLP. She holds an MBA from Harvard and is a qualified finance lawyer with 24 years of experience in direct tax, indirect tax, statutory audit, transfer pricing, and MCA compliance. She has led tax and audit work for over 300 Indian businesses.

Rashim.Gupta@kamrit.com

Aniruddh Bhatia

Associate Partner, Direct Tax

Aniruddh is an Associate Partner leading the direct tax desk at KAMRIT. He is a Chartered Accountant with 11 years of experience in income tax, TDS, advance tax, scrutiny assessments, and tax audit under Section 44AB. He has represented over 80 Indian businesses in assessment and appellate proceedings.

aniruddh.bhatia@kamrit.com

Frequently asked

Is the new tax regime now the default for AY 2026-27?

Yes. Section 115BAC(1A) of the Income Tax Act, 1961, inserted by the Finance Act 2023 and refined by Finance Act 2024 and Finance Act 2025, makes the new tax regime the default for every individual, HUF, AOP (other than co-operative), BOI, and artificial juridical person. The old regime is now an opt-in. A salaried taxpayer without business income can choose between the two regimes every year by indicating the choice in the ITR. A taxpayer with business or profession income must file Form 10-IEA to opt out of the new regime, and the election once exercised is generally final until the business income ceases.

What are the new regime slabs for AY 2026-27?

Under Section 115BAC(1A), the slabs for AY 2026-27 are: up to ₹3 lakh nil, ₹3 to ₹7 lakh at 5 percent, ₹7 to ₹10 lakh at 10 percent, ₹10 to ₹12 lakh at 15 percent, ₹12 to ₹15 lakh at 20 percent, and above ₹15 lakh at 30 percent. The Section 87A rebate is enhanced to ₹25,000 for total income up to ₹7 lakh, which makes the new regime effectively nil-tax up to ₹7 lakh of taxable income. A standard deduction of ₹75,000 against salary income is available under the new regime, raising the effective zero-tax salary to approximately ₹7.75 lakh.

Which deductions are allowed under the new regime?

Most deductions and exemptions are disallowed under the new regime, including Section 80C (life insurance, PPF, ELSS), Section 80D (medical insurance), Section 80E (education loan interest), Section 80G (donations), Section 80TTA and 80TTB (savings bank and senior citizen interest), HRA under Section 10(13A), LTA under Section 10(5), and the home loan interest deduction on self-occupied property under Section 24(b). The deductions that remain available are the standard deduction of ₹75,000 against salary, employer contribution to NPS under Section 80CCD(2) up to 14 percent of salary for central government employees and 10 percent for others, the conveyance allowance for handicapped employees, the transport allowance, the daily allowance and the gratuity exemption under Section 10(10).

What is the break-even salary between the old and new regime?

For a salaried individual claiming the standard deduction only, the new regime is structurally better at every salary band because the slabs are wider and the rebate under Section 87A is more generous. The old regime can win only if the deductions claimed exceed approximately ₹4 lakh combined across Section 80C (₹1.5 lakh), Section 80D (₹25,000 to ₹1 lakh), HRA (typically ₹2 to ₹4 lakh for metro residents), home loan interest (up to ₹2 lakh), Section 80CCD(1B) NPS (₹50,000), and other minor heads. For a salaried Indian without HRA and without a home loan, the new regime almost always wins.

How does the surcharge cap work under the new regime?

Section 115BAC(1A) caps the surcharge on income above ₹5 crore at 25 percent versus 37 percent under the old regime for the same income band. The new regime therefore offers a material benefit to high-income individuals: a taxpayer with taxable income of ₹6 crore saves approximately 4.2 percent of marginal tax on the slice above ₹5 crore under the new regime. The lower surcharge applies even where the taxpayer would otherwise prefer the old regime for the deduction stack, making the new regime an automatic call for most HNIs.

When must Form 10-IEA be filed?

Form 10-IEA is required only for taxpayers with business or profession income who want to opt out of the default new regime and elect the old regime. The form must be filed on or before the due date for filing the ITR under Section 139(1), typically 31 July for non-audit cases and 31 October for audit cases. Once Form 10-IEA is filed to opt out, the taxpayer can revert to the new regime only once in their lifetime. A salaried taxpayer without business income does not file Form 10-IEA, the regime choice is simply indicated in the ITR form.

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