New Tax Regime Explained: Tax Slabs, ₹12 Lakh Rebate, Deductions & Old vs New Comparison

The new tax regime is the default tax regime for most individual taxpayers in India. If you file your Income Tax Return (ITR) without specifically opting for the old tax regime (where permitted), your tax is generally computed under the new tax regime. In most cases, taxpayers who wish to continue under the new tax regime do not need to take any additional action. Those who want to opt for the old tax regime must choose it while filing their return, subject to the applicable provisions of the Income-tax Act.

One of the biggest changes introduced through Budget 2025 was the enhancement of the Section 87A rebate under the new tax regime. As a result, individuals with a taxable income of up to Rs 12 lakh under the new regime can effectively pay zero income tax, subject to the conditions of the rebate. For salaried individuals, the benefit extends to an income of up to Rs 12.75 lakh because the standard deduction available under the new tax regime further reduces taxable income.

This change has significantly increased the number of taxpayers who may find the new tax regime more beneficial. However, whether it is the better choice still depends on your income, eligible deductions, exemptions and overall tax planning.

This guide explains the new tax regime in simple language with practical examples, official tax slabs and real calculations. By the end, you'll be able to understand how your tax is calculated and decide whether staying in the new tax regime or opting for the old tax regime is the better choice for your situation.

New Tax Regime Slab Rates for FY 2025-26 (AY 2026-27)

The following income tax slab rates are officially applicable under the new tax regime for FY 2025-26 (AY 2026-27). As of Budget 2026, the same slab structure continues for FY 2026-27 without any changes.

After calculating tax using the above slab rates, a 4% Health and Education Cess is added to the tax amount. If your total income exceeds the prescribed limits, surcharge may also apply. Under the new tax regime, the maximum surcharge rate is capped at 25%.

Unlike the old tax regime, the new tax regime follows a uniform slab structure for all individual taxpayers. The same tax rates apply regardless of age or gender. This means senior citizens and super senior citizens do not receive a higher basic exemption limit under the new tax regime, unlike the age-based benefits available under the old tax regime.

How Tax Is Calculated Under the New Tax Regime

How Zero Tax Up to Rs 12.75 Lakh Actually Works

Many taxpayers confuse the income tax slab rates with the rebate under Section 87A. These are two different provisions. The slab rates determine how much tax is calculated on your taxable income, while the rebate can reduce or completely eliminate the tax payable if you meet the prescribed conditions.

Under the new tax regime, income up to Rs 4 lakh is taxed at a nil rate. Income above this limit is taxed according to the applicable slab rates. Therefore, even if your taxable income is Rs 10 lakh or Rs 12 lakh, tax is first calculated using the slab rates. The reason many taxpayers still end up paying no income tax is the rebate available under Section 87A of the Income-tax Act.

For FY 2025-26 (AY 2026-27), an eligible resident individual can claim a rebate of up to Rs 60,000 under Section 87A under the new tax regime, subject to the conditions specified in the Income-tax Act. Since a rebate directly reduces the tax liability and not the taxable income, it can reduce the final income tax payable to zero if the calculated tax does not exceed the eligible rebate amount.

For example, if your taxable income is exactly Rs 12 lakh, the income tax is calculated as follows:

• Income up to Rs 4 lakh: Nil
• Tax on Rs 4 lakh to Rs 8 lakh @ 5%: Rs 20,000
• Tax on Rs 8 lakh to Rs 12 lakh @ 10%: Rs 40,000
• Total tax before rebate: Rs 60,000
• Less: Section 87A rebate: Rs 60,000
• Final income tax payable: Rs 0 (before cess, since no tax remains payable)

Salaried individuals receive an additional benefit through the standard deduction of Rs 75,000 available under the new tax regime. For example, if a salaried employee has a gross taxable salary of Rs 12.75 lakh, the standard deduction reduces the taxable income to Rs 12 lakh. The income tax is then calculated on Rs 12 lakh, and the eligible rebate under Section 87A can reduce the final tax liability to zero.

In simple terms: Under the new tax regime, an eligible resident individual with taxable income of up to Rs 12 lakh can pay zero income tax because of the rebate under Section 87A. For many salaried taxpayers, the standard deduction effectively increases this benefit to a gross salary of up to Rs 12.75 lakh, subject to the applicable conditions.

What Happens If Your Income Is Just Above Rs 12 Lakh?

Many taxpayers worry that earning slightly more than Rs 12 lakh will suddenly result in a large tax liability. To prevent this situation, the Income-tax Act provides the benefit of marginal relief under the new tax regime for eligible taxpayers.

Marginal relief ensures that if your income exceeds the rebate threshold by a small amount, the additional income tax payable does not become higher than the additional income earned above the threshold. In simple words, a small increase in income should not leave you with a disproportionately higher tax liability.

For example, if your taxable income is Rs 12.50 lakh, your income exceeds the rebate threshold by Rs 50,000. Marginal relief may reduce your tax liability so that the additional tax payable does not exceed the additional income above the threshold, subject to the conditions and method prescribed under the Income-tax Act.

This provision helps ensure a smoother transition once your income crosses the rebate limit and avoids a sudden jump in tax liability.

Tax Calculation Examples Under the New Tax Regime

The following illustrations show how income tax is calculated for salaried individuals claiming the standard deduction of Rs 75,000. These examples assume that no other deductions, exemptions, surcharge or special tax provisions apply.

Note: These calculations are illustrative and assume income is taxable only under the normal slab rates of the new tax regime. The final tax liability may differ if surcharge, special tax rates, eligible deductions, or other provisions of the Income-tax Act apply.

Deductions You Can Still Claim Under the New Tax Regime

Although the new tax regime removes many popular deductions and exemptions, a few important tax benefits are still available. These are permitted under the Income-tax Act and the Income Tax Department's guidance.

• Standard Deduction of Rs 75,000: Salaried employees and eligible pensioners can claim a standard deduction of Rs 75,000 under the new tax regime. Employers generally consider this while computing TDS, and it is also available while filing the Income Tax Return.
• Employer's NPS Contribution [Section 80CCD(2)]: If your employer contributes to your National Pension System (NPS) account, the contribution remains deductible under the new tax regime, subject to the limits prescribed under Section 80CCD(2). This continues to be one of the most valuable tax-saving benefits available to salaried employees.
• Agniveer Corpus Fund [Section 80CCH]: Contributions made by an Agniveer and by the Central Government to the Agniveer Corpus Fund (Seva Nidhi) continue to qualify for deduction under the applicable provisions.
• Interest on Let-Out House Property: Interest paid on a home loan for a let-out property can still be considered while computing income under the head "Income from House Property." However, the treatment of any resulting loss and its adjustment against income under other heads is subject to the provisions applicable under the new tax regime.
• Additional Employee Cost [Section 80JJAA]: Eligible businesses can continue to claim deduction for additional employee cost under Section 80JJAA, subject to the prescribed conditions.

Other Tax Benefits That Continue Under the New Tax Regime

• Transport Allowance for Specially Abled Employees: The exemption for transport allowance granted to employees with specified disabilities continues under the applicable rules.
• Certain Allowances: Specific allowances such as conveyance allowance for official duties and some travel-related allowances continue to receive tax treatment as provided under the Income-tax Rules.
• Gifts: Gifts continue to be taxed under the normal provisions of the Income-tax Act. In general, gifts received from non-relatives exceeding the prescribed threshold may become taxable under Section 56, while specified exemptions continue to apply.

Deductions and Exemptions You Cannot Claim Under the New Tax Regime

The lower tax rates under the new tax regime come at the cost of giving up many commonly claimed deductions and exemptions that remain available under the old tax regime.

• Section 80C: No deduction is available for investments such as PPF, ELSS, NSC, life insurance premiums, Sukanya Samriddhi Account deposits, five-year tax-saving fixed deposits, home loan principal repayment or eligible tuition fees.
• Section 80D: Health insurance premiums paid for yourself, your spouse, children or parents are not deductible.
• House Rent Allowance (HRA): HRA exemption is not available under the new tax regime, even if you live in rented accommodation.
• Leave Travel Allowance (LTA): The exemption available for eligible travel expenses within India cannot be claimed.
• Interest on Home Loan for Self-Occupied Property [Section 24(b)]: The deduction for interest paid on a home loan for a self-occupied residential property is not available.
• Section 80E: Deduction for interest paid on an education loan is not available.
• Sections 80EE and 80EEA: Additional deductions relating to eligible home loans are not available.
• Section 80EEB: Deduction for interest paid on loans taken to purchase eligible electric vehicles is not available.
• Section 80G: Most deductions for donations to approved charitable institutions cannot be claimed.
• Section 80GG: Deduction for rent paid by individuals not receiving HRA is not available.
• Your Own NPS Contribution: Deductions under Sections 80CCD(1) and 80CCD(1B) for an individual's own NPS contribution are not available under the new tax regime.
• Most Other Chapter VI-A Deductions: Except for deductions specifically permitted under the new tax regime, most deductions under Chapter VI-A cannot be claimed.

Old Tax Regime Slab Rates for FY 2025-26 (AY 2026-27)

The old tax regime continues to be available for eligible taxpayers. Salaried individuals and taxpayers without business or professional income can generally choose between the old and new tax regimes while filing their Income Tax Return (ITR). Taxpayers having business or professional income are subject to separate provisions regarding the exercise of this option under the Income-tax Act.

The following income tax slab rates apply under the old tax regime for FY 2025-26 (AY 2026-27).

Under the old tax regime, an eligible resident individual with a taxable income of up to Rs 5 lakh can claim a rebate under Section 87A, subject to the conditions specified in the Income-tax Act. The maximum rebate available is Rs 12,500, which can reduce the income tax liability to zero for eligible taxpayers.

Like the new tax regime, a 4% Health and Education Cess is added to the income tax payable. If your total income exceeds the prescribed thresholds, surcharge also becomes applicable. Under the old tax regime, the maximum surcharge rate can go up to 37%, whereas under the new tax regime it is capped at 25%.

New Tax Regime vs Old Tax Regime: Which One Should You Choose?

There is no single tax regime that is best for everyone. The right choice depends on your income, salary structure, eligible deductions, exemptions and overall financial situation. Before filing your Income Tax Return (ITR), it is advisable to calculate your tax liability under both regimes and choose the one that results in the lower tax payable.

When the New Tax Regime May Be a Better Choice

• Your taxable income falls within the rebate limits: Eligible taxpayers with taxable income up to Rs 12 lakh under the new tax regime can claim the rebate under Section 87A, subject to the prescribed conditions. For many salaried individuals, the standard deduction of Rs 75,000 effectively extends this benefit to a gross salary of around Rs 12.75 lakh.
• You do not claim many deductions or exemptions: If you have limited tax-saving investments or do not claim deductions such as Section 80C, Section 80D, HRA exemption or home loan interest for a self-occupied property, the lower slab rates under the new tax regime may result in a lower tax liability.
• You prefer a simpler tax filing process: The new tax regime removes the need to maintain proof for most deductions and exemptions, making tax compliance easier for many taxpayers.
• You are a young professional or a taxpayer with minimal tax-saving investments: Taxpayers who have not yet built a large investment portfolio often find the new tax regime more suitable.
• You have a very high income: For taxpayers liable to surcharge, the new tax regime may be beneficial because the maximum surcharge rate is capped at 25%, compared with 37% under the old tax regime.

When the Old Tax Regime May Be a Better Choice

• You regularly claim deductions under Section 80C: Investments in PPF, ELSS, life insurance, NSC, Sukanya Samriddhi Account, eligible tuition fees or home loan principal repayment can significantly reduce taxable income under the old regime.
• You receive House Rent Allowance (HRA): If you pay rent and qualify for a substantial HRA exemption, the old tax regime may provide a lower overall tax liability.
• You pay interest on a home loan for a self-occupied property: The deduction under Section 24(b) is available only under the old tax regime.
• You claim deductions under Section 80D: Health insurance premiums paid for yourself, your family and your parents can reduce your taxable income under the old regime.
• You are eligible for multiple deductions and exemptions: Taxpayers who can claim several deductions together may find that the old tax regime results in lower tax, even if the slab rates are higher.

Practical Tip: Instead of relying on a fixed deduction threshold, calculate your tax liability under both tax regimes using your actual income, deductions and exemptions. Since the break-even point differs from one taxpayer to another, comparing both calculations is the most reliable way to identify the better option.

For the most accurate comparison, use the official Income Tax Calculator provided by the Income Tax Department.

Quick Decision Guide

How to Switch to the Old Tax Regime

The new tax regime is the default tax regime for most individual taxpayers. If you wish to be taxed under the old tax regime, you must exercise the option in accordance with the provisions of the Income-tax Act.

For Salaried Individuals and Taxpayers Without Business or Professional Income

If you do not have income from a business or profession, you can generally choose between the old and new tax regimes every financial year while filing your Income Tax Return (ITR). To opt for the old tax regime, simply select the appropriate option while filing your return on the Income Tax e-Filing Portal.

To exercise this option, your ITR should generally be filed on or before the applicable due date prescribed under the Income-tax Act. If the prescribed conditions are not met, the option to choose the old tax regime for that assessment year may not be available.

For Taxpayers Having Business or Professional Income

If you have income from a business or profession, the option to move between the old and new tax regimes is governed by the provisions of Section 115BAC of the Income-tax Act.

To opt for the old tax regime, you are generally required to furnish Form 10-IEA on or before the applicable due date for filing your Income Tax Return. Since the option for taxpayers with business or professional income is subject to specific statutory conditions, it should be exercised carefully after evaluating the long-term tax implications.

Inform Your Employer for Correct TDS

If you are a salaried employee, you should inform your employer about your preferred tax regime during the employer's tax declaration or TDS estimation process. This enables the employer to deduct tax at source (TDS) based on the regime you intend to follow.

Even if your employer deducts TDS under one tax regime, your final tax liability is determined when you file your Income Tax Return. If eligible, you can choose the applicable tax regime while filing your return, subject to the provisions of the Income-tax Act.

Can You Change Your Tax Regime Every Year?