Two ways to be taxed
Since the 2020 Budget, India has had two parallel income tax systems, and every year salaried taxpayers must choose between them. The old regime offers higher tax rates but lets you reduce your taxable income with dozens of deductions and exemptions. The new regime offers lower rates and a big rebate but strips away almost all of those deductions. Neither is universally better — it depends entirely on how much you can deduct.
For FY 2025-26 (Assessment Year 2026-27), the new regime is the default, and the maths now favours it for most people. But “most” isn’t “all,” and the gap can be tens of thousands of rupees. This guide explains both systems so you can choose deliberately. To see your own numbers worked out instantly, use the Income Tax Calculator; this article explains what it’s doing under the hood.
The new regime slabs for FY 2025-26
The new regime was restructured generously in the 2025 Budget. The slabs are:
- Up to ₹4 lakh — nil
- ₹4 lakh to ₹8 lakh — 5%
- ₹8 lakh to ₹12 lakh — 10%
- ₹12 lakh to ₹16 lakh — 15%
- ₹16 lakh to ₹20 lakh — 20%
- ₹20 lakh to ₹24 lakh — 25%
- Above ₹24 lakh — 30%
Tax is marginal, meaning each rate applies only to the income within that band — not your whole income. So someone earning ₹10 lakh doesn’t pay 10% on the lot; they pay nothing on the first ₹4 lakh, 5% on the next ₹4 lakh, and 10% on the last ₹2 lakh.
Salaried taxpayers also get a standard deduction of ₹75,000 under the new regime, deducted before the slabs apply.
The magic of the ₹12 lakh rebate
The headline feature of the new regime is the enhanced Section 87A rebate. For FY 2025-26, if your taxable income is ₹12 lakh or below, the rebate cancels your tax entirely — you pay zero. Combined with the ₹75,000 standard deduction, a salaried person earning up to about ₹12.75 lakh owes no income tax at all.
What happens just above ₹12 lakh? Without protection, earning ₹1 more than ₹12 lakh would suddenly cost a large amount of tax — an absurd cliff. To prevent that, marginal relief ensures your tax never exceeds the amount by which your income crosses ₹12 lakh. The Income Tax Calculator applies this relief automatically, which is why the tax just above the threshold rises gently rather than jumping.
The old regime slabs
The old regime’s slabs are unchanged and steeper:
- Up to ₹2.5 lakh — nil
- ₹2.5 lakh to ₹5 lakh — 5%
- ₹5 lakh to ₹10 lakh — 20%
- Above ₹10 lakh — 30%
Its standard deduction is ₹50,000, and its 87A rebate makes income up to ₹5 lakh tax-free. On rates alone, the old regime looks worse. Its appeal is entirely in what you can subtract before those rates apply.
What the old regime lets you deduct
This is where the old regime earns its keep. It allows a long list of deductions and exemptions, the big ones being:
- Section 80C — up to ₹1.5 lakh for EPF, PPF, ELSS, life insurance, home-loan principal, and more. If you want to understand one of those instruments, our explainer on how PPF works is a good start.
- Section 80D — health insurance premiums for you and your parents.
- House Rent Allowance (HRA) — a substantial exemption for renters, which the HRA Calculator can size up.
- Home-loan interest (Section 24) — up to ₹2 lakh on a self-occupied property.
- Section 80CCD(1B) — an extra ₹50,000 for NPS contributions.
Stack these up and a high earner can shave several lakhs off their taxable income — sometimes enough to beat the new regime despite its lower rates.
A 4% cess on top of both
Whichever regime you choose, a Health and Education Cess of 4% is added to your computed tax. It’s small but real: ₹1,00,000 of tax becomes ₹1,04,000. The Income Tax Calculator includes it in every result so the figure you see is the figure you’d pay.
How to actually decide
The decision comes down to one question: do your deductions save you more than the new regime’s lower rates and bigger rebate?
- Few or no deductions? The new regime almost always wins, often by a lot, thanks to the ₹12 lakh rebate.
- Heavy deductions (full 80C, big HRA, home-loan interest)? Run both. The old regime can still pull ahead, especially in the ₹15–25 lakh income band.
- Income at or under ₹12.75 lakh and salaried? The new regime likely makes you tax-free — hard to beat with any deductions.
The honest, fast way to decide is to compute both for your exact income and deductions, which is exactly what the Income Tax Calculator does — it shows both regimes side by side and tells you which saves more.
Informational only — not tax advice
This guide and the calculator are for general information. They cover the common salaried case but don’t model surcharge on very high incomes, capital-gains tax, or every niche exemption. Tax rules change and individual situations vary, so confirm your liability with a qualified chartered accountant or tax professional before filing or making decisions. If you’re brushing up on India’s tax landscape more broadly, our explainer on what GST is covers the other side of the system.
A worked example
Consider a salaried person earning ₹16 lakh a year with no special deductions. Under the new regime, the ₹75,000 standard deduction brings taxable income to ₹15.25 lakh. The slabs apply marginally: nil on the first ₹4 lakh, 5% on the next ₹4 lakh (₹20,000), 10% on the next ₹4 lakh (₹40,000), and 15% on the remaining ₹3.25 lakh (₹48,750). That’s ₹1,08,750 in tax, plus 4% cess (₹4,350), for about ₹1,13,100.
Under the old regime with no deductions, the ₹50,000 standard deduction leaves ₹15.5 lakh taxable: 5% on the ₹2.5 lakh slab (₹12,500), 20% on the ₹5 lakh slab (₹1,00,000), and 30% on the remaining ₹5.5 lakh (₹1,65,000) — ₹2,77,500 plus cess, well over ₹2.8 lakh. Here the new regime wins decisively.
But change one thing — suppose this person can claim ₹4 lakh of deductions (full 80C, 80D, home-loan interest, and HRA). The new-regime figure is unchanged, because it ignores those deductions. The old-regime taxable income drops to ₹11.5 lakh, cutting its tax to roughly ₹1.5 lakh plus cess. The gap narrows sharply, and with even larger deductions the old regime can overtake. This is precisely why you should never assume — run both for your real numbers in the Income Tax Calculator and let the comparison decide.
Don’t forget advance tax
If your total tax liability for the year exceeds ₹10,000, you’re generally expected to pay it in instalments through the year as advance tax, not in one lump at filing. A quick estimate from the Income Tax Calculator early in the year helps you size those instalments and avoid interest under Sections 234B and 234C.