Old vs New Tax Regime FY 2026-27: Salaried Employees’ Checklist

Old Regime vs New Regime for Salaried Employees in FY 2026-27: A CA’s Optimisation Checklist

Summary:The article explains that no changes were made to the income tax slab rates in the Union Budget 2026, and the tax structure introduced in Budget 2025 continues for FY 2026-27 (AY 2027-28) under both the old and new tax regimes. It highlights three key changes effective from 1 April 2026: the replacement of the Income-tax Act, 1961 by the Income-tax Act, 2025 with renumbered provisions, the extension of the 50% HRA exemption to Bengaluru, Pune, Hyderabad, and Ahmedabad, and the requirement to disclose the taxpayer’s relationship with the landlord for HRA claims. The article compares tax slabs, deductions, rebates, surcharge provisions, and break-even points across both regimes. It concludes that the new regime generally benefits taxpayers with fewer deductions, while the old regime remains advantageous for those claiming substantial HRA, home loan interest, Section 80C, and Section 80D deductions. Annual comparative tax computation remains essential before choosing a regime.

What changed, and what didn’t, for FY 2026-27

The Union Budget 2026, presented on 1 February 2026, made no changes to the income tax slab rates under either regime. The slab structure announced in Budget 2025 continues through FY 2026-27 (Assessment Year 2027-28). The basic exemption limit remains Rs. 4 lakh under the new regime and Rs. 2.5 lakh under the old regime. The Section 87A rebate remains at Rs. 60,000 under the new regime (effectively making taxable income up to Rs. 12 lakh tax-free) and Rs. 12,500 under the old regime (taxable income up to Rs. 5 lakh).

Three structural items did change with effect from 1 April 2026, and all of them affect how a salaried taxpayer should approach the regime choice this year:

1. The Income Tax Act, 2025 has replaced the Income Tax Act, 1961. Section numbering has changed — Section 115BAC (new regime) is now Section 202 of the new Act, Section 87A is now Section 157, and so on. The substantive law is largely the same, but practitioners and software vendors are still updating cross-references. For salaried taxpayers, the practical impact is limited to Form 16, Form 26AS, and ITR utilities reflecting the new section numbers.

2. The 50% HRA exemption has been extended to four additional cities — Bengaluru, Pune, Hyderabad, and Ahmedabad — taking the total list to eight (Delhi, Mumbai, Kolkata, Chennai, plus the new four). This is meaningful for taxpayers in those four cities under the old regime: it can swing the regime decision by Rs. 50,000 to Rs. 1,50,000 of additional exemption depending on rent levels.

3. Disclosure of the taxpayer’s relationship with the landlord is now mandatory for HRA exemption. This is an anti-fraud measure aimed at the practice of paying rent to family members; the underlying exemption rule is unchanged, but the disclosure makes it harder to claim HRA where the landlord is a related party without genuine rental commercial substance.

The rest of this article walks through the regime decision for FY 2026-27 with the updated slabs, the break-even arithmetic, deduction-by-deduction analysis, and special situations like ESOPs and capital gains.

The slab structures side by side

New Tax Regime — FY 2026-27

Standard deduction: Rs. 75,000 for salaried employees and pensioners. Section 87A rebate: Rs. 60,000 for taxable income up to Rs. 12 lakh. Effective tax-free salary: Rs. 12.75 lakh. Surcharge: 10% above Rs. 50 lakh, 15% above Rs. 1 crore, 25% above Rs. 2 crore — capped here. The 37% surcharge does not apply under the new regime.

Old Tax Regime — FY 2026-27

Standard deduction: Rs. 50,000 for salaried employees and pensioners. Section 87A rebate: Rs. 12,500 for taxable income up to Rs. 5 lakh. Surcharge: 10%, 15%, 25%, and 37% (the 37% applies above Rs. 5 crore). For senior citizens (60-80), basic exemption under the old regime is Rs. 3 lakh. For super senior citizens (above 80), it is Rs. 5 lakh. Under the new regime, age-based exemption variations do not apply.

The break-even question

The simplest way to frame the regime decision: under what level of deductions does the old regime beat the new regime at a given income level? Take a worked example for a salaried employee with gross salary of Rs. 15,00,000.

Under the new regime: gross salary Rs. 15,00,000, less standard deduction Rs. 75,000, gives taxable income Rs. 14,25,000. Tax computed as Rs. 20,000 (5% on Rs. 4–8 lakh) + Rs. 40,000 (10% on Rs. 8–12 lakh) + Rs. 33,750 (15% on Rs. 12–14.25 lakh) = Rs. 93,750. Add 4% cess of Rs. 3,750. Total tax: Rs. 97,500.

Under the old regime, for the same employee to match Rs. 97,500 of tax, total deductions (including standard deduction of Rs. 50,000) work out to approximately Rs. 3,75,000. This means that for a Rs. 15 lakh salary, the old regime is better only if the employee can actually claim Rs. 3,25,000 of deductions over and above the standard deduction. In practice, that requires a combination of full Section 80C (Rs. 1,50,000), full Section 80D family floater + parents (Rs. 50,000 to Rs. 75,000), and HRA exemption of at least Rs. 1,00,000 to Rs. 1,50,000. For most salaried employees living on rent in a metro and contributing to EPF, this is achievable. For employees in non-metro cities or in employer-provided accommodation, it is not.

Similar break-even calculations for other salary levels:

The break-even rises with income but flattens at higher levels because most deductions (Section 80C, 80D, NPS) are capped in absolute terms. The marginal benefit of the old regime above Rs. 25 lakh is therefore narrow unless the taxpayer has substantial home loan interest under Section 24(b).

Deduction by deduction — what still matters

Five categories of deductions are worth focusing on for the regime decision under FY 2026-27 rules.

Section 80C (Old regime only). Capped at Rs. 1,50,000. PPF, EPF (employee contribution), ELSS, life insurance premium, principal repayment on housing loan, children’s tuition, NSC. For a salaried employee with EPF deduction at 12% of basic, the 80C ceiling is usually filled or close to it without additional investment. This is the bedrock of the old-regime case.

Section 80D — Health insurance (Old regime only). Self, spouse, and children: up to Rs. 25,000 (Rs. 50,000 if any insured is a senior citizen). Parents: additional Rs. 25,000 (Rs. 50,000 if senior). A taxpayer covering self and senior-citizen parents can therefore claim up to Rs. 75,000. For most metro families, this category is genuinely useful and underclaimed.

HRA exemption (Old regime only). Least of (a) actual HRA received, (b) rent paid minus 10% of basic salary, (c) 50% of basic for the eight notified cities including the four new additions, or 40% for other cities. For a Rs. 15 lakh salary in Pune or Bengaluru, HRA exemption of Rs. 1.5 to 2.5 lakh is realistic and is by itself enough to tip the regime calculation.

Section 24(b) — Home loan interest (Old regime only). Up to Rs. 2,00,000 for a self-occupied house. This is the single largest deduction available outside Section 80C and shifts the break-even calculation substantially. A taxpayer with a fresh home loan in the high-interest phase of EMI will almost always benefit from the old regime up to Rs. 25-30 lakh of salary.

Section 80CCD(2) — Employer NPS contribution (Both regimes, with a regime-specific cap). Under the new regime, the cap is 14% of basic + DA for all employees (government and private sector) from FY 2025-26. Under the old regime, the 14% cap applies only to Central and State Government employees — private sector employees remain capped at 10%. This is the only major deduction preserved in the new regime, and the 14% cap under the new regime is the single most efficient tax structuring lever available to private-sector salaried employees. A taxpayer whose employer is willing to restructure CTC to route 14% of basic through an NPS contribution saves tax at the marginal rate without any change in take-home or new-regime status.

For 80C employee contribution, HRA, 80D, and home loan interest — none of these are available in the new regime. The new regime preserves only Section 80CCD(2), conveyance allowance for the differently-abled, transport allowance for handicapped employees, and a few employer-provided perquisites.

ESOP holders — a specific word

For employees of startups and listed companies receiving ESOPs, the regime decision has an extra layer. ESOP perquisite — the difference between fair market value at exercise and exercise price — is taxed as salary in the year of exercise, irrespective of regime. The mechanics are identical under both regimes. The capital gain on subsequent sale is taxed under the capital gains regime, which is also regime-neutral.

However, the cash-flow shock of ESOP perquisite tax frequently pushes the employee into a higher slab in the year of exercise. In that year specifically, the old regime may lose its edge — because the bulk of the tax sits at the 30% slab where deductions of Rs. 1.5–2 lakh make a relatively small percentage difference. The right approach for ESOP-heavy employees is to compute regime tax under both options for the specific year of exercise, not assume the previous year’s choice still holds. We routinely do this for clients in our payroll engagement at Patron, and the regime can flip back and forth between exercise years and non-exercise years.

The deferment available under Section 192(1C) for ESOPs allotted by eligible DPIIT-recognised startups (where TDS on perquisite is deferred until the earliest of 48 months from the end of the assessment year of allotment, the date of sale of the shares, or the date the employee ceases employment) is regime-neutral but valuable. Employees of DPIIT-recognised startups should always check eligibility before paying ESOP perquisite tax up-front under either regime.

Capital gains — regime doesn’t matter

A common misconception worth addressing: short-term and long-term capital gains taxed at special rates (20% STCG on listed equity under Section 111A for transfers from 23 July 2024, 12.5% LTCG on listed equity above Rs. 1.25 lakh, 12.5% LTCG on real estate from July 2024 onwards) are taxed at those rates regardless of regime. No deductions, no choice. The regime choice only affects how the slab-rate income components are taxed.

This matters for employees with significant equity portfolios or property sale income — the regime decision should be made on the salary side alone, with capital gains tax computed separately and added on top.

Switching: Form 10-IEA mechanics

Salaried employees without business income can switch between regimes every year at the time of ITR filing. No Form 10-IEA is required for them — the regime is selected directly in the ITR utility. The new regime is the default; explicit selection of the old regime is required each year.

Taxpayers with business or professional income have a one-time restriction: once they opt out of the new regime, they can return only once, and after that they are locked into the new regime. Form 10-IEA must be filed before the due date of the return for the year in which the opt-out is made.

For payroll purposes, employees declare their regime intent at the start of the year (in the investment declaration), and TDS is computed accordingly. A change at ITR-filing time is permissible — the difference is reconciled as refund or additional payment.

The decision matrix

For FY 2026-27, the practitioner’s quick rules:

• Salary up to Rs. 7.5 lakh — new regime, almost always (rebate covers tax in both).
• Salary Rs. 7.5 to Rs. 12.75 lakh — new regime, unless the taxpayer has home loan interest of Rs. 1.5 lakh+ already deductible.
• Salary Rs. 12.75 to Rs. 20 lakh — case-by-case. Old regime wins where total deductions exceed approximately Rs. 3.25 lakh.
• Salary Rs. 20 lakh to Rs. 50 lakh — old regime wins for home-loan + HRA + full 80C + 80D claimants; new regime wins for non-metro, no-home-loan employees.
• Salary above Rs. 50 lakh — surcharge math matters. Old regime can attract up to 37% surcharge; new regime is capped at 25%. For very high earners, the new regime’s surcharge cap alone can make it the cheaper option even where deductions appear to favour the old regime.

Implementation note for HR and payroll teams

For employers running payroll for salaried employees, the regime selection should not be a single annual checkbox. Where the employer maintains a structured CTC framework, the regime decision interacts with salary structure design — particularly with how HRA, LTA, and reimbursements are constructed.

We have implemented this on Zoho Payroll for several clients, where the system runs both regime calculations on each employee in parallel and shows the optimal one with the projected annual tax. The employee then picks, knowing the actual rupee impact. This single change reduces both employee dissatisfaction with TDS deductions and the volume of regime-related queries to HR.

For founders running their own payroll without a structured tool, the same logic can be implemented in Excel using the slab rates above. The discipline is annual, not lifetime — last year’s regime choice tells you nothing about this year’s optimal choice.

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About the author: CA Sundram Gupta (FCA) is the Founder of Patron Accounting LLP, a chartered accountancy and company secretarial firm with offices in Pune, Mumbai, Delhi, and Gurugram. Patron handles income tax filing, payroll, EOR services, and ESOP advisory for salaried individuals, startups, and SMEs across India.