A Comparative Legal Analysis of Old Tax Regime vis-à-vis New Tax Regime under Income-tax Act, 1961 for Assessment Year 2026-27
1. Introduction and Legislative Background
The Finance Act, 2020 introduced Section 115BAC to the Income-tax Act, 1961, thereby establishing the “New Tax Regime” as an alternative to the existing tax structure, hereinafter referred to as the “Old Tax Regime”. Vide the Finance Act, 2023, the New Tax Regime has been made the default regime w.e.f. Assessment Year 2024-25. However, assessees having income under the head “Profits and Gains of Business or Profession” are not entitled to exercise the option to opt out of the New Regime on a year-on-year basis.
The selection of the appropriate tax regime is a statutory right conferred upon the assessee, and the same must be exercised after due consideration of the legal and financial implications. The present article undertakes a detailed examination of both regimes.
2. Deductions and Exemptions: Exclusive to the Old Tax Regime
The Old Tax Regime permits the assessee to claim various exemptions and deductions under Chapter VI-A and other provisions of the Act, which are expressly barred under the New Tax Regime as per sub-section (2) of Section 115BAC. The key exclusions include:
1. House Rent Allowance [Section 10(13A)]: Exemption in respect of HRA received is admissible subject to the conditions prescribed under Rule 2A of the Income-tax Rules, 1962. The New Regime does not permit such exemption.
2. Leave Travel Allowance [Section 10(5)]: Exemption for LTA in respect of travel within India is available only under the Old Regime.
3. Chapter VI-A Deductions:
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- Section 80C: Deduction up to Rs. 1,50,000 for eligible investments/expenditures including Life Insurance Premium, Public Provident Fund, Employees’ Provident Fund, Equity Linked Savings Scheme, Tuition Fees, etc.
- Section 80D: Deduction in respect of medical insurance premia paid for self, spouse, dependent children, and parents, subject to prescribed limits.
- Section 80CCD(1) & 80CCD(1B): Deduction for employee’s contribution to the National Pension System.
4. Interest on Housing Loan [Section 24(b)]: In case of self-occupied property, deduction up to Rs. 2,00,000 on interest paid on housing loan is permissible only under the Old Regime. Under the New Regime, no deduction is allowable for self-occupied property. However, for let-out property, interest is deductible from rental income under both regimes, though the New Regime prohibits set-off of loss from house property against any other head of income or carry forward thereof.
5. Benefits Permissible Under Both Regimes: Notwithstanding the restrictions under Section 115BAC(2), certain benefits remain available under both regimes:
1. Standard Deduction [Section 16(ia)]:
- New Tax Regime: Rs. 75,000 for AY 2026-27, as amended by the Finance Act, 2024.
- Old Tax Regime: Rs. 50,000.
2. Employer’s Contribution to NPS [Section 80CCD(2)]: Deduction is admissible to the extent of:
- 14% of Salary [Basic + DA] for employees, including non-Government employees, under the New Regime.
- 10% of Salary for non-Government employees and 14% for Government employees under the Old Regime.
3. Exempt Allowances for Official Duties:
Certain allowances prescribed under Rule 2BB, such as conveyance allowance for official duties, transport allowance for differently-abled employees, and daily allowance, remain exempt under both regimes to the extent actually incurred.
5. Statutory Position on Home Loan Interest:
The treatment of interest on housing loan constitutes a material difference between the two regimes:
| Nature of Property | Old Tax Regime | New Tax Regime |
| Self-Occupied | Deduction up to Rs. 2,00,000 u/s 24(b) permitted | No deduction permitted |
| Let-Out | Interest deductible from House Property Income; Loss can be set-off/carry forward | Interest deductible from House Property Income; Loss cannot be set-off against other heads or carried forward |
6. Conclusion and Legal Advice
In light of the foregoing, it is submitted that:
1. No Universal Rule: There exists no straitjacket formula for selection of tax regime. The determination is contingent upon the assessee’s specific facts, including salary structure, HRA component, investment profile under Section 80C, housing loan, and medical insurance under Section 80D.
2. Statutory Mandate: As per the proviso to Section 115BAC(6), the assessee must compute total income without giving effect to the excluded provisions and thereafter apply the rates specified under Section 115BAC(1A).
3. Prudent Course of Action: Every assessee is advised to undertake a comparative computation of tax liability under both regimes before filing the return of income under Section 139(1). For assessees having income from business or profession, the option once exercised shall apply to subsequent assessment years, with only one opportunity to re-enter the Old Regime.
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Disclaimer: This article is for informational purposes only and does not constitute legal advice. Stakeholders should refer to the official GSTN Advisory and consult their tax advisor for specific situations.
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