Old vs New Tax Regime FY 2026-27: Which One Should You Choose?

Choosing between the old and new tax regime is one of the most important financial decisions salaried individuals face in India. For FY 2026-27, the government has made the new tax regime even more attractive by raising the tax-free income limit to Rs. 12.75 lakhs for salaried employees, while the old regime still offers a wide range of deductions and exemptions. This article breaks down the key differences, who benefits from each, and how to make the right choice for your income profile.

Key Comparison at a Glance: FY 2026-27

What Changed in the New Tax Regime for FY 2026-27?

The new tax regime got a significant upgrade in Budget 2025. The most notable change is the higher rebate under Section 87A, which now covers individuals with taxable income up to Rs. 12 lakhs. When you add the Rs. 75,000 standard deduction for salaried employees, the effective tax-free limit becomes Rs. 12.75 lakhs. This makes the new regime genuinely attractive for middle-income earners for the first time.

The new regime is also now the default option. If you do not actively inform your employer which regime you prefer, your tax will be calculated under the new regime automatically.

Allowances and Exemptions: What Is Still Available?

Exemptions Available in BOTH Regimes

Even under the new tax regime, several key exemptions remain intact:

1. Gratuity exemption u/s 10(10) – fully or partially exempt as per prescribed limits
2. Leave encashment u/s 10(10AA) – available within limits
3. Voluntary retirement exemption u/s 10(10C)
4. Conveyance and daily allowance for official duties
5. Transport allowance for specially-abled persons
6. Gifts up to Rs. 50,000 from employer
7. Standard deduction on family pension income
8. Employer’s NPS contribution u/s 80CCD(2)
9. Agniveer Corpus Fund contribution u/s 80CCH
10. Car lease and official perquisites (valued as per Rule 3)
11. Meal allowance / food vouchers (up to Rs. 200 per meal for official use)

Exemptions Only in the Old Regime

These important benefits are available only if you stick to the old regime:

1. HRA Exemption u/s 10(13A) – if you pay rent, this can be significant
2. Leave Travel Allowance (LTA) u/s 10(5)
3. Interest on home loan u/s 24(b) for self-occupied property (up to Rs. 2 lakhs)
4. Entertainment Allowance and Professional Tax deduction u/s 16(ii) and 16(iii)

Deductions: Old Regime vs New Regime

*Set-off of loss from house property is restricted under both regimes as per applicable provisions.

Which Regime Should You Choose?

Choose the New Regime if:

1. Your taxable income is below Rs. 12.75 lakhs (salaried) – you pay zero tax
2. You do not have large home loan interest or HRA claims
3. You prefer simplicity without maintaining investment proof documents
4. Your employer’s NPS contribution is substantial (available in both regimes)

Choose the Old Regime if:

1. You have a significant home loan on a self-occupied property (up to Rs. 2 lakh interest deduction)
2. You pay rent in a metro city and claim HRA exemption
3. You consistently max out 80C (Rs. 1.5 lakh) and 80D (medical insurance)
4. Your total deductions and exemptions exceed Rs. 3.75 lakhs (the break-even point over new regime benefits)

As a general rule of thumb: if your eligible deductions and exemptions total more than the difference between the two standard deductions (Rs. 25,000) plus the rebate advantage of the new regime, the old regime will likely save you more tax. Use a tax calculator with your actual numbers before deciding.

Practical Tips Before You Decide

1. Always calculate your tax liability under both regimes using an online tax calculator before the financial year begins.
2. Inform your employer of your regime choice at the start of the year to avoid TDS complications.
3. You can switch regimes when filing your income tax return if you have no business income.
4. If you have business or professional income, switching out of the new regime is allowed only once.
5. Factor in investments already made – if you have ongoing LIC, PPF, or home loan EMIs, the old regime may already justify itself.

Conclusion

For FY 2026-27, the new tax regime is a clear winner for most salaried individuals earning up to Rs. 12.75 lakhs, as they effectively pay zero income tax. For those with higher incomes, the right choice depends entirely on the actual value of your deductions – particularly HRA, home loan interest, and 80C investments. Do not make this decision based on habit. Run the numbers for your specific situation, factor in all eligible deductions, and choose the regime that puts more money in your hands. When in doubt, consult a chartered accountant, especially if your income profile includes multiple sources or significant investments.

You can call or whatsapp at +91 9769647582 for any ITR filing or Tax planning query or service.

Frequently Asked Questions

Can I switch from the new regime to the old regime every year?

Yes, salaried individuals with no business income can switch between regimes every year at the time of filing their income tax return. However, if you have business income, you can switch out of the new regime only once.

Is HRA available under the new tax regime?

No. House Rent Allowance (HRA) exemption under Section 10(13A) is not available under the new tax regime. If you pay significant rent, this makes the old regime more beneficial in many cases.

What is the effective tax-free income limit for salaried employees in FY 2026-27?

Under the new regime, salaried employees earning up to Rs. 12.75 lakhs effectively pay no income tax. This is because the Rs. 60,000 rebate under Section 87A covers tax up to Rs. 12 lakh, and the Rs. 75,000 standard deduction further adds to the benefit.

Is the employer’s NPS contribution deductible under the new regime?

Yes. The employer’s contribution to NPS under Section 80CCD(2) is available as a deduction under both the old and new tax regimes. This is one of the most valuable benefits that carries over to the new regime.

Is gratuity taxable under the new regime?

No. Gratuity received at retirement or death is exempt under Section 10(10) in both the old and new tax regimes, subject to prescribed limits.