Old Vs New Income Tax Regime

Which Tax Regime is Better, Old or New in 2026?

The old income tax regime offers more deductions and benefits, while the new regime simplifies the tax structure with lower rates but fewer deductions

Written by : Knowledge Centre Team

2026-07-07

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10 minutes read

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The Indian government offers individual taxpayers a choice between two income tax regimes, the Old Tax Regime and the New Tax Regime, each with its own set of tax slabs, rates, and deduction rules.

Under the current framework for FY 2026-27 (Tax Year 2026-27 under the Income Tax Act, 2025), the New Tax Regime under Section 115BAC of the Income Tax Act, 1961 [Section 202, Income Tax Act, 2025] is the default tax regime for all individual taxpayers, HUFs, and AOPs. Unless a taxpayer explicitly opts out, their tax will be computed under the new regime.

Understanding income tax is extremely crucial, but it can often be overwhelming for taxpayers, and many factors can make it confusing. For instance, several people end up calculating the wrong value by deducting the allowable deductions from total tax liability instead of their Gross Total Income. 

This article aims to explain the older tax system and compare it with the new regime in the simplest possible terms.

Key Takeaways

  • The new tax regime offers lower tax rates but removes most deductions and exemptions

  • The old tax regime allows multiple deductions (e.g., Section 123, HRA, home loan interest) that reduce taxable income

  • Taxpayers earning up to ₹12 lakh get a full rebate under the new tax regime (Section 156, Income Tax Act, 2025 (previously 87A)), compared to ₹5 lakh in the old regime

  • Salaried individuals with high deductions may benefit from the old regime

  • Those with lower deductions or who prefer simplified filing may find the new regime more suitable

What is the Old Tax Regime and Its Advantages?

The old tax regime has long been structured around the principle of incentivising savings and investments. By offering deductions on instruments like ULIPs, PPF, ELSS, and life insurance premiums, it encouraged taxpayers to plan their finances around long-term goals such as retirement, education, and homeownership. For taxpayers who already invest in such instruments, the old regime continues to offer meaningful tax relief.

Here are some of the key advantages of this old tax regime:

  • Under the old tax regime, the basic tax exemption limit is ₹2.5 lakh. So, if an individual’s income lies within this limit, they will not be obliged to pay tax

  • If the income does not exceed ₹5 lakh, then the individual can avail a tax rebate of up to ₹12,500, meaning they may end up paying zero tax if their income is up to ₹5 lakh

  • Taxpayers can claim deductions under various sections, such as Section 80C [Section 123, ITA 2025], 80D [Section 126, ITA 2025], 80E [Section 129, ITA 2025], 80EE [Section 130, ITA 2025], 80U [Section 154, ITA 2025], 80G [Section 133, ITA 2025], 80TTA [Section 153, ITA 2025], etc., which reduce their taxable income and thereby lower their overall tax liability.

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What is the New Tax Regime and Its Advantages?

The new tax regime, with concessional tax rates, was introduced in Budget 2020. Also, since most exemptions and deductions are not available, tax filing becomes simpler because less documentation is required. Moreover, the reduced tax rate provides more disposable income to people who could not invest in specified instruments due to certain financial or personal reasons. This, therefore, offers increased liquidity in the hands of the taxpayers and allows them the flexibility of customising their investment choices.

Under the new regime, all taxpayers would be treated at par because the benefits of the new tax regime deduction/allowance do not affect tax liability. This can be especially helpful for taxpayers who may not subscribe to the specified investment modes, as most of these investments have a lock-in period. They can instead invest in open-ended instruments, which provide them with good returns as well as the flexibility of quicker withdrawal.

Here are the key advantages of the New Tax Regime for FY 2026-27:

  • Increased Tax Rebate Limit: One of the most significant benefits of the new tax regime is the enhanced tax rebate under Section 87A of the Income Tax Act, 1961 [Section 156, Income Tax Act, 2025]. For FY 2026-27, taxpayers with a total income of up to ₹12 lakh can claim a full rebate, meaning zero tax liability. This is significantly higher compared to the old tax regime, where the rebate applies only to incomes up to ₹5 lakh.
  • Simplified Tax Slabs: The new tax regime introduces fewer and broader tax slabs under Section 115BAC of the Income Tax Act, 1961 [Section 202, Income Tax Act, 2025], making tax calculations easier. The simplified structure eliminates the need to consider various exemptions and deductions, reducing paperwork and making the process more straightforward for taxpayers.
  • New Tax Regime as Default: The new tax regime is set as the default from FY 2023-24 onwards. TDS is calculated based on the new regime if it is not specified by the taxpayer. In non-business cases, taxpayers can switch to the old regime every year directly while filing their ITR under Section 139(1) of the Income Tax Act, 1961 [Section 263, Income Tax Act, 2025].
  • Standard Deduction Available: Salaried individuals and pensioners opting for the new regime can claim a standard deduction of ₹75,000 under Section 16 of the Income Tax Act, 1961 [Section 19, Income Tax Act, 2025] from their gross salary or pension income. Family pensioners can claim a standard deduction of ₹25,000.
  • Employer NPS Contribution Deduction: Taxpayers under the new regime can still claim a deduction for their employer's contribution to the National Pension System under Section 80CCD(2) of the Income Tax Act, 1961 [Section 124, Income Tax Act, 2025], up to 14% of salary.
  • Reduced Surcharge for High Earners: The surcharge on annual incomes exceeding ₹5 crore is capped at 25% under the new regime, compared to 37% under the old regime. This lowers the effective maximum tax rate to 39% under the new regime.

Difference Between Old vs New Tax Regime

Understanding the key differences between the two tax regimes can help taxpayers make an informed decision about which one to choose.

List of Deductions and Exemptions in the Old Tax Regime:

The old tax regime allowed taxpayers to claim various deductions and exemptions, such as:

  • Standard deduction of ₹50,000 under Section 16 of the Income Tax Act, 1961 [Section 19, Income Tax Act, 2025]

  • House Rent Allowance (HRA) under Section 10(13A) of the Income Tax Act, 1961 [Schedule III (Table, S. No. 11) of the Income Tax Act 2025]

  • Leave Travel Allowance (LTA) under Section 10(5) of the Income Tax Act, 1961 [Schedule III (Table, Serial No. 8), Income Tax Act, 2025]

  • Deductions under Section 80C [Section 123, ITA 2025] (e.g., EPF, PPF, ELSS, life insurance premiums)

  • Health insurance premium deduction under Section 80D [Section 126, ITA 2025]

  • Interest on a home loan under Section 24(b) [Section 22, Income Tax Act, 2025] up to ₹2 lakh for self-occupied property

These deductions significantly reduced taxable income, providing tax-saving opportunities.

Significant Exemptions in the New Tax Regime:

Unlike the old tax regime, the new one under Section 115BAC of the Income Tax Act, 1961 [Section 202, Income Tax Act, 2025] has fewer exemptions and deductions. However, it still allows:

  • Standard deduction of ₹75,000 under Section 16 of the Income Tax Act, 1961 [Section 19, Income Tax Act, 2025] for salaried individuals and pensioners

  • Employer’s contribution to NPS under Section 80CCD(2) of the Income Tax Act, 1961 [Section 124, Income Tax Act, 2025], up to 14% of salary

  • Transport allowance for disabled individuals

  • Deduction for family pension income of ₹25,000

  • Deduction under Section 80CCH of the Income Tax Act, 1961 [Section 125, Income Tax Act, 2025] for contributions to the Agniveer Corpus Fund

While the overall number of exemptions is lower, the lower tax rates and enhanced rebate limit of ₹12 lakh under Section 87A of the Income Tax Act, 1961 [Section 156, Income Tax Act, 2025] aim to compensate for the reduced deductions.

Old vs New Regime Example: Practical Comparison:

Consider two individuals earning ₹10 lakh per year. One opts for the old tax regime, claiming deductions under Section 80C [Section 123, ITA 2025], 80D [Section 126, ITA 2025], and HRA, while the other chooses the new tax regime without deductions.

  • Old Tax Regime: After deductions of ₹2 lakh, taxable income = ₹8 lakh, resulting in a tax liability of around ₹54,600 (post-rebate, if applicable).

  • New Tax Regime: With the revised slabs for FY 2026-27 under Section 115BAC [Section 202, ITA 2025], taxable income of ₹10 lakh (after ₹75,000 standard deduction, net taxable = ₹9.25 lakh) results in a tax liability of approximately ₹45,000 (before cess), making the new regime more favourable in this case.

Depending on the available deductions, one regime may be more beneficial than the other.

Breakeven Threshold for Choosing Between Old vs New Regime

The breakeven point determines when a taxpayer should switch from the old to the new tax regime based on their deductions.

  • If You Have Salary Income: Salaried employees with high deductions (e.g., HRA, EPF, 80C [Section 123, ITA 2025] investments) may find the old regime more beneficial. However, those with fewer deductions might save more under the new regime.

  • If You Have Income Other Than Salary: For individuals with business or rental income, tax benefits depend on expenses claimed. The old regime may allow more deductions, while the new regime provides straightforward calculations.

  • Mixed-Income Situations: Individuals with multiple sources of income, such as salary, freelance income, or capital gains, must determine which deductions apply to them. If significant deductions are available, the old regime may be preferable; otherwise, the new regime’s lower rates could be more advantageous.

Choosing between the old and new tax regimes depends on individual financial situations, deductions, and tax-saving goals. Taxpayers should assess their total deductions and calculate tax liability under both regimes before making a decision.

Which Tax Regime is Better? New or Old Regime

For income segments up to ₹15 lakh, the New Tax Regime has proposed lower income tax rates but only at the cost of taxpayers giving up exemptions and deductions available under various provisions of the Income Tax Act 2025. This means they will have to let go of some exemptions, including Leave Travel Allowance (LTA), House Rent Allowance (HRA), and deductions available, including Insurance Premium payout and Savings Account Interest under Chapter VIII A of the IT Act 2025, such as 80C [Section 123, ITA 2025], 80CCC [Section 123, ITA 2025], 80CCD [Section 124, ITA 2025], 80D [Section 126, ITA 2025], 80DD [Section 127, ITA 2025], 80E [Section 129, ITA 2025], 80EE [Section 130, ITA 2025], 80G [Section 133, ITA 2025], 80GG [Section 134, ITA 2025], 80GGA [Section 135, ITA 2025], 80GGC [Section 137, ITA 2025], etc.

Even the standard deduction of ₹₹75,000 under Section 19, Income Tax Act, 2025, is available to salaried individuals, and the deduction on home loan interest under Section 22 will not be allowed. However, the deduction under Section 124, which is the employer’s contribution on account of an employee in a notified pension scheme, and the deduction under Section 146 (previously Section 80JJAA of the Income Tax Act 1961) for new employment can be claimed.

One should have a deep understanding of both sides before choosing the regime that is most beneficial to them. The older regime will work in the interest of taxpayers' financial well-being if they are looking to fulfil their financial goals, such as wealth creation through investments in tax-saving instruments, paying premiums to meet health and life insurance needs, paying children’s school fees, buying a house with a home loan, etc. On the other hand, the new regime will do well for someone who does not intend to invest major amounts in tax-saving plans. Opting for the new tax regime streamlines documentation by eliminating the complexities of calculating and claiming deductions and exemptions. This simplification accelerates the filing of income tax returns (ITR).

Tax Under Old vs New Regime for Tax Year 2026-27

The Indian Income Tax system offers two tax regimes: the Old Regime and the New Regime. With the Income Tax Act, 2025 coming into effect from 1 April 2026, Tax Year 2026-27 marks the first year governed by the new Act. While the Old Regime provides various deductions and exemptions, the New Regime under Section 115BAC of the Income Tax Act, 1961 [Section 202, Income Tax Act, 2025] comes with lower tax rates and enhanced slabs but without most deductions. Taxpayers must evaluate their income, deductions, and financial goals to determine which regime is better for income tax.

  1. When Total Deductions Are Less Than ₹1.5 Lakhs: If your total deductions (including Section 123, Section 126, HRA under Schedule III, Table, S. No. 11, Income Tax Act, 2025, and others) are below ₹1.5 lakhs, the New Tax Regime is generally more beneficial. The significantly improved slabs under the New Regime for  Year 2026-27, with nil tax up to ₹4 lakh and a full rebate under Section 156, Income Tax Act, 2025 (previously Section 87A) for incomes up to ₹12 lakh, often result in a lower tax liability compared to the Old Regime. Opting for the New Regime simplifies tax filing and eliminates the need for investment-based deductions.

  2. When Total Deductions Are Between ₹1.5 Lakhs and ₹3.75 Lakhs: For taxpayers with deductions in this range, the decision becomes more nuanced. If deductions are closer to ₹1.5 lakhs, the New Regime may still be preferable due to lower slab rates. However, as deductions approach ₹3.75 lakhs, the Old Regime starts to offer better tax savings, as the benefits of available deductions outweigh the advantage of lower tax rates under the New Regime.

  3. When Total Deductions Exceed ₹3.75 Lakhs: If your total deductions exceed ₹3.75 lakhs, the Old Regime is generally the better choice. The significant tax savings from deductions such as EPF, PPF, home loan interest, NPS, and medical insurance can substantially reduce taxable income. The New Regime lower rates may not be sufficient to offset these benefits, making the Old Regime more tax-efficient.

How to Choose Between Old and New Tax Regimes?

Selecting the right tax regime requires analysing multiple factors, including deductions, tax liability, and personal financial preferences. Here’s a step-by-step approach to making an informed decision:

  • Evaluate Your Deductions and Exemptions: Start by calculating the total deductions and exemptions you usually claim under the Old Regime. If they are minimal, the New Regime might be more advantageous. However, if you claim significant deductions under Chapter VIII, Income Tax Act, 2025, particularly above ₹3.75 lakhs, the Old Regime typically results in lower tax payments.
  • Assess the Simplification Benefits of the New Regime: The New Tax Regime under Section 202, Income Tax Act, 2025, eliminates the need for complex tax planning by offering straightforward tax rates without requiring investments in tax-saving instruments. If you prefer simplicity and do not want to lock funds into specific financial products, the New Regime is an attractive choice.
  • Consider the Tax Rebate Eligibility: Under the New Tax Regime, resident individual taxpayers with a total taxable income of up to ₹12 lakh are eligible for a full rebate under Section 156, Income Tax Act, 2025, resulting in zero tax liability. Under the Old Tax Regime, this rebate applies only to incomes up to ₹5 lakh, with a maximum rebate of ₹12,500. If your income falls within this range, the New Regime might be more appealing due to its simpler structure. However, for incomes exceeding this limit, evaluating overall tax liability under both regimes is essential.

    By carefully analysing these factors, you can make an informed decision that maximises tax savings while aligning with your financial goals.

Key Benefits of Investing in Tax-Saving Instruments

Investing in tax-saving instruments provides multiple financial advantages beyond just reducing your tax burden. Some key benefits include:

  • Tax Deductions: Investments in options like ELSS funds, Public Provident Fund (PPF), and National Savings Certificate (NSC) qualify for deductions under Section 123 of the ITA 2025, helping you save up to ₹1.5 lakh in taxable income

  • Wealth Growth: Instruments such as ELSS and Unit-Linked Insurance Plans (ULIPs) offer market-linked returns, allowing your investment to grow while enjoying tax benefits

  • Stable Returns and Security: Fixed-income options such as the Senior Citizens Savings Scheme (SCSS) and tax-free bonds provide consistent, risk-free returns, making them ideal for retirees

  • Dual Benefits of ELSS: These funds reduce tax liability and can deliver higher returns than traditional fixed-income instruments

  • Tax-Free Maturity Proceeds: Some investments, such as PPF and tax-free bonds, offer tax-exempt maturity proceeds, resulting in higher post-tax earnings

Risks to Consider for Senior Citizens While Investing

While investing can help preserve wealth and generate income, senior citizens must be mindful of potential risks:

  • Market Volatility: Investments in equities or ELSS funds are subject to market fluctuations, which can impact short-term returns. It's important to allocate funds based on your risk tolerance

  • Liquidity Constraints: Some tax-saving instruments, such as ELSS (3-year lock-in) and PPF (15-year tenure), have limited liquidity, which may not be ideal for unexpected financial needs

  • Interest Rate Fluctuations: Fixed-income options such as SCSS and bank FDs can be affected by fluctuating interest rates, which can impact future returns

  • Inflation Risk: Traditional fixed deposits may offer lower returns that fail to outpace inflation, reducing purchasing power over time

  • Tax Implications of Withdrawals: While interest from tax-free bonds remains untaxed, selling them prematurely may trigger capital gains tax

Glossary

  1. Tax Rebate: A reduction in income tax liability available to eligible taxpayers under specified conditions
  2. Surcharge: An additional tax charged on income tax when income exceeds specified thresholds
  3. Leave Encashment Exemption: Tax exemption on leave salary received for unused leave, subject to applicable limits
  4. Exemption: Income excluded from total taxable income, such as HRA or LTA, under specified conditions
  5. TDS (Tax Deducted at Source): Tax deducted by the payer before crediting income to the recipient's account
Glossary book
Uncertain About Insurance

The decision between the old and new tax regimes depends on individual financial circumstances and goals. The old regime offers more deductions and exemptions, suitable for those with significant investments or loans. In contrast, the new regime offers lower tax rates and greater simplicity, benefiting those seeking streamlined tax filing and those who don't rely heavily on deductions. For Tax Year 2026-27, taxpayers with income up to ₹12 lakh will find the New Regime especially attractive due to the zero tax benefit under Section 156, Income Tax Act, 2025.

For an income of ₹12 lakhs, the new tax regime might be more advantageous due to its lower tax rates and simplified structure. This results in lower tax liability than the old regime, which had deductions.

In the new tax regime under Section 202, Income Tax Act, 2025, you cannot claim House Rent Allowance (HRA) deductions, as it eliminates most deductions and exemptions in favour of lower tax rates.

In the new tax regime, deductions under Section 123 of the Income Tax Act 2025 (such as investments in PPF, EPF, ELSS, etc.) are not allowed. The government aims to simplify taxes by offering lower tax rates but without the benefit of traditional deductions.

No, PPF (Public Provident Fund) contributions are not exempted in the new tax regime under Section 123, Income Tax Act, 2025 in the new tax regime. However, the maturity proceeds of PPF remain tax-free under Schedule II of the Income Tax Act, 2025 [previously Section 10(11) of the Income Tax Act, 1961] regardless of the regime chosen.

In the new tax regime, deductions such as those under Section 123 (PPF, ELSS, etc.), Section 126 (health insurance premiums), Section 22  (home loan interest), and other commonly claimed deductions of the Income Tax Act 2025 are not allowed. This regime prioritises lower tax rates over deductions for simplicity and fairness.

Choosing between the old tax regime and the new tax regime depends on your deductions. Compare your total eligible deductions under the old tax regime vs. the new tax regime using an income tax calculator. If deductions exceed ₹3.75 lakh, the old regime wins. If not, the new regime's lower slabs and zero tax up to ₹12 lakh make it the smarter pick.

Taxpayers with minimal investments or deductions should opt for the new tax regime. It works best for those who do not claim HRA, home loan interest, or Section 80C [Section 123, ITA 2025] benefits. When comparing income tax old regime vs new regime, salaried individuals with straightforward finances benefit most from the new regime's lower rates and zero tax up to ₹12 lakh.

Taxpayers with high deductions should stick with the old tax regime. When weighing the old tax regime and the new tax regime, those claiming HRA, home loan interest under Section 24(b) [Section 22, ITA 2025], life and health insurance premiums under Section 80C [Section 123, ITA 2025] and Section 80D [Section 126, ITA 2025], and NPS contributions exceeding ₹1.5 lakh will typically find the old regime more tax-efficient.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

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