4. Old Regime vs New Regime: FY 2026-27

Tax Year 2026-27. First year under the Income-tax Act, 2025.

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The new regime is the default. If you do nothing, you are taxed under it. The old regime must be actively opted into, and it only wins if your deductions are large enough to offset its higher rates.

The Income-tax Act, 2025 replaced the Income-tax Act, 1961 on 1 April 2026, after 65 years. It is a restatement rather than a change of policy — rates, slabs and most substantive rules carried over — but the vocabulary moved. Tax Year replaces both Previous Year and Assessment Year, so what was "FY 2026-27, AY 2027-28" is now simply Tax Year 2026-27. Form 16 became Form 130, and the other form numbers moved with it. Sections were renumbered throughout, and are given here as "Section 123 (formerly 80C)"; the full form and section maps are in §17 and §18. Both numbering systems stay in circulation for another year, because your Form 16 for FY 2025-26 reports a year governed by the old Act.

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4.1 The new regime: slabs for FY 2026-27

Budget 2026 made no changes to slabs or the basic exemption limit. FY 2026-27 rates are identical to FY 2025-26.

Plus:

• Standard deduction for salaried: ₹75,000
• Rebate under Section 156 (formerly 87A): up to ₹60,000, available where total income does not exceed ₹12,00,000
• Health and education cess: 4% on tax plus surcharge

The ₹12.75 lakh figure

This is where "salary up to ₹12.75 lakh is tax-free" comes from:

The rebate is a cliff, not a taper: at ₹12,00,001 of total income it vanishes entirely.

Marginal relief

Without a correction, earning ₹1 more than ₹12 lakh would cost ₹60,000 in tax, or ₹62,400 with cess. Marginal relief prevents that: tax payable cannot exceed the amount by which total income exceeds ₹12,00,000.

Relief applies from ₹12,00,001 up to about ₹12,70,588 of total income, where the ordinary tax and the relief cap converge. Above that, normal slab tax applies.

The cap applies to tax before cess, and the 4% cess is then charged on the capped figure. Every additional rupee earned inside the relief band therefore carries ₹1.04 of tax: an effective marginal rate of 104%. At the top of the band, ₹12,70,588 of total income attracts ₹73,412 of tax on the ₹70,588 by which it exceeds ₹12,00,000, leaving ₹2,824 less in hand than a total income of exactly ₹12,00,000; income does not net more than ₹12,00,000 again until about ₹12,73,934.

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4.2 The old regime: slabs for FY 2026-27

Plus:

• Standard deduction for salaried: ₹50,000
• Rebate under Section 156 (formerly 87A): ₹12,500, where total income does not exceed ₹5,00,000
• Cess: 4%

Higher basic exemption thresholds apply for senior citizens (₹3,00,000, age 60–79) and super senior citizens (₹5,00,000, age 80+) under this regime.

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4.3 Surcharge

Applies to both regimes on tax, before cess.

The new regime caps surcharge at 25%, taking the maximum marginal rate from 42.744% (old) to 39% (new) at the top.

Marginal relief applies at each surcharge threshold on the same principle as the rebate. New-regime tax on a total income of exactly ₹50,00,000 is ₹10,80,000 with no surcharge; at ₹50,01,000 the 10% surcharge would add ₹1,08,030, so relief caps the total at ₹10,81,000 — the tax at the threshold plus the ₹1,000 of excess. The cap binds up to a total income of about ₹51,61,194.

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4.4 What survives in the new regime

This is the operative question for most salaried engineers. The new regime is not "no deductions"; it is "a short, specific list."

Available in the new regime

Not available in the new regime

• Section 123 (80C): the ₹1.5 lakh basket: EPF employee contribution, PPF, ELSS, life insurance premium, tuition fees, 5-year tax-saver FD, NSC, home loan principal
• Section 124(1) and 124(1B): your own NPS contributions, including the additional ₹50,000
• Section 126 (80D): health insurance premium
• Section 129 (80E): education loan interest
• Section 133 (80G): donations
• Section 153 (80TTA/80TTB): savings account and deposit interest
• HRA exemption
• LTA exemption
• Home loan interest on self-occupied property (the ₹2 lakh under old Section 24(b))
• Professional tax paid

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4.5 The break-even calculation

The old regime generally wins only for people who simultaneously pay significant rent in a metro and have a home loan, or who carry large education loan interest. For an early-career engineer renting a flat with no home loan, the new regime usually wins, often by a wide margin.

For any individual the question is arithmetic: whether your deductions exceed the point at which the old regime's higher rates are offset.

Worked from first principles

Take a gross salary of ₹16,36,710.

Under the new regime:

To match this under the old regime, we need old-regime tax before cess of ₹1,14,257. Working backwards through the old slabs:

So total deductions must be:

₹16,36,710 − ₹10,05,857 = ₹6,30,853

Break-even ≈ ₹6.31 lakh of total deductions, of which ₹50,000 is the standard deduction, so ₹5.81 lakh of other deductions are needed before the old regime wins at this income level.

Published break-even tables circulate for every income level; they disagree with each other and with this method, mostly over whether the standard deduction sits inside the figure and whether marginal relief was applied. Compute your own rather than relying on one.

What ₹5.8 lakh of deductions actually requires

For a salaried engineer, the realistic maximum stack under the old regime:

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4.6 Choosing and switching

Your employer's declaration is not your final choice. In January or February your employer will ask you to declare a regime so it can compute TDS. If your circumstances change, you can still file under the other regime and claim a refund or pay the balance. The declaration determines cash flow during the year, not your legal position.

A practical consequence: if you declare the new regime to your employer and later discover you had enough deductions for the old regime, you can still switch when filing. The reverse also holds. Excess TDS comes back as a refund.