Guide to Choosing a Tax Regime in FY26

The income tax slab and rate changes announced in Budget 2025-26 are now in effect. The new financial year 2025-26 began on April 1, 2025.

This is an important time for salaried employees. Their HR departments will soon ask them to choose between the old and new tax regimes. The employer will deduct advance tax from their monthly salary. This deduction will be based on their choice and will consider all available exemptions and deductions.

The tax slab and rate changes announced in Budget 2025 have made the new regime attractive to many salaried employees. However, the old regime may still be better for some taxpayers.

If you are unsure which regime to choose, this guide can help.

Understanding the Difference Between Old and New Tax Regimes

It’s important to understand the differences between the old and new tax regimes.

Old Tax Regime

In the old regime, you can claim tax deductions. These deductions apply to investments in various tax-saving schemes. Examples include NPS, PPF, SCSS, ELSS, and tax-saver FDs. You can also claim deductions for health insurance premiums, donations, and children’s tuition fees.

Additionally, you can claim up to ₹2 lakh of home loan interest as a deduction under the old regime. Tax exemptions like HRA and the standard deduction are also available in the old regime.

New Tax Regime

In contrast, the new regime does not allow most of these deductions. However, salaried persons can still get an exemption for employer contributions to NPS and EPF. A standard deduction of ₹75,000 is also allowed in the new tax regime.

Choosing a Tax Regime

So, if you want tax exemptions and deductions, choose the old regime. If not, the new tax regime is the default option.

However, many employees may not need to claim deductions, as explained below.

New Regime Advantage for Salaried Individuals Earning Up to ₹12 Lakh

The new tax regime offers a significant advantage. If your taxable salary is ₹12 lakh in FY 2025-26, you may not pay any tax.

To find your taxable salary, deduct all exemptions and deductions from your total salary. The only deduction allowed in the new regime is the standard deduction of ₹75,000. Employer contributions to NPS and EPF are also exempt.

The amount remaining after these deductions is your total taxable income. If this amount is ₹12 lakh or slightly above, the new regime is a good choice.

Calculations show that a salary package up to ₹15 lakh or even higher can result in zero tax under the new regime in FY 2025-26. However, certain conditions apply.

Choosing a Tax Regime for Salaries Above ₹12 Lakh

If your taxable salary is higher than ₹12 lakh, you will need to do some calculations. You can use an Income-tax Calculator to compare your tax liability under both regimes. Then, choose the regime that is most beneficial.

In most cases, the new regime is expected to be more advantageous in FY 2025-26.

However, the situation can be more complex if you have income from multiple sources, not just salary. In such cases, it is advisable to consult a tax expert.

Conclusion

Salaried employees must choose between tax regimes. The new regime is simpler, often better for incomes around ₹12 lakh. The old regime suits those with many deductions.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions.

Investments in the securities market are subject to market risks. Read all the related documents carefully before investing.