Published 21 October 2026
Every April an employer asks the same question: old regime or new? The answer given then decides only how much tax the employer deducts each month. The choice that actually fixes the year’s tax is made later, in the return, and a salaried employee can make it afresh every year. A person who also has business income is in a different position: the choice sticks, and it can be reversed only once. Two other points cause trouble. The old regime can be chosen only in a return filed on time. And the figures that make the new regime attractive, the higher standard deduction and the larger rebate, changed for assessment year 2026-27 and are carried into the Income-tax Act, 2025. This guide sets out what the law says about the choice, for both Acts.
Which Act governs which year
- Financial year 2025-26 (assessment year 2026-27) and earlier. The new regime is section 115BAC(1A) of the Income-tax Act, 1961. The rebate is section 87A, and the standard deduction is section 16(ia). Returns for AY 2026-27 are filed under the 1961 Act.
- Tax year 2026-27 onwards. The Income-tax Act, 2025 applies from 1 April 2026. The new regime is section 202, the rebate is section 156, and the standard deduction is serial number 2 of the Table in section 19(1). The manner of exercising the option is rule 136 of the Income-tax Rules, 2026.
- Section 536(2) of the 2025 Act keeps the 1961 Act alive for earlier years. Clause (f) deems “any election or declaration made, or option exercised” under the 1961 Act and in force on 1 April 2026 to have been made under the corresponding provision of the 2025 Act.
The new regime is the default
The Finance Act, 2023 inserted section 115BAC(1A) with effect from assessment year 2024-25. Since then the new rates apply to an individual, a Hindu undivided family, an association of persons (other than a co-operative society), a body of individuals and an artificial juridical person, “other than a person who has exercised an option under sub-section (6)”. In other words, the new regime applies unless the person opts out. Section 202(1) of the 2025 Act is built the same way: tax “shall, unless the person exercises the option in the manner provided under sub-section (4), be computed at the rate of tax given in the following Table”.
The slabs are the same for both years compared here:
| Total income | AY 2026-27 (s.115BAC(1A)(iii), 1961 Act) | Tax year 2026-27 (s.202(1), 2025 Act) |
|---|---|---|
| Up to Rs 4,00,000 | Nil | Nil |
| Rs 4,00,001 to Rs 8,00,000 | 5 per cent | 5 per cent |
| Rs 8,00,001 to Rs 12,00,000 | 10 per cent | 10 per cent |
| Rs 12,00,001 to Rs 16,00,000 | 15 per cent | 15 per cent |
| Rs 16,00,001 to Rs 20,00,000 | 20 per cent | 20 per cent |
| Rs 20,00,001 to Rs 24,00,000 | 25 per cent | 25 per cent |
| Above Rs 24,00,000 | 30 per cent | 30 per cent |
The 1961 table for AY 2026-27 is clause (iii) of section 115BAC(1A), inserted by the Finance Act, 2025 with effect from 1 April 2026. Clause (ii), with its Rs 3,00,000 starting slab, now covers AY 2025-26 only.
The old regime’s slabs for an individual below 60 are nil up to Rs 2,50,000, 5 per cent to Rs 5,00,000, 20 per cent to Rs 10,00,000 and 30 per cent above. For AY 2026-27 they are in Paragraph A of Part I of the First Schedule to the Finance Act, 2026. For tax year 2026-27 the same rates are in Paragraph A of Part III of that Schedule, which governs deduction of tax from salary under section 392 of the 2025 Act and advance tax. Higher exemption limits apply to residents aged 60 and 80.
What the new regime takes away
Section 115BAC(2)(i) computes total income without, among other things:
- the leave travel concession under section 10(5);
- house rent allowance under section 10(13A);
- the allowances prescribed under section 10(14), other than those prescribed for this purpose;
- the entertainment allowance and professional tax deductions in section 16(ii) and (iii);
- interest on a self-occupied house under section 24(b); and
- every Chapter VI-A deduction except section 80CCD(2) (employer’s pension contribution), 80CCH(2) (Agniveer) and 80JJAA.
Section 202(2)(a) of the 2025 Act lists the same items by their new addresses:
- Schedule III serial numbers 5, 6, 7, 8 (travel concession), 11 (house rent allowance) and 17;
- serial numbers 12 and 13, other than those prescribed;
- section 19(1) serial number 1 (professional tax);
- section 22(1)(b) for a self-occupied house; and
- Chapter VIII other than section 124(1) and (2), 125(2) and 146.
Gratuity, leave encashment on retirement, retrenchment compensation and the voluntary retirement payment are not on either list. They remain available in both regimes. See Gratuity, Leave Encashment and Retirement Receipts.
Two things the new regime adds:
- Employer’s pension contribution. The cap on the employer’s contribution to the notified pension scheme is 14 per cent of salary, against 10 per cent for a private employer in the old regime. This is the proviso to section 80CCD(2) and section 124(2) of the 2025 Act.
- Allowances that survive. A few allowances stay exempt: travel on tour or transfer, daily allowance on tour, conveyance in the performance of duties, and the transport allowance for an employee with a specified disability. Rule 280(3) of the Income-tax Rules, 2026 lists them, but its wording is awkward. It refers to an employee “who has exercised an option under section 202(4)”. Under the 2025 Act, that option is the one that takes a person out of the new regime, so read literally the rule restricts the wrong group. Section 202(2)(a)(ii), which the rule serves, is about the employee who stays in the new regime.
The standard deduction
| Year | New regime | Old regime | Provision |
|---|---|---|---|
| AY 2026-27 | Rs 75,000 or the salary, if less | Rs 50,000 or the salary, if less | s.16(ia) and its proviso, 1961 Act |
| Tax year 2026-27 | Rs 75,000 or the salary, if less | Rs 50,000 or the salary, if less | s.19(1), Table serial number 2, 2025 Act |
There is a point of drafting in the 1961 Act. The proviso to section 16(ia), inserted by the Finance (No. 2) Act, 2024, raises the deduction where tax “is computed under clause (ii) of sub-section (1A) of section 115BAC”. The Finance Act, 2025 limited clause (ii) to AY 2025-26 and put the AY 2026-27 rates in a new clause (iii), but left the proviso unchanged. The 2025 Act avoids the problem. Its Table gives Rs 75,000 “where income-tax is computed under section 202(1)”.
The rebate, and the step at Rs 12 lakh
For a resident individual in the new regime, the first proviso to section 87A, as amended by the Finance Act, 2025 from AY 2026-27, allows a rebate of the whole tax or Rs 60,000, whichever is less, where total income does not exceed Rs 12,00,000. Above Rs 12,00,000, a second limb gives marginal relief: tax payable is cut to the amount by which income exceeds Rs 12,00,000, if that is less. A further proviso, added from 1 April 2026, says the deduction “shall not exceed the amount of income-tax payable as per the rates provided in sub-section (1A) of section 115BAC”. In the old regime the rebate stays at Rs 12,500, for total income up to Rs 5,00,000.
Section 156 of the 2025 Act repeats all three rules for tax year 2026-27:
- section 156(1) for the old regime;
- section 156(2)(a) and (b) for the Rs 60,000 rebate and the marginal relief; and
- section 156(3) for the cap.
A worked example for AY 2026-27 follows. The figures are the same for tax year 2026-27.
| Item | New regime | Old regime |
|---|---|---|
| Gross salary, including HRA of Rs 2,40,000 | Rs 13,00,000 | Rs 13,00,000 |
| HRA exempt (rent paid, see guide 1802) | nil | Rs 2,00,000 |
| Standard deduction | Rs 75,000 | Rs 50,000 |
| Professional tax | nil | Rs 2,500 |
| Section 80C and 80D | nil | Rs 1,75,000 |
| Total income | Rs 12,25,000 | Rs 8,72,500 |
| Tax at slab rates | Rs 63,750 | Rs 87,000 |
| Rebate (marginal relief: tax cut to Rs 25,000) | Rs 38,750 | nil |
| Tax before cess | Rs 25,000 | Rs 87,000 |
| With 4 per cent health and education cess | Rs 26,000 | Rs 90,480 |
The comparison turns on each person’s own exemptions and deductions. The law does not pick the cheaper regime for the taxpayer. The return records the choice, and the return is computed on it.
How an employee leaves the new regime: every year, in the return
A person with no income from business or profession exercises the option under section 115BAC(6)(ii) “along with the return of income to be furnished under sub-section (1) of section 139” for that year. The option lasts for that year only. Next year the default applies again unless the option is exercised again. Section 202(4)(b) of the 2025 Act is the same, with the return “to be furnished under section 263(1)”. Rule 136 of the 2026 Rules, Table serial number 4, says the option is to be exercised “in the return of income to be furnished under section 263(1)”.
Both provisions name only the return under section 139(1) or 263(1), the return filed by the due date. A belated return is filed under section 139(4) of the 1961 Act or section 263(4) of the 2025 Act. On the words of the provisions, a person who files late cannot opt out, and is taxed under the new regime. The due date for most salaried individuals is 31 July after the end of the year. See Belated and Revised Returns.
What the employee tells the employer is a separate matter. CBDT Circular No. 04/2023 of 5 April 2023 directs every employer to ask each employee for the “intended tax regime” for the year, and to deduct tax accordingly. If the employee says nothing, the employer deducts under the new regime. Paragraph 6 of the circular adds that the intimation “would not amount to exercising option” under section 115BAC(6). The return can therefore choose differently from the intimation. The tax deducted is credited all the same, and any shortfall is paid as self-assessment tax. Section 536(2)(j) of the 2025 Act continues circulars issued under the 1961 Act, so far as they are consistent with it.
The ITR-1 walkthroughs show where the choice sits in the return; see How to file ITR-1 with a single salary.
How a person with business income leaves it: once, and it sticks
For a person with income from business or profession, section 115BAC(6)(i) requires the option to be exercised “on or before the due date specified under sub-section (1) of section 139”. Once exercised, it applies to later years. Under the proviso it can be withdrawn only once. After that, the person can never opt out again, unless he ceases to have business or professional income.
Under the 1961 Act, the form is Form 10-IEA. It was notified by Notification No. 43/2023 of 21 June 2023, which inserted rule 21AGA of the Income-tax Rules, 1962. The e-filing portal’s user manual for Form 10-IEA says it is “mandatory to submit Form 10-IEA” for individuals, HUFs, AOPs, BOIs and AJPs having income from business and profession. It is to be filed within the time under section 139(1), and it “can be filed twice in lifetime”: once to opt out, once to re-enter. The manual’s path is e-File, then Income Tax Forms, then File Income Tax Forms, then Form 10-IEA under Persons with Business/Professional Income. The form is e-verified.
Under the 2026 Rules there is no separate form. Rule 136 covers the option under section 202(4) for every person in Table serial number 4, whether or not the person has business income, and says only that it “shall be in the return of income”. It prescribes no counterpart to Form 10-IEA. Section 202(4)(a) keeps the substance for business income:
- the option is exercised on or before the due date under section 263(1);
- it applies to later tax years;
- it may be withdrawn only once; and
- after withdrawal it cannot be exercised again unless business income ceases.
An option made in Form 10-IEA and in force on 1 April 2026 carries over to the 2025 Act through section 536(2)(f).
What to have ready
- The employer’s intimation of regime, and the Form 16 (Form No. 130 under the 2026 Rules) showing the regime the employer used. See TDS Certificates: Form 16 and 16A.
- Evidence for every old-regime claim: rent receipts and the landlord’s PAN, investment and insurance proofs, and the home loan interest certificate. The employer collects these in Form 12BB or Form No. 124. See HRA Exemption and Form 12BB.
- A computation under both regimes, with the standard deduction, rebate and marginal relief for the right year.
- For business income: the acknowledgement of any Form 10-IEA filed for earlier years. The return asks for its date and acknowledgement number.
- The due date, because the old regime is lost in a belated return.
In order
- The employee tells the employer the intended regime for the year. Without an intimation, tax is deducted under the new regime.
- At the year end, total income is computed under both regimes, using the standard deduction and rebate for that year.
- A salaried person with no business income chooses in the return for that year, filed by the due date. The choice can differ from the intimation to the employer.
- A person with business income opts out on or before the due date, by Form 10-IEA up to AY 2026-27 and in the return from tax year 2026-27. The option sticks and can be withdrawn only once.
- Any shortfall between tax deducted and tax due is paid as self-assessment tax before filing. See Advance Tax and Self-Assessment Tax.
The next guide, HRA Exemption and Form 12BB, deals with the exemption that most often decides the choice.