Every year, usually in April, Indian HR teams field the same question from employees in different forms: should I choose the old tax regime or the new one? The question sounds simple. The answer depends on the employee's salary structure, their investments, whether they have a home loan, and how much HRA they claim — and it's different for every person.
Since FY 2024-25, the new tax regime has become the default. Employees who want to opt for the old regime must actively declare it each year. That shift in default means more employees are ending up in the new regime without having made a conscious choice — which creates a different kind of problem for HR teams at year end when employees want to reconcile their TDS with their actual tax liability.
This guide covers the actual slabs, what deductions apply under each regime, worked examples at common salary levels, and what HR teams need to do to handle the annual declaration correctly.
The Core Difference
The old tax regime has higher tax rates but allows a wide range of deductions and exemptions — 80C investments, HRA, home loan interest, LTA, standard deduction, and more. The new tax regime has lower tax rates but removes most deductions. You can't have both.
The question is whether your deductions are large enough to make the old regime worth the higher base rate. For employees with minimal investments and no home loan, the new regime's lower rates usually win. For employees with significant 80C investments, home loans, and metro HRA, the old regime often comes out ahead.
Tax Slabs: New Regime (FY 2025-26)
The new regime slabs were revised significantly in Union Budget 2025. The key change: a rebate under Section 87A now covers income up to ₹12 lakh, making the effective tax zero for many mid-income salaried employees.
| Income Range | Tax Rate |
|---|---|
| Up to ₹4 lakh | Nil |
| ₹4 lakh – ₹8 lakh | 5% |
| ₹8 lakh – ₹12 lakh | 10% |
| ₹12 lakh – ₹16 lakh | 15% |
| ₹16 lakh – ₹20 lakh | 20% |
| ₹20 lakh – ₹24 lakh | 25% |
| Above ₹24 lakh | 30% |
Standard deduction of ₹75,000 applies under the new regime. Rebate u/s 87A: full tax rebate up to ₹12 lakh income. Practical result: an employee earning ₹12.75 lakh (₹12 lakh + ₹75,000 standard deduction) pays zero income tax under the new regime.
Tax Slabs: Old Regime (FY 2025-26)
| Income Range | Tax Rate |
|---|---|
| Up to ₹2.5 lakh | Nil |
| ₹2.5 lakh – ₹5 lakh | 5% |
| ₹5 lakh – ₹10 lakh | 20% |
| Above ₹10 lakh | 30% |
Standard deduction: ₹50,000. Rebate u/s 87A: up to ₹5 lakh income. Available deductions include 80C (up to ₹1.5 lakh), 80D (health insurance premiums), HRA exemption, home loan interest under Section 24(b) (up to ₹2 lakh), LTA, NPS deduction under 80CCD(1B) (₹50,000 additional), and more.
Deductions Available Under Each Regime
| Deduction / Exemption | Old Regime | New Regime |
|---|---|---|
| Standard deduction | ₹50,000 | ₹75,000 |
| Section 80C (investments, PF, etc.) | Up to ₹1.5 lakh | Not available |
| HRA exemption | Available | Not available |
| Home loan interest (Sec 24b) | Up to ₹2 lakh | Not available |
| Section 80D (health insurance) | Up to ₹25,000 | Not available |
| NPS 80CCD(1B) | ₹50,000 additional | Not available |
| LTA exemption | Available | Not available |
| Leave encashment on retirement | Partial exemption | Full exemption |
| Employer NPS contribution (80CCD(2)) | Available | Available |
| Gratuity exemption | Available | Available |
Worked Examples: Which Regime Wins at Different Salaries?
Example 1: ₹8 lakh annual salary, minimal deductions
Assumptions: ₹8 lakh gross, standard deduction only, no significant 80C or HRA.
- New regime: ₹8L − ₹75K standard deduction = ₹7.25L taxable. Tax = 5% on ₹3.25L (₹4L–₹7.25L) = ₹16,250. Rebate u/s 87A covers up to ₹12L → tax = ₹0.
- Old regime: ₹8L − ₹50K standard = ₹7.5L taxable. Tax = ₹12,500 (5% on ₹2.5L) + ₹50,000 (20% on ₹2.5L) = ₹62,500.
- Verdict: New regime wins significantly — ₹0 vs ₹62,500.
Example 2: ₹15 lakh annual salary, heavy deductions
Assumptions: ₹15L gross, ₹1.5L in 80C, ₹2L home loan interest, ₹1.2L HRA exemption, ₹50K NPS 80CCD(1B).
- Old regime: ₹15L − ₹50K standard − ₹1.5L (80C) − ₹2L (home loan) − ₹1.2L (HRA) − ₹50K (NPS) = ₹9.3L taxable. Tax = ₹12,500 (5% on ₹2.5L) + ₹86,000 (20% on ₹4.3L) = ₹98,500.
- New regime: ₹15L − ₹75K standard = ₹14.25L taxable. Tax = 5% on ₹4L + 10% on ₹4L + 15% on ₹2.25L = ₹20,000 + ₹40,000 + ₹33,750 = ₹93,750.
- Verdict: New regime wins even with heavy deductions — ₹93,750 vs ₹98,500. The margin is smaller than at lower incomes, but the new regime still comes out ahead.
Example 3: ₹25 lakh annual salary, very heavy deductions
Assumptions: ₹25L gross, maximum 80C + home loan + HRA + NPS deductions totalling ₹5.5L.
- Old regime taxable: ₹25L − ₹50K − ₹5.5L = ₹19L. Tax = ₹12,500 (5% on ₹2.5L) + ₹1,00,000 (20% on ₹5L) + ₹2,70,000 (30% on ₹9L) = ₹3,82,500.
- New regime taxable: ₹25L − ₹75K = ₹24.25L. Tax = ₹20,000 (5% on ₹4L) + ₹40,000 (10% on ₹4L) + ₹60,000 (15% on ₹4L) + ₹80,000 (20% on ₹4L) + ₹1,00,000 (25% on ₹4L) + ₹7,500 (30% on ₹0.25L) = ₹3,07,500.
- Verdict: New regime wins by ₹75,000. At high incomes the new regime's advantage holds — the lower progressive rates outweigh even maximum deductions under the old regime.
The pattern: after the Budget 2025 revisions, the new regime is advantageous for most salaried employees — including many with moderate deductions. The old regime becomes competitive only for employees with very high deductions relative to income, typically those with large home loan interest deductions in combination with maximum 80C and HRA.
Who Might Still Prefer the Old Regime?
- Employees with a large home loan on a property that qualifies for the full ₹2 lakh interest deduction under Section 24(b)
- Employees paying high metro-city rent with significant HRA exemption (typically where rent exceeds 40–50% of basic)
- Employees with HUF income or other sources that benefit significantly from old-regime deductions
- Employees very close to a tax bracket threshold where a specific deduction pushes them below it
For most employees — particularly younger professionals, those renting modest accommodations, or those without home loans — the new regime is now the better choice after Budget 2025 changes.
What HR Teams Need to Do
Collect Form 12BB at the start of the year
Form 12BB is the investment declaration form employees submit to their employer. It declares which regime the employee is opting for, and if old regime — what deductions they plan to claim. TDS for the year is calculated based on this declaration. Employees who don't submit Form 12BB default to the new regime.
Mid-year changes
Employees can request a change to their declaration during the year if their situation changes — a home purchase, a new insurance policy, a change in rented accommodation. The updated declaration should be processed promptly to avoid a large TDS catch-up in the last quarter.
Year-end reconciliation
At year end, actual investment proofs need to be collected to verify the declared amounts. TDS is adjusted based on actual figures, not just declarations. Employees who over-declared investments will have higher TDS in the last few months to compensate.
Filing regime vs return regime
The regime declared to the employer for TDS purposes can differ from the regime used when filing the actual ITR. An employee can declare old regime to the employer (allowing investment proofs to be submitted and TDS to be calculated accordingly), but switch to the new regime when filing the return if that works out better. HR teams should make employees aware of this flexibility.
MedleyHR lets employees declare their tax regime and submit investment proofs through the self-service portal. TDS is calculated automatically for each employee based on their declaration — old or new regime, handled correctly without manual spreadsheets. Start free →
The Bottom Line for 2026
After the Budget 2025 revisions, the new tax regime is the better choice for most salaried employees in India — particularly those earning up to ₹12.75 lakh (zero tax) and those without large home loan interest deductions. The old regime remains relevant for a specific set of employees with high deductions, but it's no longer the default winner at higher income levels that it once was.
For HR teams, the job is to ensure every employee submits a declaration at the start of the year, TDS is calculated correctly under whichever regime they choose, and the year-end reconciliation is clean. Getting one employee's regime wrong means their Form 16 is wrong — which causes problems when they file their ITR.