Salaried employees must again choose between the old and new tax regimes as FY27 begins, with the right option depending on income, deductions and investment habits. The choice can directly affect your tax outgo and monthly take-home pay.
There are no changes in income tax slabs this year, but several updates and clarifications have renewed the debate over which regime offers better value. For many taxpayers, the better option may not be the same as last year.
The old regime suits those who claim multiple exemptions and deductions, while the new regime favours taxpayers who want lower rates with fewer compliances. The decision matters most for middle-income earners and those with housing, insurance or investment-linked claims.
Two Systems
The old tax regime allows taxpayers to lower taxable income through deductions and exemptions. Common claims include Section 80C investments, health insurance premiums, home loan interest, HRA and LTA. In return, tax rates are higher.
Under the old regime, income up to Rs 2.5 lakh is nil, Rs 2.5 lakh to Rs 5 lakh is taxed at 5%, Rs 5 lakh to Rs 10 lakh at 20%, and income above Rs 10 lakh at 30%.
The new tax regime offers lower tax rates but removes most deductions and exemptions. Only limited benefits, such as employer contributions to NPS, remain available.
Under the new regime, income up to Rs 4 lakh is nil, Rs 4 lakh to Rs 8 lakh is taxed at 5%, Rs 8 lakh to Rs 12 lakh at 10%, Rs 12 lakh to Rs 16 lakh at 15%, Rs 16 lakh to Rs 20 lakh at 20%, Rs 20 lakh to Rs 24 lakh at 25%, and income above Rs 24 lakh at 30%.
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Who Gains
The new tax regime may work better if your income is up to Rs 12.75 lakh, where tax liability can fall to zero because of the standard deduction and rebate under Section 87A.
It may also suit taxpayers who do not invest regularly in tax-saving products, prefer higher monthly take-home salary, or fall in the Rs 12 lakh to Rs 20 lakh bracket with limited deductions.
The old tax regime may be better for those claiming deductions of around Rs 4 lakh to Rs 5 lakh or more.
It can also benefit taxpayers who invest under Section 80C, pay health insurance under Section 80D, claim high HRA or home loan interest, support senior citizen parents' medical costs, or use structured tax planning to reduce liability.
What Changes Next
Recent updates to the Income-Tax Act will not affect FY27 tax filings immediately. They will apply when returns are filed in June-July 2027.
Deadlines remain unchanged for most taxpayers. Budget 2026 extended the due date for ITR-3 and ITR-4 for non-audit taxpayers to August 31.
Several changes effective from April 1 will apply for next year's filing cycle. Tax-free meal allowance under the old regime rises to meals costing Rs 200 or less, from Rs 50 earlier.
Gift vouchers, cards or coupons become tax free up to Rs 15,000 annually under the old regime.
Ahmedabad, Bengaluru, Hyderabad and Pune move into the higher HRA exemption category.
Corporate loans with no interest or lower interest will be taxed based on the gap between the SBI lending rate and the rate charged. Loans below Rs 2 lakh and medical emergency loans remain exempt.
For employer-provided cars, tax will be Rs 8,000 a month for engines up to 1.6 litre and Rs 10,000 a month for larger vehicles.
Children's education allowance rises from Rs 100 a month to Rs 3,000 a month per child under the old regime. Hostel expenditure allowance rises from Rs 300 a month to Rs 9,000 a month per child.
Transport-related allowances increase from Rs 10,000 a month or 70% of the allowance, whichever is lower, to Rs 25,000 a month or 70% of the allowance.
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