Old vs New Tax Regime — How to Choose in FY 2025-26

Arjun earns ₹18 LPA at a Pune fintech company. His HR just sent the annual “investment declaration” email. He has 48 hours to pick a regime. He has a home loan, pays rent, and puts ₹1.5 lakh into PPF every year.

He picks the new regime because “it’s the default” and “the slabs are lower.” He files his ITR in July. His tax: ₹1,50,280.

If he’d picked old? ₹1,87,044. Wait — new was actually cheaper? Yes. But what if he’d had different deductions? That’s exactly the problem. The answer changes based on four or five inputs, and most people guess instead of calculating.

The new regime is better for most people. But “most people” isn’t everyone. Here’s how to know which side of the line you fall on.

All numbers follow FY 2025-26 rules (AY 2026-27). Verified against incometax.gov.in and ClearTax.

The two slab structures, side by side

These are the actual slab rates. Memorize the shape, not the numbers — the shape tells you everything.

New regime — 7 slabs, starts taxing later, climbs slowly:

Old regime — 4 slabs, fewer but steeper:

The new regime’s advantage is obvious from the structure: the 30% bracket doesn’t kick in until ₹24 lakh. In the old regime, it starts at ₹10 lakh. That’s a ₹14 lakh gap of lower rates — and that gap is exactly what old regime deductions need to overcome.

The three things the new regime gives you for free

Before comparing, know what the new regime already includes — because most people think it includes nothing.

1. Standard deduction: ₹75,000

Automatically deducted from your gross salary. No proof, no investment, no filing hassle. The old regime’s standard deduction is only ₹50,000 — so the new regime gives you ₹25,000 more here.

This means: if your gross salary is ₹12,75,000 or less, your taxable income drops to ₹12,00,000 — and Section 87A wipes your tax to zero. Effectively, salaried individuals earning up to ₹12.75 lakh pay no tax under the new regime.

2. Employer NPS — 80CCD(2): up to 14% of basic

If your employer contributes to NPS, you get a deduction of up to 14% of basic salary in the new regime. In the old regime, the cap is only 10%. This is the one deduction that’s actually better in the new regime.

At ₹18L CTC with 40% basic, that’s up to ₹1,00,800/year in tax-free employer NPS.

3. Section 87A rebate: tax-free up to ₹12 lakh taxable income

If your taxable income (after standard deduction) is ₹12 lakh or less, the government gives you a full rebate — up to ₹60,000. Your tax becomes zero. The old regime’s 87A rebate is only ₹12,500 and kicks in at ₹5 lakh.

Plus there’s marginal relief: if your taxable income is between ₹12L and ₹12.75L, your tax is capped at the amount exceeding ₹12L. So at ₹12.5L taxable, you pay ₹50,000 — not ₹1,12,500.

What the old regime still offers (and the new one doesn’t)

Here’s the full list of deductions you give up by choosing the new regime:

*HRA exemption = minimum of (actual HRA, 50%/40% of basic, rent minus 10% of basic)

The math question is simple: do these deductions, combined, save you more tax than the new regime’s lower slab rates already give you?

If your total old-regime deductions (including HRA) exceed roughly ₹3.75 lakh to ₹4.25 lakh — the old regime probably wins. Below that, the new regime’s wider slabs more than compensate.

The break-even at every income level

Here’s the deduction threshold you need to cross in the old regime to beat the new regime. Below this number, new wins. Above it, old wins.

The pattern: below ₹15 lakh gross, new regime wins for almost everyone. Between ₹15L and ₹25L, it depends on your deductions. Above ₹25L, old regime can win — but only if you have a home loan AND pay high rent AND max out 80C/80D.

Arjun’s numbers — the worked example

Arjun: ₹18 LPA gross, Pune, 40% basic, 50% HRA of basic, PF capped at ₹15K.

His old regime deductions:

Old regime: Taxable income = ₹18,00,000 − ₹5,75,500 = ₹12,24,500 Tax on slabs = ₹1,79,850 + 4% cess = ₹1,87,044

New regime: Deductions = ₹75,000 (standard deduction) + ₹2,500 (PT) = ₹77,500 Taxable income = ₹18,00,000 − ₹77,500 = ₹17,22,500 Tax on slabs = ₹1,44,500 + 4% cess = ₹1,50,280

New regime saves Arjun ₹36,764/year. Even with ₹5.75 lakh in old regime deductions — including a home loan — the new regime’s wider slabs still win at ₹18 LPA from Pune.

Why? Because Pune is non-metro for HRA. HRA exemption is capped at 40% of basic instead of 50%, which costs him ₹72,000 in deductions compared to Mumbai or Bangalore. That’s the difference between old winning and losing.

But bump Arjun’s rent to ₹30K/month with HRA exemption recalculated, or add ₹50K of NPS under 80CCD(1B), and the gap closes fast. At ₹20L gross with the same deductions, old regime starts winning.

The takeaway: at ₹18 LPA in a non-metro city, even ₹5.75 lakh in deductions isn’t enough to beat the new regime. The home loan helps, HRA helps — but the non-metro HRA cap (40% vs 50%) is a silent killer. Metro employees with the same salary and deductions might see old regime win. City matters.

The decision rule — one question

Here’s the simplest way to decide:

Add up everything you can claim under old regime — HRA, 80C, 80D, 80CCD(1B), home loan interest, and the standard deduction (₹50K).

If the total crosses the break-even for your income level (see the table above), pick old. If it doesn’t, pick new.

If it’s close — within ₹10,000 of tax difference — pick new. The compliance simplicity is worth ₹10K. No investment proofs, no rent receipts, no HRA calculation, no 80C scramble in March.

You can switch every year

This isn’t a permanent decision. Salaried employees can switch between regimes every financial year at the time of filing their ITR. No lock-in, no penalty. You pick old for FY 2025-26 and new for FY 2026-27 — perfectly fine.

The only exception: if you have business income and switch to old, you get only one lifetime chance to switch back to new. Salaried-only earners don’t have this restriction.

New regime is the default

If you don’t actively choose, you’re in the new regime. Your employer will deduct TDS based on new regime slabs unless you submit Form 12BAA requesting old regime. Don’t let inertia decide — run the numbers first.

→ Run your numbers on Unpakk Salary — enter your CTC, toggle between regimes, and see the exact difference. Takes 30 seconds.

Quick reference

FY 2025-26 rules (AY 2026-27). Verified against incometax.gov.in, ClearTax, and Unpakk’s open-source tax engine.

This guide is for informational purposes. Tax laws change — verify against incometax.gov.in for your specific situation.