The new tax regime has undergone significant changes since its introduction in Budget 2020. What started as an optional alternative with limited appeal has now become the default tax regime and the better choice for most Indian taxpayers. With a higher standard deduction of ₹75,000 and a full rebate up to ₹12 lakh income, the new regime in FY 2025-26 (AY 2026-27) is more attractive than ever. In this guide, we break down all the benefits, compare it with the old regime, and help you decide which one is right for you.
What is the New Tax Regime?
The new tax regime, introduced under Section 115BAC of the Income Tax Act, offers lower tax rates in exchange for giving up most deductions and exemptions available under the old regime. Here is what changed over the years:
- Budget 2020: New regime introduced as an optional alternative with 6 tax slabs
- Budget 2023: Made the default regime; standard deduction of ₹50,000 introduced; slabs simplified; rebate limit raised to ₹7 lakh
- Budget 2024: Standard deduction increased to ₹75,000; rebate limit raised to ₹12 lakh; slabs further simplified
- Budget 2025: No changes to the new regime — structure remains the same for FY 2025-26
The key philosophy is simplicity: lower rates, fewer forms, no need to save investment proofs or collect rent receipts. You file your return in minutes instead of hours.
New Regime Tax Slabs for FY 2025-26
Here are the income tax slabs under the new tax regime for FY 2025-26 (AY 2026-27):
| Taxable Income | Tax Rate |
|---|---|
| Up to ₹4,00,000 | NIL |
| ₹4,00,001 to ₹8,00,000 | 5% |
| ₹8,00,001 to ₹12,00,000 | 10% |
| ₹12,00,001 to ₹16,00,000 | 15% |
| ₹16,00,001 to ₹20,00,000 | 20% |
| ₹20,00,001 to ₹24,00,000 | 25% |
| Above ₹24,00,000 | 30% |
Surcharge and 4% health & education cess are additional. The surcharge rates are: 10% for income above ₹50 lakh, 15% above ₹1 crore, 25% above ₹2 crore (capped at 25% under new regime).
Standard Deduction of ₹75,000
One of the biggest improvements in the new tax regime is the standard deduction of ₹75,000 for salaried individuals. This was increased from ₹50,000 in Budget 2024.
What this means in practice:
- If your gross salary is ₹8,25,000, your taxable income becomes ₹7,50,000 after standard deduction
- At ₹7.5 lakh taxable income, your tax under the new regime is ₹25,000 — but with Section 87A rebate, this becomes zero
- Effectively, you can earn up to ₹12.75 lakh (₹12 lakh + ₹75,000 standard deduction) and pay zero tax under the new regime
The standard deduction is available automatically — no proofs or documents needed. It is deducted from your gross salary before calculating taxable income.
Section 87A Rebate Up to ₹12 Lakh
The Section 87A rebate under the new tax regime is one of the most generous provisions in the Indian tax system. Here is how it works:
- If your taxable income (after standard deduction) is up to ₹12,00,000, you get a full rebate on the tax amount
- This means your tax liability is zero even though you technically have taxable income
- The effective gross income threshold is ₹12,75,000 (₹12,00,000 + ₹75,000 standard deduction)
- The rebate applies to the tax calculated before cess — 4% cess is not applicable if rebate covers the full tax
Example: If your gross salary is ₹12,50,000:
- Standard deduction: ₹75,000
- Taxable income: ₹11,75,000
- Tax calculated: ₹42,500
- Section 87A rebate: ₹42,500 (full rebate as taxable income ≤ ₹12L)
- Final tax: ₹0
Who Should Switch to New Regime?
The new tax regime is better for you if:
- Your total deductions are less than ₹3-4 lakh: If you don't claim HRA, home loan interest, or make heavy 80C investments, the new regime is almost always better
- You are a young professional: If you don't have a home loan, don't pay rent (living with parents), and don't invest in PPF/ELSS aggressively
- Your income is up to ₹12.75 lakh: You pay zero tax under the new regime regardless of deductions
- You want simplicity: No need to maintain investment proofs, rent receipts, or worry about deduction limits
- You are a freelancer or consultant: Unless you have significant business expenses to claim
- Both spouses are earning: With separate standard deductions and rebates, the household benefit is maximized
Who Should Stay in Old Regime?
The old regime may still be better if you have total deductions exceeding ₹4 lakh. Here are the scenarios where the old regime wins:
- Heavy HRA claim: If you pay rent of ₹30,000+ per month in a metro city, HRA exemption alone can be ₹2-4 lakh
- Home loan interest: Section 24(b) allows up to ₹2 lakh deduction on home loan interest for self-occupied property
- Full 80C utilization: ₹1.5 lakh in PPF, ELSS, life insurance, home loan principal, etc.
- 80D health insurance: ₹25,000 for self, ₹50,000 for senior citizen parents
- NPS contribution: Additional ₹50,000 under 80CCD(1B)
- Total deductions above ₹4 lakh: The old regime's higher deduction value offsets its higher tax rates
If your combined deductions (HRA + home loan interest + 80C + 80D + NPS) exceed ₹4 lakh, use our Income Tax Calculator to compare both regimes before deciding.
Old vs New Regime: Comparison Examples
Let us compare the tax liability under both regimes for different income levels:
Example 1: Gross Income ₹8 Lakh, Minimal Deductions
| Particulars | Old Regime | New Regime |
|---|---|---|
| Gross Income | ₹8,00,000 | ₹8,00,000 |
| Standard Deduction | ₹50,000 | ₹75,000 |
| 80C Deductions | ₹50,000 | Not available |
| Taxable Income | ₹7,00,000 | ₹7,25,000 |
| Tax Amount | ₹32,500 | ₹16,250 |
| Rebate 87A | ₹12,500 (if ≤ ₹7L) | ₹16,250 (if ≤ ₹12L) |
| Final Tax | ₹20,000 | ₹0 |
Winner: New regime by ₹20,000. With ₹50,000 deductions in old regime, you still pay tax. Under new regime, ₹12L rebate makes it zero.
Example 2: Gross Income ₹15 Lakh, Heavy Deductions
| Particulars | Old Regime | New Regime |
|---|---|---|
| Gross Income | ₹15,00,000 | ₹15,00,000 |
| Standard Deduction | ₹50,000 | ₹75,000 |
| HRA Exemption | ₹2,00,000 | Not available |
| 80C | ₹1,50,000 | Not available |
| 80D | ₹25,000 | Not available |
| Home Loan Interest (24b) | ₹2,00,000 | Not available |
| Taxable Income | ₹8,75,000 | ₹14,25,000 |
| Tax Amount | ₹87,500 | ₹83,750 |
Winner: New regime by ₹3,750. Even with ₹6.25 lakh total deductions, the new regime is slightly better. The old regime only wins when deductions exceed ₹6.5-7 lakh at this income level.
Compare Old vs New Regime for your income
Use our free Income Tax Calculator to instantly see which regime saves you more tax.
Use Income Tax Calculator →Frequently Asked Questions
What is the new tax regime in India?
The new tax regime (Section 115BAC) offers lower tax rates with fewer deductions. From FY 2023-24 onwards, it is the default regime with a standard deduction of ₹75,000 and rebate up to ₹12 lakh income.
Is new tax regime better than old?
For most salaried individuals with deductions under ₹3-4 lakh, the new regime is better due to lower rates and ₹75,000 standard deduction. The old regime is better only if you claim heavy deductions (home loan interest, HRA, 80C, 80D totaling above ₹4 lakh).
What is the standard deduction in new tax regime?
The standard deduction in the new tax regime is ₹75,000 for FY 2025-26 (AY 2026-27). This was increased from ₹50,000 in Budget 2024.
Can I switch between old and new tax regime?
Salaried individuals can switch between old and new regime every year while filing ITR. Business owners who opt out of the new regime can only switch back once.
What is the Section 87A rebate in new regime?
Under the new tax regime, if your taxable income is up to ₹12 lakh (after standard deduction of ₹75,000, effectively ₹12.75 lakh gross), you get a full rebate under Section 87A, making your tax liability zero.