Understanding Tax Rules for FY 2026-27
Budget 2026 will be presented by the Finance Minister in February 2026. Until then, taxpayers should plan based on current tax rules applicable to FY 2025-26, while staying alert for changes that may apply from April 2026 onwards.
This guide explains the existing tax framework and illustrates how to evaluate regime choice, calculate tax liability, and plan investments—skills that remain relevant regardless of budget changes. Always verify specific rates, limits, and slabs at incometax.gov.in after Budget 2026 is announced.
Current Income Tax Regime Structure (FY 2025-26)
Indian taxpayers can choose between two tax regimes. The old regime offers numerous deductions and exemptions; the new regime offers lower slab rates but fewer deductions.
Old Tax Regime Slabs (FY 2025-26)
| Income Range (₹) | Tax Rate |
|---|---|
| 0 – 2,50,000 | Nil |
| 2,50,001 – 5,00,000 | 5% |
| 5,00,001 – 10,00,000 | 20% |
| Above 10,00,000 | 30% |
New Tax Regime Slabs (FY 2025-26)
| Income Range (₹) | Tax Rate |
|---|---|
| 0 – 3,00,000 | Nil |
| 3,00,001 – 6,00,000 | 5% |
| 6,00,001 – 9,00,000 | 10% |
| 9,00,001 – 12,00,000 | 15% |
| 12,00,001 – 15,00,000 | 20% |
| Above 15,00,000 | 30% |
Surcharge applies on income above ₹50 lakh (rates vary by income level), plus 4% health and education cess on tax plus surcharge. Verify current slab rates at incometax.gov.in before filing.
Key Deductions and Exemptions: Old vs. New Regime
Old Regime Deductions (FY 2025-26)
- Section 80C: Up to ₹1.5 lakh for EPF, PPF, ELSS, life insurance, tuition fees, home loan principal
- Section 80D: Health insurance premiums up to ₹25,000 (₹50,000 for senior citizens)
- Section 80CCD(1B): Additional ₹50,000 for NPS contributions
- HRA exemption: Based on rent paid, salary, and city of residence
- Section 24(b): Home loan interest deduction up to ₹2 lakh for self-occupied property
- LTA: Leave Travel Allowance (twice in four-year block)
- Standard deduction: ₹50,000 for salaried employees
New Regime Deductions (FY 2025-26)
- Standard deduction: ₹50,000 for salaried employees
- Employer NPS contribution (80CCD(2)): Up to 10% of salary (14% for central government employees)
Most popular deductions—80C, 80D, HRA, home loan interest—are not available under the new regime. This is the core trade-off: lower rates versus deductions.
Worked Example: Choosing Between Regimes
Let's calculate tax liability for a salaried professional under both regimes to understand the decision framework.
Profile: 32-year-old software engineer in Bengaluru
Annual gross salary: ₹12,00,000
Rent paid monthly: ₹20,000
EPF contribution (employee share): ₹1,44,000 (12% of basic)
Life insurance premium: ₹30,000
Health insurance premium: ₹15,000
NPS (own contribution): ₹50,000
Old Regime Calculation
Step 1 – Gross total income: ₹12,00,000
Step 2 – Deductions:
• Standard deduction: ₹50,000
• HRA exemption (least of: actual HRA, rent paid minus 10% of salary, or 50% of basic): assume ₹1,20,000
• 80C (EPF ₹1,44,000 + insurance ₹30,000 = ₹1,74,000, but limited to ₹1,50,000): ₹1,50,000
• 80CCD(1B) (NPS): ₹50,000
• 80D (health insurance): ₹15,000
Total deductions: ₹3,85,000
Step 3 – Taxable income: ₹12,00,000 – ₹3,85,000 = ₹8,15,000
Step 4 – Tax calculation:
• Up to ₹2,50,000: Nil
• ₹2,50,001 to ₹5,00,000 (₹2,50,000): 5% = ₹12,500
• ₹5,00,001 to ₹8,15,000 (₹3,15,000): 20% = ₹63,000
Tax before rebate: ₹75,500
Step 5 – Rebate under 87A: Not applicable (income > ₹5 lakh)
Step 6 – Cess: 4% of ₹75,500 = ₹3,020
Total tax (old regime): ₹75,500 + ₹3,020 = ₹78,520
New Regime Calculation
Step 1 – Gross total income: ₹12,00,000
Step 2 – Deductions:
• Standard deduction: ₹50,000
Total deductions: ₹50,000
Step 3 – Taxable income: ₹12,00,000 – ₹50,000 = ₹11,50,000
Step 4 – Tax calculation:
• Up to ₹3,00,000: Nil
• ₹3,00,001 to ₹6,00,000 (₹3,00,000): 5% = ₹15,000
• ₹6,00,001 to ₹9,00,000 (₹3,00,000): 10% = ₹30,000
• ₹9,00,001 to ₹11,50,000 (₹2,50,000): 15% = ₹37,500
Tax before cess: ₹82,500
Step 5 – Cess: 4% of ₹82,500 = ₹3,300
Total tax (new regime): ₹82,500 + ₹3,300 = ₹85,800
Conclusion: For this profile, the old regime saves ₹7,280 annually. The saver claimed ₹3,85,000 in deductions; had deductions been under ₹2 lakh, the new regime would likely be better.
When to Choose Which Regime
Choose Old Regime If:
- You claim HRA exemption of ₹1 lakh+ annually
- You maximize 80C with EPF, PPF, ELSS, or insurance (₹1.5 lakh)
- You pay home loan interest (up to ₹2 lakh deductible)
- You contribute to NPS beyond employer contribution
- Your total deductions exceed ₹2.5 lakh
Choose New Regime If:
- You live with family (no HRA claim)
- Your 80C investments are minimal (only EPF from employer)
- You have no home loan
- You prefer simplicity and don't want to track investment proofs
- Your gross income is ₹7-10 lakh with minimal deductions
Use a tax saving calculator with your actual salary structure to compare. Small changes in deductions can swing the optimal choice.
What to Expect from Budget 2026
While we cannot predict specific changes, recent budget trends suggest possible areas of reform:
- Adjustment of tax slabs or rates to provide relief to middle-income earners
- Changes to standard deduction amounts
- Rationalization of exemptions and deductions to encourage new regime adoption
- Modifications to rebate limits under Section 87A
- Tweaks to surcharge structure for high earners
After Budget 2026 is presented in February 2026, review the Finance Bill details on incometax.gov.in and recalculate your tax liability. Inform your employer of your regime choice before April 2026 to ensure correct TDS.
Action Steps Before March 31, 2026
- Calculate under both regimes: Use current FY 2025-26 rules and your actual salary, rent, and investments
- Maximize applicable deductions: Complete 80C investments (PPF, ELSS), pay insurance premiums, and ensure rent receipts are ready if claiming HRA
- Check Form 16: Review your employer's TDS deductions and ensure regime choice is correctly applied
- Plan for FY 2026-27: After Budget 2026, re-evaluate and inform your employer of any regime change
- Review long-term goals: Use tools like the financial health checkup and retirement calculator to ensure tax planning aligns with your financial roadmap
Special Considerations
Surcharge and High Earners
Individuals earning above ₹50 lakh pay surcharge on top of base tax. Rates vary: verify the current surcharge structure at incometax.gov.in. At high income levels, even a 1-2% effective rate difference from regime choice can mean ₹50,000+ in annual tax savings.
Advance Tax and TDS
Your regime choice affects monthly TDS by your employer. If you switch regimes mid-year, inform payroll immediately. Freelancers and those with non-salary income must pay advance tax in four installments (June, September, December, March) based on their chosen regime.
NPS and Retirement Planning
NPS offers tax benefits under 80CCD(1B) in the old regime, but not in the new. However, employer NPS contributions remain deductible under 80CCD(2) in both regimes (subject to limits). If retirement tax efficiency is a priority, model both scenarios over 20-30 years, considering upfront tax saved versus corpus growth.
Frequently Asked Questions
As of now, Budget 2026 has not yet been presented. The Union Budget for FY 2026-27 will be announced in February 2026. Current tax rules for FY 2025-26 include a new tax regime with revised slabs, standard deduction of ₹50,000 (new regime) or ₹50,000 (old regime), and various deductions under sections 80C, 80D, HRA etc. under the old regime. Check incometax.gov.in for the latest updates after Budget 2026 is presented.
Choose the new regime if your deductions under 80C, 80D, HRA etc. are minimal (typically under ₹2.5 lakh annually). Choose the old regime if you claim substantial deductions like home loan interest, HRA, or maximize 80C investments. Use a tax calculator to compare both scenarios with your actual salary and deduction figures before deciding.
Budget 2026 will be presented in February 2026. Any tax changes announced will typically apply to Financial Year 2026-27 (Assessment Year 2027-28), meaning they take effect from April 1, 2026. Employers will adjust TDS from April 2026 salary onwards based on the new rules.
For FY 2025-26, the standard deduction is ₹50,000 for salaried individuals under both old and new tax regimes. This deduction is automatically available to all salaried employees and pensioners. Budget 2026 may revise this amount, so verify the latest figures at incometax.gov.in after the budget announcement.
Section 80C deductions (up to ₹1.5 lakh) for EPF, PPF, ELSS, life insurance premiums, etc. are available only under the old tax regime. The new regime does not allow 80C or most other Chapter VIA deductions in exchange for lower tax slab rates. Choose your regime based on your total eligible deductions.
This guide is general information, not personalised financial advice. Rules and limits can change — please check current rules and read our disclaimer. Spotted an error? Tell us.