Authored by Vipin1. Statutory Overview and Legislative Intent
For decades, India's personal income tax system combined relatively high slab rates with a long list of exemptions and deductions that rewarded particular kinds of saving and spending. The Finance Act, 2020 introduced an alternative concessional regime in Section 115BAC with lower rates but almost no deductions. The Finance Act, 2023 made it the default regime from FY 2023-24, and the Finance Act, 2025 reworked the slabs and raised the rebate so that resident individuals with total income up to Rs. 12 lakh pay no tax. The policy intent is to simplify, reduce compliance and leave saving decisions to the taxpayer.
The Income-tax Act, 2025 carries the new regime forward as the default (in Section 202 of the new Act), with the old structure available by choice subject to conditions. For companies, the Taxation Laws (Amendment) Act, 2019 introduced concessional rates in Sections 115BAA (22% for existing domestic companies that forgo specified incentives) and 115BAB (15% for new manufacturing companies, a window that has now closed for new entrants).
Who the regimes apply to
- New regime (default): individuals, HUFs, associations of persons (other than co-operative societies), bodies of individuals and artificial juridical persons.
- Old regime (optional): available on exercising the option within the prescribed time and manner.
- Companies: normal rates, or the concessional regimes on exercising the option in the prescribed form.
2. Applicability and Threshold Matrix
A. Slab rates for individuals and HUFs (as carried forward from the Finance Act, 2025)
| Total income slab (Rs.) | New regime rate | Old regime rate (below 60 years) | Old regime (60 to 79 years) | Old regime (80 years and above) |
|---|---|---|---|---|
| 0 to 2,50,000 | Nil | Nil | Nil | Nil |
| 2,50,001 to 3,00,000 | Nil | 5% | Nil | Nil |
| 3,00,001 to 4,00,000 | Nil | 5% | 5% | Nil |
| 4,00,001 to 5,00,000 | 5% | 5% | 5% | Nil |
| 5,00,001 to 8,00,000 | 5% | 20% | 20% | 20% |
| 8,00,001 to 10,00,000 | 10% | 20% | 20% | 20% |
| 10,00,001 to 12,00,000 | 10% | 30% | 30% | 30% |
| 12,00,001 to 16,00,000 | 15% | 30% | 30% | 30% |
| 16,00,001 to 20,00,000 | 20% | 30% | 30% | 30% |
| 20,00,001 to 24,00,000 | 25% | 30% | 30% | 30% |
| Above 24,00,000 | 30% | 30% | 30% | 30% |
Health and Education Cess at 4% applies on tax plus surcharge in both regimes. The rates and rebate above are those in force for FY 2025-26 and carried into the new law; confirm against the rates applicable to tax year 2026-27 as finally enacted, including any change made by the Finance Act, 2026.
B. Key features compared
| Feature | New regime | Old regime |
|---|---|---|
| Standard deduction (salary and pension) | Rs. 75,000 | Rs. 50,000 |
| Family pension deduction | Rs. 25,000 or one-third of pension, whichever is lower | Rs. 15,000 or one-third, whichever is lower |
| Rebate (Section 87A, resident individuals) | Up to Rs. 60,000 where total income does not exceed Rs. 12 lakh, with marginal relief just above Rs. 12 lakh; not available against tax on special-rate incomes such as capital gains under Sections 111A and 112A | Up to Rs. 12,500 where total income does not exceed Rs. 5 lakh |
| Effective nil-tax salary | Rs. 12.75 lakh (Rs. 12 lakh plus standard deduction), where there is no special-rate income | Depends on deductions |
| Maximum surcharge | 25% (income above Rs. 2 crore) | 37% (income above Rs. 5 crore) |
| Section 80C (Rs. 1.5 lakh), 80D, 80E, 80G, 80TTA and 80TTB, 80CCD(1B) | Not allowed | Allowed |
| Section 80CCD(2): employer contribution to NPS | Allowed up to 14% of salary | Allowed up to 10% of salary (14% for Government employees) |
| Section 80CCH (Agnipath) and 80JJAA (new employment) | Allowed | Allowed |
| House rent allowance (Section 10(13A)) and leave travel concession (Section 10(5)) | Not allowed | Allowed |
| Interest on housing loan, self-occupied property (Section 24(b), up to Rs. 2 lakh) | Not allowed (allowed for let-out property against that income) | Allowed |
| Professional tax (Section 16(iii)) and entertainment allowance | Not allowed | Allowed |
| Gratuity, leave encashment on retirement, VRS compensation, commuted pension exemptions | Allowed | Allowed |
C. Surcharge rates
| Total income | New regime | Old regime |
|---|---|---|
| Above Rs. 50 lakh up to Rs. 1 crore | 10% | 10% |
| Above Rs. 1 crore up to Rs. 2 crore | 15% | 15% |
| Above Rs. 2 crore up to Rs. 5 crore | 25% | 25% |
| Above Rs. 5 crore | 25% | 37% |
Surcharge on dividend income and on capital gains under Sections 111A, 112 and 112A is capped at 15%.
D. Corporate tax rates
| Category | Base rate | Surcharge | Effective maximum rate (with 4% cess) | MAT |
|---|---|---|---|---|
| Domestic company with turnover or gross receipts up to Rs. 400 crore in the reference year | 25% | 7% above Rs. 1 crore; 12% above Rs. 10 crore | 29.12% | 15% of book profit (Section 115JB) |
| Other domestic companies | 30% | 7% above Rs. 1 crore; 12% above Rs. 10 crore | 34.944% | 15% of book profit |
| Section 115BAA (any domestic company opting) | 22% | 10% flat | 25.168% | Not applicable |
| Section 115BAB (new manufacturing companies incorporated on or after 1 October 2019 that commenced manufacturing by 31 March 2024) | 15% | 10% flat | 17.16% | Not applicable |
| Foreign company | 35% | 2% above Rs. 1 crore; 5% above Rs. 10 crore | 38.22% | 15% of book profit where applicable |
| Firms and LLPs | 30% | 12% above Rs. 1 crore | 34.944% | Alternate Minimum Tax at 18.5% where applicable |
Conditions for Section 115BAA: the company must compute income without deductions such as Section 10AA (SEZ units), additional depreciation under Section 32(1)(iia), Section 32AD, 33AB, 33ABA, 35(1)(ii), (iia), (iii) and 35(2AA), 35AD, 35CCC and 35CCD, and Chapter VI-A deductions other than Section 80JJAA and 80M; it cannot set off losses or unabsorbed depreciation attributable to these deductions. The option, once exercised in Form 10-IC, cannot be withdrawn.
3. Step-by-Step Compliance and Filing Workflow
A. Salaried employees
- April: declare the intended regime to the employer. If no declaration is made, the employer deducts TDS under Section 192 as per the new (default) regime, as clarified by CBDT Circular No. 04/2023.
- During the year: under the old regime, submit investment declarations and, by January or February, proofs in Form 12BB (rent receipts and landlord PAN where rent exceeds Rs. 1 lakh a year, LTC bills, home loan interest certificate, 80C and 80D proofs).
- After year end: obtain Form 16 by 15 June, download the Annual Information Statement (AIS) and Taxpayer Information Summary (TIS) from incometax.gov.in, and reconcile salary, interest, dividends and capital gains.
- Choose the final regime in the return. A salaried person without business income may choose either regime afresh each year in the return of income, filed by the due date, even if a different regime was declared to the employer.
- File the return on the e-filing portal (ITR-1 or ITR-2 as applicable), and e-verify within 30 days using Aadhaar OTP, net banking, bank or demat account EVC, or DSC.
B. Individuals and HUFs with business or professional income
- The new regime applies by default. To opt for the old regime, file Form 10-IEA on or before the due date for filing the return of income for that year.
- Once opted out, the taxpayer can re-enter the new regime only once in a lifetime (by withdrawing the option in Form 10-IEA). After that, the old regime cannot be chosen again while business income exists.
- Compute advance tax liability under the chosen regime and pay instalments on time to avoid interest under Sections 234B and 234C.
C. Companies
- Evaluate the 115BAA option: compare normal tax with MAT, available MAT credit, and the deductions that would be lost (especially SEZ and Section 80-IA type incentives).
- File Form 10-IC on or before the due date of filing the return for the first year in which the option is exercised. Form 10-ID applied for Section 115BAB.
- Report the option in the return (ITR-6) and in the tax audit report. Advance tax and MAT computations change accordingly.
D. A worked comparison (salaried resident, below 60 years)
| Item | New regime (Rs.) | Old regime (Rs.) |
|---|---|---|
| Gross salary | 15,00,000 | 15,00,000 |
| Standard deduction | 75,000 | 50,000 |
| HRA exemption (assumed) | Nil | 1,50,000 |
| Section 80C | Nil | 1,50,000 |
| Section 80D (self and family) | Nil | 25,000 |
| Section 80CCD(1B) | Nil | 50,000 |
| Taxable income | 14,25,000 | 10,75,000 |
| Tax on slabs | 93,750 (20,000 + 40,000 + 33,750) | 1,35,000 (12,500 + 1,00,000 + 22,500) |
| Cess at 4% | 3,750 | 5,400 |
| Total tax | 97,500 | 1,40,400 |
In this example the new regime saves Rs. 42,900 despite deductions of Rs. 4.25 lakh under the old regime. As a rule of thumb, the old regime becomes competitive only for taxpayers with very large deductions, typically substantial HRA together with home loan interest on a self-occupied house. Always run both computations every year.
E. Marginal relief just above Rs. 12 lakh
Assume a resident salaried individual under the new regime with gross salary of Rs. 12,85,000 and no other income. Taxable income after the standard deduction of Rs. 75,000 is Rs. 12,10,000, which is just above the rebate limit, so the Section 87A rebate is not available in the normal way. Tax on slabs would be Rs. 61,500 (Rs. 20,000 on the 4 to 8 lakh slab, Rs. 40,000 on the 8 to 12 lakh slab, and Rs. 1,500 at 15% on the Rs. 10,000 above Rs. 12 lakh). Marginal relief limits the tax to the income exceeding Rs. 12 lakh, that is Rs. 10,000. Tax payable is therefore Rs. 10,000 plus cess of Rs. 400, a total of Rs. 10,400, not Rs. 63,960. Payroll software must apply this relief in TDS computations, otherwise employees near the threshold suffer excess deduction.
F. When the old regime still wins
Consider gross salary of Rs. 24 lakh with HRA exemption of Rs. 3,60,000 (high rent in a metro), Section 80C of Rs. 1,50,000, Section 80D of Rs. 75,000 (self and senior citizen parents), Section 80CCD(1B) of Rs. 50,000 and interest on a self-occupied home loan of Rs. 2,00,000. Under the old regime the deductions, including the standard deduction of Rs. 50,000, total Rs. 8,85,000 and taxable income is Rs. 15,15,000. Under the new regime, taxable income is Rs. 23,25,000. Old regime tax: Rs. 1,12,500 on income up to Rs. 10 lakh plus Rs. 1,54,500 at 30% on Rs. 5,15,000, total Rs. 2,67,000 before cess. New regime tax: Rs. 20,000 plus Rs. 40,000 plus Rs. 60,000 plus Rs. 80,000 plus Rs. 81,250 (25% on Rs. 3,25,000), total Rs. 2,81,250 before cess. Here the old regime saves about Rs. 14,250 before cess. The lesson: taxpayers with large HRA, home loan interest and full use of other deductions should compute both.
4. Statutory Due Dates and Frequency Table
| Action | Who | Due date for FY 2026-27 |
|---|---|---|
| Regime intimation to employer | Salaried employees | At the start of the year (on joining for new employees); default applies otherwise |
| Advance tax instalments | All taxpayers with liability of Rs. 10,000 or more | 15 June 2026, 15 September 2026, 15 December 2026 and 15 March 2027 |
| Form 16 to employees | Employers | 15 June 2027 |
| Form 10-IEA (opt out of new regime) | Individuals and HUFs with business income | On or before the due date of the return |
| Return of income, non-audit cases | Individuals, HUFs and others not liable to audit | 31 July 2027, unless a different date is prescribed under the new Act or extended by CBDT |
| Return of income, audit cases and companies | Companies and taxpayers liable to tax audit | 31 October 2027 (30 November 2027 where transfer pricing reports are required) |
| Form 10-IC (Section 115BAA) | Domestic companies opting | On or before the due date of return of the first year of option |
5. Interest, Late Fees and Penal Consequences
| Default | Provision (1961 Act reference) | Consequence |
|---|---|---|
| Late filing of return | Section 234A | Simple interest at 1% per month or part on unpaid tax from the due date to the date of filing |
| Shortfall in advance tax | Sections 234B and 234C | 1% per month; see the companion article on advance tax for computation |
| Late filing fee | Section 234F | Rs. 5,000; Rs. 1,000 where total income does not exceed Rs. 5 lakh |
| Form 10-IEA not filed in time | Section 115BAC(6) | Taxpayer with business income remains in the new regime for that year |
| Wrong claim of deductions in the new regime, or of rebate against special-rate income | Section 143(1) adjustments; Section 270A | Disallowance in processing with demand and interest; penalty for under-reporting at 50% of tax on under-reported income, or 200% for misreporting |
| Bogus deduction claims (for example fictitious rent receipts or donations) | Section 270A(9); Section 276C | Misreporting penalty of 200% and possible prosecution |
6. Practical Audit Pitfalls and Best Practices
- Run both computations every year. Changes in salary, rent, loans and family health insurance can flip the answer.
- Remember special-rate incomes and rebate. A taxpayer with Rs. 11 lakh of salary income and Rs. 2 lakh of short-term capital gains under Section 111A cannot use the Section 87A rebate against tax on the capital gains.
- Business taxpayers must calendar Form 10-IEA. Missing the form means the default regime applies, and the switch-back rule limits future flexibility.
- Check employer NPS structuring. Section 80CCD(2) is one of the few deductions available in the new regime and can be built into salary structures.
- For companies, model MAT credit. A company with large MAT credit may benefit from deferring the move to Section 115BAA until the credit is used.
- Keep evidence for old regime claims. The department matches HRA claims with landlord PANs, and deduction claims with AIS data. Unsupported claims are a major source of notices under the e-verification scheme.
- Watch transition mapping. From tax year 2026-27, cite the provisions of the Income-tax Act, 2025 in declarations and correspondence, using the official mapping, especially in employer forms and board resolutions.
7. Statutory References and Official Sources
- Income-tax Act, 2025 (in force from 1 April 2026), including the provisions on the default concessional regime for individuals and others (Section 202) and on rates of tax; and the official section mapping utility on incometax.gov.in.
- Income-tax Act, 1961 (for FY 2025-26 and earlier): Sections 10(5), 10(13A), 16, 24(b), 80C, 80CCD, 80CCH, 80D, 80JJAA, 87A, 111A, 112, 112A, 115BAA, 115BAB, 115BAC, 115JB, 234A, 234B, 234C, 234F and 270A.
- Finance Act, 2020 (introduction of Section 115BAC); Finance Act, 2023 (new regime as default); Finance (No. 2) Act, 2024 (standard deduction of Rs. 75,000 and capital gains rates); Finance Act, 2025 (revised slabs and Rs. 60,000 rebate).
- Taxation Laws (Amendment) Act, 2019 (Sections 115BAA and 115BAB).
- CBDT Circular No. 04/2023 dated 5 April 2023 (TDS on salary and choice of regime).
- Income-tax Rules: Forms 10-IEA, 10-IC, 10-ID, 12BB and 16 (or their successors under the Rules framed under the 2025 Act).
- Official portals: incometax.gov.in (e-filing, AIS, forms and section mapping); cbdt circulars and notifications at incometaxindia.gov.in.