Every individual filing an income tax return for FY 2025-26 needs to answer one fundamental question before anything else: which tax regime applies, and what rate is their income being taxed at. For Assessment Year 2026-27, two parallel tax regimes exist side by side, each with its own slab rates, its own exemptions, and its own logic. Choosing the right one can make a meaningful difference to the final tax payable. This article explains both regimes clearly, covers all three age categories, and explains surcharge, the Section 87A rebate, and cess in plain language.
The New Regime Is Now the Default
Since AY 2024-25, the new tax regime under Section 115BAC has been the default regime. This means it applies automatically to every taxpayer unless they actively choose the old regime. The new regime offers lower slab rates but removes most deductions and exemptions. The old regime has higher base rates but allows claims for HRA, Section 80C investments, home loan interest, health insurance premiums, and many other deductions that can significantly reduce taxable income.
For salaried individuals and those without business income, the choice between regimes can be made each year directly in the ITR, as long as the return is filed on or before the due date. For those with business or professional income, switching out of the new regime requires filing Form 10-IEA before the due date, and returning to the new regime after opting out is permitted only once in a lifetime.
Understanding the New Regime Slabs in Detail
The new regime’s slab structure is more granular than the old one. It has seven tax brackets compared to the old regime’s three, which creates a gentler step-up as income rises. The 10 percent and 15 percent brackets in the Rs 8 lakh to Rs 16 lakh range are genuinely lower than the old regime’s 20 percent rate for income above Rs 5 lakh, making the new regime particularly attractive for individuals whose income falls in this middle range without significant deductions to claim.
The 30 percent top rate kicks in above Rs 24 lakh under the new regime, compared to above Rs 10 lakh under the old regime. This means a much larger band of income between Rs 10 lakh and Rs 24 lakh is taxed at lower rates under the new regime, which is a structural advantage for higher-income earners even before the rebate benefit is considered.
How Age Affects the Old Regime Only
Under the new tax regime, the slab structure is identical for all individuals regardless of age. The zero-tax band begins at Rs 4,00,000 for everyone.
Under the old regime, age matters significantly. Individuals below 60 get a basic exemption up to Rs 2,50,000. Senior citizens between 60 and 79 years get a higher exemption up to Rs 3,00,000. Super senior citizens aged 80 and above get the most generous exemption up to Rs 5,00,000, and their slab jumps directly from nil to 20 percent with no 5 percent bracket in between.
Category 1: Individuals Below 60 Years of Age
| Income Slab | Old Tax Regime | New Tax Regime (Default) |
| Up to Rs 2,50,000 | Nil | — |
| Up to Rs 4,00,000 | — | Nil |
| Rs 2,50,001 to Rs 5,00,000 | 5% | — |
| Rs 4,00,001 to Rs 8,00,000 | — | 5% |
| Rs 5,00,001 to Rs 10,00,000 | 20% | — |
| Rs 8,00,001 to Rs 12,00,000 | — | 10% |
| Above Rs 10,00,000 | 30% | — |
| Rs 12,00,001 to Rs 16,00,000 | — | 15% |
| Rs 16,00,001 to Rs 20,00,000 | — | 20% |
| Rs 20,00,001 to Rs 24,00,000 | — | 25% |
| Above Rs 24,00,000 | — | 30% |
Category 2: Senior Citizens (60 Years to Below 80 Years)
| Income Slab | Old Tax Regime | New Tax Regime (Default) |
| Up to Rs 3,00,000 | Nil | — |
| Up to Rs 4,00,000 | — | Nil |
| Rs 3,00,001 to Rs 5,00,000 | 5% | — |
| Rs 4,00,001 to Rs 8,00,000 | — | 5% |
| Rs 5,00,001 to Rs 10,00,000 | 20% | — |
| Rs 8,00,001 to Rs 12,00,000 | — | 10% |
| Above Rs 10,00,000 | 30% | — |
| Rs 12,00,001 to Rs 16,00,000 | — | 15% |
| Rs 16,00,001 to Rs 20,00,000 | — | 20% |
| Rs 20,00,001 to Rs 24,00,000 | — | 25% |
| Above Rs 24,00,000 | — | 30% |
Note: Under the new regime, the slab structure is the same for all age groups.
Category 3: Super Senior Citizens (80 Years and Above)
| Income Slab | Old Tax Regime | New Tax Regime (Default) |
| Up to Rs 5,00,000 | Nil | — |
| Up to Rs 4,00,000 | — | Nil |
| Rs 5,00,001 to Rs 10,00,000 | 20% | — |
| Rs 4,00,001 to Rs 8,00,000 | — | 5% |
| Above Rs 10,00,000 | 30% | — |
| Rs 8,00,001 to Rs 12,00,000 | — | 10% |
| Rs 12,00,001 to Rs 16,00,000 | — | 15% |
| Rs 16,00,001 to Rs 20,00,000 | — | 20% |
| Rs 20,00,001 to Rs 24,00,000 | — | 25% |
| Above Rs 24,00,000 | — | 30% |
Note: Super senior citizens have no 5% slab under the old regime. Income jumps directly from Nil to 20%.
The Section 87A Rebate: Making Rs 12 Lakh Effectively Tax Free
The Section 87A rebate is one of the most powerful features of the current tax framework under the new regime. Under the new regime, the tax computed at slab rates on income of exactly Rs 12,00,000 works out to Rs 60,000. The rebate of Rs 60,000 exactly offsets this, resulting in zero tax payable. For a salaried individual, the standard deduction of Rs 75,000 available under the new regime means the gross salary can be as high as Rs 12,75,000 before the taxable income crosses Rs 12,00,000.
However, the rebate has important limitations. If taxable income is even one rupee above Rs 12,00,000, the rebate does not apply at all. Tax is then computed on the full income, which creates a cliff effect at the threshold. Marginal relief addresses this partially by ensuring the additional tax plus surcharge when crossing Rs 12,00,000 cannot exceed the actual excess income above that amount, but this relief is limited and should not be confused with the rebate itself.
Additionally, certain types of income do not qualify for the rebate. Short-term capital gains taxed under Section 111A and long-term capital gains under Section 112A are taxed at specific flat rates, and the rebate cannot be applied against these. A taxpayer with Rs 10,00,000 of salary income and Rs 3,00,000 of short-term capital gains cannot claim the rebate simply because the salary component alone would be within the threshold.
Under the old regime, the rebate of Rs 12,500 applies where taxable income does not exceed Rs 5,00,000. This is a far more modest benefit and primarily helps lower-income taxpayers.
Rebate Under Section 87A for AY 2026-27
| Particulars | New Tax Regime | Old Tax Regime |
| Maximum rebate amount | Rs 60,000 | Rs 12,500 |
| Income threshold for rebate | Up to Rs 12,00,000 | Up to Rs 5,00,000 |
| Effect of rebate | Tax reduced to zero | Tax reduced to zero |
| Available to | Resident individuals only | Resident individuals only |
Note: The rebate is not available if taxable income exceeds the threshold even by Re 1. Certain income types such as short-term capital gains under Section 111A may not qualify for the rebate. For salaried individuals under the new regime, the standard deduction of Rs 75,000 means gross salary up to Rs 12,75,000 can still result in zero tax after the rebate.
Surcharge: The Tax on Top of Tax
Surcharge is levied on the income tax amount itself, not on the income, which is an important distinction. It applies only when total income crosses Rs 50 lakh. At that point a 10 percent surcharge is added to the computed income tax. As income rises through further thresholds at Rs 1 crore, Rs 2 crore, and Rs 5 crore, the surcharge rate steps up.
The only difference between the two regimes on surcharge is at the top end. Above Rs 5 crore, the new regime caps the surcharge at 25 percent while the old regime goes up to 37 percent. This makes the new regime materially more favourable for very high-income taxpayers, since the effective maximum tax rate under the new regime stays lower at this level.
For capital gains income specifically, the enhanced surcharge rates do not apply. Income taxable under Section 111A (short-term capital gains on equity), Section 112 (other long-term capital gains), and Section 112A (long-term capital gains on listed equity and equity mutual funds) and dividend income are all capped at a maximum 15 percent surcharge regardless of total income. This cap applies under both regimes.
Marginal relief protects taxpayers whose income just crosses a surcharge threshold. Without it, earning Rs 1 above Rs 50 lakh could trigger a disproportionately large tax jump. Marginal relief ensures the incremental tax and surcharge when crossing any threshold cannot exceed the actual amount of income by which the threshold was crossed.
Surcharge on Income Tax for AY 2026-27
| Total Income | New Tax Regime | Old Tax Regime |
| Up to Rs 50 lakh | Nil | Nil |
| Rs 50 lakh to Rs 1 crore | 10% | 10% |
| Rs 1 crore to Rs 2 crore | 15% | 15% |
| Rs 2 crore to Rs 5 crore | 25% | 25% |
| Above Rs 5 crore | 25% | 37% |
Health and Education Cess
A health and education cess of 4 percent is levied on the combined amount of income tax plus surcharge. This applies under both the old and new tax regimes without exception and for all categories of taxpayers. There are no exemptions, deductions, or rebates available against cess. It is calculated last, after income tax and surcharge have both been computed, and added to arrive at the total tax liability.
Old Regime vs New Regime: Who Benefits More
The new regime benefits taxpayers who have limited deductions to claim. If total deductions including HRA exemption, Section 80C investments, Section 80D premiums, home loan interest, and other items add up to less than roughly Rs 3.75 lakh for an individual in the Rs 10 to 15 lakh income range, the new regime generally results in lower tax. The break-even point varies by income level, so running the actual numbers with specific figures rather than applying a general rule is the most reliable approach.
The old regime benefits taxpayers who pay significant rent and claim full HRA exemption, have a home loan with substantial interest payments, maximise Section 80C investments, pay health insurance premiums for themselves and their parents, and have other eligible deductions that together bring taxable income down substantially. For taxpayers who can genuinely reduce their taxable income by Rs 4 lakh or more through these deductions, the old regime often still results in lower net tax despite its higher headline slab rates.
Frequently Asked Questions
1. Which tax regime is the default for AY 2026-27? The new tax regime under Section 115BAC is the default. It applies automatically unless a taxpayer actively opts for the old regime. Salaried individuals without business income can make this choice each year directly in the ITR, as long as it is filed on or before the due date.
2. Can the old and new regime be compared before filing? Yes. The income tax portal now shows a comparison of tax liability under both regimes based on the data entered, and allows the taxpayer to choose before submission. It is worth running this comparison every year rather than assuming the same regime as last year is still better, since income structure and deductions can change.
3. What happens if taxable income is Rs 12,00,001 under the new regime? The Section 87A rebate does not apply. Tax is computed on the full Rs 12,00,001 at the applicable slab rates. Marginal relief ensures that the additional tax payable because of crossing the threshold does not exceed Rs 1, the amount of excess income, though the exact marginal relief calculation depends on the specific figures.
4. Is surcharge calculated on income or on tax? On tax. Surcharge is a percentage of the income tax amount, not of the income itself. A 10 percent surcharge on Rs 50,000 of income tax equals Rs 5,000 in surcharge, giving total tax before cess of Rs 55,000.
5. Does the 4 percent cess apply to everyone? Yes. Health and education cess at 4 percent applies on the combined income tax plus surcharge under both regimes, for all categories of taxpayers, without exception.
6. Are capital gains taxed differently under the two regimes? Capital gains are taxed at specific flat rates under both regimes, such as 20 percent for short-term gains on equity and 12.5 percent for long-term gains on equity above Rs 1.25 lakh. These rates apply regardless of which regime the taxpayer has chosen. The regime choice primarily affects income taxed at slab rates.
7. What is the maximum effective tax rate under the new regime? At the highest income levels above Rs 5 crore, the maximum marginal rate under the new regime is 30 percent slab rate plus 25 percent surcharge on that tax, plus 4 percent cess, resulting in an effective rate of approximately 39 percent. Under the old regime at the same income level, the 37 percent surcharge pushes the effective rate to approximately 42.74 percent, making the new regime materially more favourable at very high income levels.
8. Is there a benefit to filing early in terms of regime choice? Not directly on regime choice, but filing before the due date is essential to preserve the right to choose the old regime for salaried individuals, and is mandatory for filing Form 10-IEA for those with business income. A belated return filed after the due date locks the taxpayer into the new regime for that year.
