How to Save Tax in the New Tax Regime (FY 2025-26 / AY 2026-27)

Why the New Tax Regime Is the Default Now

Since FY 2023-24, the new tax regime under Section 115BAC is the default option for every taxpayer; if you don’t actively choose the old regime while filing, the new regime applies automatically. This matters practically for salaried employees: if you don’t submit an explicit regime declaration to your employer at the start of the financial year, TDS on your salary will be computed assuming the new regime.

Income Tax Slabs Under the New Regime for FY 2025-26

What are the new tax regime slabs for FY 2025-26?

For FY 2025-26 (Assessment Year 2026-27), the new regime taxes income at 0% up to ₹4 lakh, 5% from ₹4–8 lakh, 10% from ₹8–12 lakh, 15% from ₹12–16 lakh, 20% from ₹16–20 lakh, 25% from ₹20–24 lakh, and 30% above ₹24 lakh.

A 4% Health and education cess applies on top of the computed tax, and a surcharge applies at higher income levels as per the current schedule, check the latest notification for exact surcharge slabs before finalizing high-income tax computations.

The Section 87A Rebate, Zero Tax up to ₹12 Lakh

How does the Section 87A rebate make income up to ₹12 lakh tax-free?

Budget 2025 raised the Section 87A rebate under the new regime to ₹60,000, which exactly cancels out the tax liability on a taxable income of ₹12 lakh, so any resident individual with taxable income up to ₹12 lakh pays zero tax, and a salaried individual effectively gets this benefit up to ₹12.75 lakh gross income once the ₹75,000 standard deduction is applied.

This rebate has two important limits founders and salaried taxpayers often miss: it applies only to income taxed at normal slab rates, not to special-rate income such as short-term or long-term capital gains, lottery winnings, or certain other categories, so a taxpayer with ₹11 lakh salary income and ₹2 lakh short-term capital gains does not get a fully tax-free outcome despite total income being under ₹13 lakh. Marginal relief also applies for income just above ₹12 lakh, so the tax increase is graded rather than an abrupt jump.

Deductions You Can Still Claim in the New Regime

Contrary to popular belief, the new regime is not deduction-free. Here’s what survives:

• Standard deduction of ₹75,000, available automatically to all salaried individuals and pensioners, no proof or investment required
• Employer’s NPS contribution under Section 80CCD(2), up to 14% of salary (basic + DA) for both government and private sector employees from FY 2025-26, deducted from taxable salary; note this is the employer’s contribution, not your own voluntary NPS contribution, which is not separately deductible under the new regime.
• Agniveer Corpus Fund contribution under Section 80CCH: for individuals enrolled under the Agnipath scheme, covering both their own and the government’s contribution to the Seva Nidhi account
• Deduction for family pension: a flat deduction (lower of ₹15,000 or one-third of the pension) remains available to family pensioners
• Interest on let-out property; deduction for interest on a home loan continues to be available against rental income from a let-out property (though not for a self-occupied property, unlike the old regime)
• Transport allowance for specially abled employees and conveyance allowance for actual travel; certain specific exemptions notified for employees continue under the new regime.

What You Lose by Choosing the New Regime

• Section 80C deductions (₹1.5 lakh limit); PPF, ELSS, life insurance premium, home loan principal repayment
• Section 80D, health insurance premium deduction
• HRA exemption for salaried employees paying rent
• Interest deduction on a home loan for a self-occupied property under Section 24(b)
• Section 80E: interest on education loans
• Section 80G donations to most charitable institutions (a few specific national funds remain available under some structures; verify current notification before assuming any 80G deduction applies)
• Leave Travel Allowance (LTA) exemption

How to Decide: New Regime vs. Old Regime

The new regime tends to work better if you don’t have significant Section 80C investments, don’t pay rent (no HRA to claim), or your employer already contributes meaningfully to NPS. The old regime still wins for taxpayers who fully utilize the ₹1.5 lakh Section 80C limit, claim HRA on genuine rent payments, have a home loan on a self-occupied property, or claim substantial health insurance premiums under Section 80D. Since you can typically switch between regimes each year (with some restrictions for those with business income), it’s worth recalculating both ways before filing, rather than assuming last year’s choice is still optimal.

Worked Example

Consider a salaried employee with a gross salary of ₹15 lakh for FY 2025-26, with an employer NPS contribution of 10% of basic salary (basic assumed at ₹6 lakh, so ₹60,000 employer NPS contribution):

• Gross salary: ₹15,00,000
• Less: Standard deduction: ₹75,000
• Less: Employer NPS contribution under 80CCD(2): ₹60,000
• Taxable income: ₹13,65,000
• Tax as per slabs: Nil on first ₹4L + 5% on next ₹4L (₹20,000) + 10% on next ₹4L (₹40,000) + 15% on remaining ₹165,000 (₹24,750) = ₹84,750
• Since taxable income exceeds ₹12 lakh, the ₹60,000 rebate does not apply here; a cess of 4% is added: ₹84,750 + ₹3,390 = approximately ₹88,140 total tax
• This example shows why the ₹12 lakh threshold matters so much; a salary structured to keep taxable income just under that line (through employer NPS optimization, for instance) can mean the difference between zero tax and a meaningful tax outflow.

Key Takeaways

• Income up to ₹12 lakh (₹12.75 lakh for salaried taxpayers after standard deduction) is effectively tax-free under the new regime for FY 2025-26, due to the enhanced Section 87A rebate.
• The new regime is now the default; you must actively opt for the old regime if you want it.
• Employer NPS contribution under Section 80CCD(2), now up to 14% of salary for all employees, remains one of the most powerful deductions still available in the new regime.
• Popular deductions like Section 80C, 80D, and HRA are not available in the new regime; compare both regimes’ outcomes before filing.
• The 87A rebate does not apply to special-rate income like capital gains, so total income and taxable-at-slab-rate income are not always the same thing.

FAQs

Is income up to ₹12 lakh really tax-free under the new regime?

Yes, for FY 2025-26, a resident individual with taxable income up to ₹12 lakh pays zero tax under the new regime due to the Section 87A rebate of up to ₹60,000, and salaried individuals get this effectively up to ₹12.75 lakh gross income after the ₹75,000 standard deduction.

Can I claim 80C deductions like PPF and ELSS in the new tax regime?

No, Section 80C deductions are not available under the new tax regime; they remain available only under the old tax regime.

Is employer NPS contribution taxable in the new regime?

No, employer contributions to NPS up to 14% of salary (Basic + DA) are deductible under Section 80CCD(2) in the new regime for both government and private sector employees from FY 2025-26.

Do I need to submit investment proofs to claim the standard deduction in the new regime?

No, the ₹75,000 standard deduction is available automatically to all salaried individuals and pensioners without any investment proof or documentation.

Can I switch between the old and new tax regime every year?

Salaried individuals without business income can choose between the old and new regime each financial year when filing their return; those with business or professional income have more limited switching options once they opt out of the default regime.

Does the Section 87A rebate apply to capital gains income? No, the Section 87A rebate applies only to income taxed at normal slab rates and does not apply to special-rate income such as short-term or long-term capital gains, so total income above ₹12 lakh, including such gains does not automatically mean zero tax on the slab-rate portion either, the calculation needs to be done carefully.

Talk to Growthora.

Choosing between the old and new tax regime and structuring your salary to legally minimize tax within the new regime’s rules is easier with a professional running the actual numbers for your specific salary structure. Book a free consultation with Growthora Advisory’s taxation team for a personalized comparison.