What Is the Alternative Tax Regime? Slabs, Deductions, and Switching

India’s new tax regime is the default income tax system under Section 115BAC, offering lower slab rates in exchange for giving up most traditional deductions and exemptions. Understanding the new tax regime’s slabs and deductions matters because since the Finance Act 2023, your income is taxed under these rates automatically unless you actively opt out.¹ For Assessment Year 2026-27, individuals with income up to ₹12 lakh pay no tax at all (₹12.75 lakh for salaried taxpayers, once the standard deduction is applied), and the slabs above that threshold have been widened to reduce liability at almost every income level.²

Slab Rates for Assessment Year 2026-27

Budget 2025 restructured the slabs, added a new 25 percent bracket, and pushed the top 30 percent rate further up the income scale. The rates that apply for AY 2026-27 are:

Up to ₹4,00,000: nil
₹4,00,001 to ₹8,00,000: 5 percent
₹8,00,001 to ₹12,00,000: 10 percent
₹12,00,001 to ₹16,00,000: 15 percent
₹16,00,001 to ₹20,00,000: 20 percent
₹20,00,001 to ₹24,00,000: 25 percent
Above ₹24,00,000: 30 percent

These rates apply to your net taxable income after the standard deduction (for salaried individuals) but before any Section 87A rebate.³ The nil-tax bracket has expanded from ₹3 lakh to ₹4 lakh compared to the previous year, and each subsequent bracket is wider than before.

The ₹12 Lakh Zero-Tax Threshold

Under an enhanced Section 87A rebate, individuals with total income up to ₹12,00,000 owe zero income tax. Salaried taxpayers effectively get a ₹12,75,000 ceiling because the ₹75,000 standard deduction brings taxable income back down to ₹12 lakh.² The rebate does not apply to special-rate income such as short-term or long-term capital gains.

Marginal relief prevents a small overshoot from creating a disproportionate tax bill. If your income slightly exceeds ₹12 lakh, the tax payable is capped at the amount by which your income exceeds the threshold. Someone earning ₹12,10,000 pays only ₹10,000 in tax, not the ₹61,500 that a straight slab calculation would produce. This relief phases out gradually and disappears around ₹12,75,000, after which the full slab rates apply with no rebate.

Deductions You Keep Under the New Regime

The new regime is not a total wipeout of tax benefits. Several deductions and exemptions survive:

Standard deduction of ₹75,000 for salaried employees and pensioners, with no documentation required.²
Employer NPS contributions under Section 80CCD(2), deductible up to 14 percent of your salary (basic plus dearness allowance).⁴
Agniveer Corpus Fund contributions under Section 80CCH.
Section 80JJAA deduction for businesses on the additional cost of hiring new employees.⁵
Gratuity exemption up to ₹20 lakh for employees covered under the Payment of Gratuity Act.
Leave encashment exemption at retirement, up to ₹25 lakh for non-government employees.
Home loan interest on a let-out property, deductible in full against rental income.

The employer NPS deduction is the one taxpayers most often overlook. Many assume all Chapter VI-A deductions vanish under the new regime and fail to claim what their employer is already contributing on their behalf. That amount reduces your taxable income even here.

Deductions and Exemptions You Give Up

The price of the lower rates is the loss of most benefits that anchor traditional tax planning. The major casualties:

Section 80C: no deduction for life insurance premiums, PPF, ELSS, tuition fees, or home loan principal repayment.
Section 80D: no deduction for health insurance premiums or preventive health check-ups.
House Rent Allowance (HRA) received from your employer is fully taxable.
Leave Travel Allowance (LTA) exemption is not available.
Professional tax and entertainment allowance deductions under Section 16(ii) and 16(iii) are not permitted.

The full list of forfeited exemptions is long and covers everything from savings account interest under Section 80TTA to charitable donations under Section 80G. Section 115BAC explicitly lists each provision that must be disregarded when computing income under the new regime.⁶

How Homeowners Are Affected

The new regime hits homeowners with self-occupied property the hardest. Under the old regime, Section 24(b) allows a deduction of up to ₹2 lakh of home loan interest annually. Under the new regime, that deduction vanishes entirely for self-occupied homes. A large EMI on a housing loan can, by itself, tilt the math back toward the old regime.

Let-out properties fare differently. You can still deduct the full interest paid on the housing loan against rental income from that property. But if the interest exceeds the rent and creates a loss under the “Income from House Property” head, that loss cannot be set off against salary or other income. Under the old regime, up to ₹2 lakh of such housing loss could be offset against other income. Under the new regime, the loss stays trapped under the house property head, and no carry-forward is permitted either.

Old Regime or New Regime: How to Decide

No universal breakeven exists because the answer depends entirely on which deductions you actually use. As a rough guide: if your total deductions and exemptions under the old regime (80C, 80D, HRA, home loan interest, and so on) add up to less than about ₹3 to ₹4 lakh, the new regime will almost certainly save you money thanks to the wider slabs and the higher zero-tax threshold. The more deductions you claim, the more competitive the old regime becomes. A taxpayer with a large home loan on a self-occupied property, substantial health insurance premiums, and fully utilized 80C investments will often still come out ahead under the old regime.

The Income Tax Department provides an online calculator on its e-filing portal that lets you run the numbers under both regimes before you decide.⁵

Switching Regimes and Form 10-IEA

Because the new regime is the default, most taxpayers do not need to file any additional form. You simply file your Income Tax Return, and the system applies the new regime’s slabs.

Salaried individuals who want the old regime can switch back every year at the time of filing. The choice is not permanent, so you can compare and pick whichever gives the lower liability each year.

Taxpayers with business or professional income face tighter rules. To opt out of the new regime, you must file Form 10-IEA on the e-filing portal before the filing deadline for that assessment year.⁷ The form asks for your PAN, the assessment year, and details of your business income. The catch: this form can be used only twice in your lifetime, once to opt out of the new regime and once to re-enter it.⁸ A business owner who opts out without thinking it through may find themselves locked into the old regime even after their circumstances change.

Surcharge on High Incomes

Once your total income crosses certain thresholds, a surcharge applies on top of the calculated tax:

₹50,00,001 to ₹1,00,00,000: 10 percent surcharge
₹1,00,00,001 to ₹2,00,00,000: 15 percent surcharge
Above ₹2,00,00,000: 25 percent surcharge

The new regime caps the maximum surcharge at 25 percent, compared with the old regime where surcharges could reach 37 percent on incomes above ₹5 crore.⁹ Marginal relief applies at each surcharge threshold to prevent a small increase in income from producing a disproportionate jump in total tax. A health and education cess of 4 percent is added on top of the tax-plus-surcharge amount for all taxpayers.

1
Press Information Bureau. Clarification Regarding Applicability of New Tax Regime and Old Tax Regime
2
Press Information Bureau. No Income Tax on Annual Income Upto Rs 12 Lakh
3
Income Tax Department. Tax Rates for AY 2026-27
4
National Pension System Trust. Tax Benefits Under NPS
5
Income Tax Department. FAQs on New Tax vs Old Tax Regime
6
Income Tax Department. Section 115BAC
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Income Tax Department. Form 10-IEA FAQ
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Income Tax Department. Form 10-IEA User Manual
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Income Tax Department. Salaried Individuals for AY 2026-27