Salaried taxpayer? Pick your tax regime for FY 2025-26 before it’s too late; know why

With the financial year approaching, salaried employees in India are reminded of their obligation to select between the old and new tax regimes. This choice must be communicated to employers at the start of the fiscal year. Failure to declare a preference results in automatic taxation under the new regime, which is now the default option. This default mechanism aims to streamline tax deduction at source (TDS) processes for employers, who will apply the new tax rates unless instructed otherwise by their employees. 

Under current rules, salaried taxpayers must inform their employers of their choice between the old and new tax regimes at the start of the financial year. If they don’t, employers will default to the new regime while computing tax deducted at source (TDS).

Most employees would have already received an email from their HR teams asking them to confirm their choice—usually due in April. The decision can have a significant impact on your take-home salary and tax liability, so it’s important to compare key differences between the two regimes before making the call.

The old tax regime features a basic exemption limit of Rs 2,50,000, with the highest tax slab at 30% for income above Rs 10,00,000. In contrast, the new tax regime offers a higher basic exemption limit of Rs 4,00,000 and has seven tax slabs with rates ranging from 5% to 30%. 

From FY 2025-26, the highest tax rate of 30% applies to income above Rs 24,00,000. This broader range of tax brackets under the new regime is designed to provide a more tailored approach to tax liabilities based on different income levels.

In terms of rebates, the new tax regime offers significant benefits. It allows a full tax rebate of up to Rs 60,000 for incomes up to Rs 12,00,000 under Section 87A, starting from FY 2025-26. This provision aims to ensure that individuals close to the rebate threshold are not burdened excessively. Marginal relief is also available, limiting additional tax payable to the exact amount by which income exceeds Rs 12,00,000, thereby maintaining equitable taxation. The old regime provides different rebates, with a full tax rebate for incomes up to Rs 5,00,000.

Old Tax Regime
Total Income     Rate of Tax

Upto Rs 2,50,000    Nil
Rs 2,50,001 to Rs 5,00,000    5%
Rs 5,00,001 to Rs 10,00,000    20%
Above Rs 15,00,000    30%

New Tax Regime
Total Income     Rate of Tax
Upto Rs 4,00,000    Nil
Rs 4,00,001 to Rs 8,00,000    5%
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%

Surcharge rates differ significantly between the two regimes, especially for high-net-worth individuals (HNIs). The new tax regime caps the highest surcharge rate at 25% for incomes exceeding ₹5 crore, thereby reducing the effective tax rate from 42.744% to 39%. Conversely, the old regime imposes a 37% surcharge rate for similar high-income levels. These adjustments in the new regime are part of broader efforts to create a more competitive and attractive tax environment for individuals with substantial earnings.

Taxpayers should consider the availability of deductions and exemptions when choosing their regime. The old tax regime allows a variety of deductions, such as investments in tax-saving instruments and premiums on life and medical insurance. In contrast, the new regime restricts deductions to specific allowances like the standard deduction on salary, employer contributions to the National Pension System (NPS), and the Employees Provident Fund (EPF). Employees retain the option to switch between regimes annually and can rectify their choice by filing tax returns at the end of the financial year if they default initially.