The Income-tax Act provides taxpayers with a choice between the old tax regime and the new tax regime. While both regimes are designed to compute an individual’s tax liability, the key difference lies in the availability of exemptions, deductions, and rebates.
The old tax regime allows taxpayers to claim a wide range of exemptions and deductions, whereas the new tax regime offers comparatively lower tax rates and a simplified structure with limited tax benefits. Therefore, taxpayers should clearly understand the distinction between exemptions, deductions, and rebates before choosing a regime.
Deductions – Deductions reduce the Gross Total Income before tax is calculated
| Deduction | Old Tax Regime | New Tax Regime |
| Standard Deduction | Available – Rs 50,000 | Available – Rs 75,000 |
| Section 80C (PF, PPF, ELSS, Life Insurance, Principal Repayment of Housing Loan, etc.) | Available – Up to Rs 1,50,000 | Not Available |
| Section 80CCD(1B) – Additional NPS Contribution | Available – Up to Rs 50,000 | Not Available |
| Section 80D – Medical Insurance Premium | Available – Up to prescribed limits | Not Available |
| Section 80E – Interest on Education Loan | Available | Not Available |
| Section 80G – Donations to Eligible Funds/Institutions | Available (subject to conditions) | Not Available |
| Section 24(b) – Interest on Self-Occupied House Property | Available – Up to Rs 2,00,000 | Not Available |
| Section 80CCD(2) – Employer’s Contribution to NPS | Available | Available (subject to prescribed limits) |
Exemptions – Exemptions reduce the amount of income that is taxable
| Exemption | Old Tax Regime | New Tax Regime |
| House Rent Allowance (HRA) | Available | Not Available |
| Leave Travel Allowance (LTA) | Available | Not Available |
| Children’s Education Allowance | Available | Not Available |
| Hostel Expenditure Allowance | Available | Not Available |
| Allowances for Official Duties | Available | Available in specified cases |
| Other Salary-related Exemptions | Available subject to conditions | Largely not available |
Rebate under Section 87A – A rebate differs from exemptions and deductions as it directly reduces the tax payable.
| Particulars | Old Tax Regime | New Tax Regime |
| Maximum Rebate | Rs 12,500 | Rs 60,000 |
| Eligible Taxable Income | Up to Rs 5,00,000 | Up to Rs 12,00,000 |
| Effective Tax Liability | Nil | Nil |
“As a broad principle, the old tax regime may be beneficial for taxpayers who regularly claim significant exemptions and deductions, while the new tax regime may suit those who prefer a simplified tax structure and do not have substantial tax-saving investments or eligible deductions,” said Sandeep Bhalla, Partner, Dhruva Advisors.
Taxpayers should evaluate their tax liability under both regimes before making a choice.
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Deductions and Exemptions
Under the old tax regime, taxpayers can avail a wide range of deductions and exemptions, thereby reducing taxable income. Common exemptions include House Rent Allowance (HRA), Leave Travel Allowance (LTA) and certain allowances available to salaried individuals.
Further, deductions may be claimed under provisions such as section 80C (for investments like provident fund, life insurance premium, ELSS, principal repayment of housing loan, etc.), section 80D (medical insurance premium), section 24(b) (interest on self-occupied housing loan), and eligible contributions to pension schemes under section 80CCD(1B), among others. In exchange for these tax breaks, the old regime generally applies comparatively higher slab rates.
The new tax regime, on the other hand, offers concessional tax slab rates but significantly restricts the availability of deductions and exemptions. Most common exemptions and deductions available under the old regime are not permitted.
However, certain benefits continue to remain available even under the new regime, including the standard deduction (enhanced to Rs. 75,000), employer contribution to the National Pension System (NPS) under prescribed conditions, and deduction in respect of the employer’s contribution to EPF / NPS / superannuation funds within overall limits.
The regime is intended to simplify tax compliance for individuals who do not have substantial deductions to claim.
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Rebate
Under the old tax regime, a resident individual is eligible to claim a rebate under Section 87A if the taxable income does not exceed Rs. 5 lakh. The maximum rebate available is Rs. 12,500 or the amount of income-tax payable, whichever is lower. Consequently, an individual with taxable income up to Rs. 5 lakh may effectively have no tax liability after claiming the rebate.
Under the new tax regime, the scope of the rebate is more beneficial. For FY 2025-26 (AY 2026-27), a resident individual whose taxable income does not exceed Rs. 12 lakh is eligible to claim a rebate under Section 87A, subject to the prescribed conditions.
As a result, eligible taxpayers with income up to the specified threshold may claim a rebate of up to Rs. 60,000. However, in both such cases, a rebate cannot be claimed against income taxable at special rates (such as certain capital gains), as such income does not qualify for rebate benefits.
Accordingly, while the old tax regime provides a rebate threshold of Rs. 5 lakh, the new tax regime offers a significantly higher threshold, making it more attractive for many salaried and middle-income taxpayers who do not have substantial deductions and exemptions available under the old regime.
Should salaried employees reconsider their tax regime choice after receiving Form 16?
Salaried employees may consider revisiting their tax regime selection after receiving Form 16, particularly where the actual tax position differs from assumptions made earlier in the financial year. In many cases, employees opt for a tax regime at the beginning of the year based on estimated investments, exemptions and deductions.
However, the final Form 16 issued by the employer reflects actual salary components, tax deducted at source (TDS), exemptions considered, deductions claimed through payroll and any changes in compensation structure during the year. As a result, the ultimate tax liability may vary from the initial estimate.
For taxpayers eligible to choose between the old and new tax regimes, receipt of Form 16 presents an opportunity to undertake a final comparative computation under both regimes before filing the income-tax return.
“Salaried individuals who have made significant investments qualifying under section 80C, contributed to NPS under section 80CCD(1B), incurred medical insurance expenses under section 80D, paid housing loan interest, or claimed HRA/LTA exemptions may find the old tax regime more beneficial than initially anticipated. Conversely, employees with limited deductions may still benefit from the lower slab rates under the new regime,” said CA (Dr.) Suresh Surana.
“Importantly, for salaried taxpayers (who do not have business or professional income), the choice of regime exercised with the employer for TDS purposes is not necessarily final for return filing purposes. They may generally reassess and choose the more beneficial regime while filing their income-tax return, subject to applicable conditions,” Surana further added.
Accordingly, before filing the income-tax return, taxpayers should use the information contained in Form 16 along with details of any additional income, deductions or investments not considered by the employer to compute their tax liability under both regimes and choose the option that results in the lowest overall tax outgo.
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How can taxpayers verify whether deductions and exemptions reflected in Form 16 have been correctly considered while filing ITR?
Taxpayers should not rely solely on prefilled data or the figures appearing in the ITR utility. They should independently verify whether the deductions, exemptions and salary components reflected in Form 16 have been correctly considered while filing the income tax return. According to Surana, broadly, the following checks may be undertaken:
Match salary income with salary slips and Form 16 – Taxpayers should reconcile the gross salary, taxable allowances, perquisites, bonus, arrears, and deductions reflected in the monthly salary slips with the figures reported in Part B of Form 16. Any mismatch in annual taxable salary, exempt allowances (such as HRA/LTA, where applicable), or standard deduction should be carefully reviewed.
Verify deductions claimed with investment proofs submitted to the employer – Deductions under provisions such as Section 80C, Section 80CCD(1B), Section 80D, housing loan interest (where applicable), and other eligible deductions should be cross-checked with the proofs submitted to the employer during the financial year and the corresponding disclosure in Form 16. In some cases, an employer may not have considered certain investments due to delayed submission or incomplete documentation.
Compare Form 16 with Annual Information Statement (AIS) and Form 26AS – Taxpayers should verify whether the TDS deducted by the employer as reflected in Form 16 matches the TDS appearing in Form 26AS and AIS. Any discrepancy in TDS credit may lead to notices or delayed refunds.
Review exempt allowances and perquisites carefully – Where the old tax regime has been opted for, taxpayers should ensure that exemptions such as HRA, leave travel allowance (LTA), or deductions relating to housing loan interest, if eligible, have been appropriately factored into the taxable income computation in Form 16. Similarly, taxable perquisites (e.g., employer-provided benefits) should be reviewed for accuracy.
Check whether the correct tax regime has been applied – Employees should confirm that the tax regime selected by the employer for TDS purposes aligns with the regime ultimately intended to be opted while filing the ITR. A different regime can generally be selected at the time of filing the return (subject to applicable conditions), and this may materially impact the admissibility of deductions and exemptions.
Verify carry-forward or omitted claims – If certain eligible deductions or exemptions were not considered by the employer in Form 16 (for example, due to missed proof submission timelines), taxpayers may still claim eligible benefits directly in the ITR, subject to maintaining adequate supporting documentation.
Reconcile taxable income computation before final submission – A line-by-line reconciliation between Form 16, salary slips, bank interest, capital gains, and other income should be undertaken to ensure that total income, deductions, tax liability and refund position are correctly computed before filing.
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How should taxpayers optimise deductions under Section 80C, 80CCD(1B), and home loan provisions before deciding on a tax regime?
Before choosing between the old and new tax regimes, taxpayers should first undertake a comprehensive review of deductions and exemptions available to them, as the availability of tax benefits can materially alter the overall tax outflow.
A starting point is to evaluate utilisation of the section 80C deduction, which permits eligible deductions up to Rs. 1.5 lakh for specified investments and expenditures, such as employee provident fund (EPF), public provident fund (PPF), life insurance premium, Equity Linked Savings Schemes (ELSS), tuition fees, tax-saving fixed deposits and repayment of principal on housing loans.
Taxpayers should assess whether existing mandatory contributions (such as EPF) already exhaust this limit or whether additional tax-efficient investments may be considered. In addition, taxpayers may separately evaluate the benefit under section 80CCD(1B), which provides an additional deduction of up to Rs. 50,000 for contributions to the National Pension System (NPS) over and above the section 80C limit. For individuals comfortable with long-term retirement-oriented investments, this deduction may further reduce taxable income under the old tax regime.
Taxpayers with housing loans should also carefully assess the tax benefit arising from home loan provisions, including deduction for interest on self-occupied property under section 24(b) (subject to prescribed limits) and deduction for principal repayment under section 80C. In many cases, home loan-related deductions substantially improve the attractiveness of the old tax regime, particularly for middle- and high-income salaried taxpayers.
However, optimisation should not be approached solely from a tax-saving lens. Investments should align with financial objectives, liquidity needs and risk appetite, rather than being made merely to exhaust deduction limits. Once all eligible deductions and exemptions are identified and quantified, taxpayers should undertake a comparative tax computation under both regimes to determine the more tax-efficient option based on their specific facts and circumstances.
Disclaimer: This article is for informational purposes only and does not constitute professional tax advice. Tax laws and regimes are subject to frequent changes by the government. Readers should verify details with official Income Tax Department notifications or consult a Chartered Accountant before making any financial decisions.
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