Income Tax on Salary FY 2026-27: Old vs New Regime

Two things changed for FY 2026-27 that most payroll teams have not adjusted for, and neither of them is a slab.

The first is that TDS on salary is no longer Section 192. The Income-tax Act, 2025 replaced the 1961 Act with effect from 1 April 2026, and salary withholding now sits at Section 392. Salary paid up to 31 March 2026 was governed by Section 192 of the old Act; salary paid from 1 April 2026 is governed by Section 392 of the new one. The obligation is substantively the same and every template, policy document and employee communication citing Section 192 is now citing a repealed provision.

The second is that the old regime has quietly become a minority position that still costs everybody time. Budget 2026 made no change to slabs, which means the FY 2025-26 position carries forward: the new regime is the default, the rebate covers total income up to ₹12 lakh, and the deduction level needed to make the old regime worthwhile has moved out of reach for most salaried people. Section 6 works out the exact number at which it flips, which for a ₹18 lakh salary is ₹6.42 lakh of deductions.

What follows is the arithmetic your employer runs every month, shown in full, plus the comparison you need to make once a year. It is not advice on which regime you should pick, because that depends on facts about your rent, your home loan and your investments that we do not have.

Rates and thresholds are those applying to FY 2026-27, assessment year 2027-28, for a resident individual below 60, current at August 2026. Surcharge, senior citizen thresholds and the treatment of specific perquisites are summarised rather than set out in full. Verify against the current Act before configuring a payroll run. Nothing here is tax advice.

What TDS on Salary Actually Is

Your employer is required to estimate your total salary income for the whole financial year, work out the tax on it, and deduct one twelfth of that tax from each month's pay. Not a flat percentage, not a slab applied to the month's salary in isolation. An estimate of the year, divided across the year.

That design is behind nearly every question employees ask about their TDS.

Because the deduction follows the estimate, it moves whenever the estimate moves. A mid-year increment, a bonus, or an investment declaration submitted in December all revise the year's figure, and the months still to come absorb the difference. A sudden jump in February is almost always this and almost never an error.

The estimate is also only as good as what you have told your employer. Rent, investments, a home loan, salary from a previous employer in the same year: none of it is visible to payroll unless you declare it. Anything undeclared means over-deduction that you recover when you file, not before.

And the correction, when there is one, lands entirely in the final months. If ten months were under-deducted because a declaration was made in April and never substantiated with proof, months eleven and twelve carry the whole shortfall between them. That is why January to March payslips look strange in a lot of companies.

Deducted tax must be deposited by the 7th of the following month, except for March, where the deadline is 30 April. Quarterly returns go in Form 24Q, and the annual certificate you receive is Form 16.

The Slabs for FY 2026-27

The new regime, which applies by default:

The old regime, for anyone who opts out of the default:

Health and education cess of 4 per cent applies on the tax in both regimes. Surcharge applies above ₹50 lakh of total income, rising in steps, and is capped at 25 per cent under the new regime against 37 per cent at the top of the old one, which matters only at income levels where this article stops being the right reference.

The old regime's slabs have not moved since 2013. That, rather than any change in the new regime, is what has made the comparison so lopsided.

The Standard Deduction and the Rebate

Two figures do most of the work.

The standard deduction is ₹75,000 under the new regime and ₹50,000 under the old. It is automatic, requires no proof and no declaration, and applies to salaried employees and pensioners.

The rebate, commonly known as Section 87A. Under the new regime, a resident individual whose total income does not exceed ₹12,00,000 gets a rebate of up to ₹60,000, which is enough to reduce the tax to nil at that income. Combined with the standard deduction, a salaried person with gross salary up to ₹12,75,000 pays no income tax at all. Under the old regime, the equivalent rebate is much smaller and cuts out at ₹5,00,000 of total income.

That ₹12.75 lakh threshold is the single most consequential number in Indian salary taxation right now, and it is worth being precise about what it means. It is not an exemption. Tax is computed on the whole amount and then wiped out by the rebate. The distinction matters at the boundary, which is where marginal relief comes in.

Marginal Relief, and the Cliff at ₹12 Lakh

Cross ₹12,00,000 of total income by one rupee and the rebate disappears entirely. Without a corrective, someone at ₹12,10,000 would pay ₹61,500 of tax while someone at ₹12,00,000 paid nothing, which would make ₹10,000 of extra income cost ₹61,500.

Marginal relief prevents that. The tax payable is limited to the amount by which income exceeds ₹12,00,000.

Relief tapers off as income rises and stops mattering once the ordinary tax is lower than the excess over ₹12 lakh. Payroll systems that do not implement marginal relief over-deduct for everybody in the band just above ₹12 lakh, and that band is heavily populated. It is worth checking that yours does.

Two Worked Comparisons

The same arithmetic your employer runs, at two salary levels.

Case one: gross salary ₹9,00,000. Assume, for the old regime, a full ₹1,50,000 of Section 80C investments and ₹25,000 of medical insurance premium.

At this level the comparison is not close and there is no realistic set of deductions that changes it, because the rebate takes the new regime liability to zero and nothing can beat zero.

Case two: gross salary ₹18,00,000. For the old regime, assume a well-optimised position: ₹1,50,000 under 80C, ₹25,000 of medical insurance, ₹50,000 of additional NPS, and ₹3,00,000 of HRA exemption, which requires paying real rent of roughly ₹32,000 a month in a metro.

The new regime wins by ₹36,400 despite the old regime being given ₹5,25,000 of deductions, most of which require the employee to actually spend or lock up the money. That is the shape of the current position: the old regime does not lose because people fail to optimise it, it loses even when they optimise it well.

The Break-Even, Stated Properly

The honest way to answer "which regime should I choose" is to find the level of deductions at which the two produce the same tax, and then ask whether you actually have that many.

At a gross salary of ₹18,00,000, the new regime liability before cess is ₹1,45,000. For the old regime to match that, total income has to fall to about ₹11,08,333, because tax on that amount is ₹12,500 plus ₹1,00,000 plus 30 per cent of ₹1,08,333, which is ₹1,45,000. Gross salary less the ₹50,000 standard deduction is ₹17,50,000, so the deductions required are:

₹17,50,000 − ₹11,08,333 = ₹6,41,667

Six lakh forty-one thousand of deductions, at an ₹18 lakh salary. The realistic components are ₹1,50,000 of 80C, ₹50,000 of additional NPS, ₹25,000 to ₹75,000 of medical insurance, up to ₹2,00,000 of home loan interest on a self-occupied property, and HRA. Reaching ₹6.42 lakh generally requires either a substantial home loan or a metro rent above ₹35,000 a month, and usually both.

Which gives a usable rule: the old regime is worth checking if you pay high metro rent, or service a home loan, or both. Otherwise the default is almost certainly right. Below about ₹12.75 lakh of gross salary, do not bother checking at all, because the new regime produces nil.

One caution on the input side. The HRA exemption depends on which city you live in, and the draft Income-tax Rules published in February 2026 extend the 50 per cent metro treatment under Rule 279 to Bengaluru, Hyderabad, Pune and Ahmedabad, alongside the four existing metros. Whether the final notification has actually issued is unclear: we could not find it in the gazette as at August 2026, and published guidance is split. If you live in one of those four cities and you are close to the break-even, confirm the current position before you decide, because it moves the number. Our HRA calculator runs the three limits either way.

How the Regime Choice Actually Works

The new regime applies unless you opt out. There is no form to fill in to stay in it, and doing nothing keeps you there.

For payroll purposes, your employer will ask at the start of the financial year which regime to apply, so they can deduct correctly. That declaration governs your TDS for the year. What it does not do is bind you permanently: a salaried employee without business income can choose the other regime when filing the return, and claim a refund if the year's TDS was computed on the less favourable basis.

Two practical points follow. First, if you declare the old regime and then fail to submit proofs, your employer must fall back to the position they can substantiate, and the correction lands in the final months. Second, if you declare nothing, the default applies, and if the old regime would have suited you better you can still fix it at filing. The cost is a refund cycle rather than a lost benefit.

Documentation, briefly. Form 12BB is the declaration of the exemptions and deductions you are claiming, along with the evidence. Form 12B is the one people forget: it is how you report salary from a previous employer when you change jobs mid-year. Skip it and both employers apply the basic exemption and the rebate to their own slice of your income independently, you end up under-deducted across the year, and the shortfall plus interest arrives when you file. Changing jobs in the middle of a year is the single most common cause of an unexpected tax bill in India.

What Employers Get Wrong

In rough order of how often we see it.

• Applying the slabs to each month's salary rather than to the annual estimate. This produces wildly variable monthly TDS and a large correction in March, and it is more common in spreadsheet payrolls than anyone admits.
• Not implementing marginal relief, which over-deducts for every employee in the band just above ₹12 lakh of total income. After the standard deduction, that is a very well-populated band.
• Not collecting Form 12B from mid-year joiners. The employer's own computation is then perfectly correct and the employee's overall position is still wrong, which they discover at filing.
• Treating declarations as proof, and deducting all year on a declared ₹1,50,000 of 80C that never materialises.
• Missing perquisites. Rent-free or concessional accommodation, a company car available for personal use, interest-free loans above the threshold, and employer contributions to PF, NPS and superannuation above the aggregate limit are all taxable and all routinely omitted.
• Applying old-regime deductions to employees on the new regime, professional tax and the HRA exemption being the usual culprits. This under-deducts all year.
• Missing the deposit deadline, which is the 7th of the following month and 30 April for March. Interest runs from the date of deduction rather than from the due date, which surprises people.
• Still citing Section 192. Cosmetic rather than costly, but it appears on Form 16 templates, payroll policies and employee FAQs, and from 1 April 2026 the correct reference is Section 392.

Most of these are not knowledge failures. They are what happens when the annual estimate lives in one system, the declarations live in a shared drive, and the payslip is produced by a third thing. Our payroll management system runs the estimate, the declarations and the deduction off the same record, which is why it comes up here at all.

Questions People Ask

Which tax regime is better for a salary of ₹12 lakh?

The new regime, decisively. With the ₹75,000 standard deduction, a gross salary of ₹12,00,000 gives total income of ₹11,25,000, which is under the ₹12,00,000 rebate threshold, so the tax is nil. Nothing the old regime offers can beat nil. The threshold at which a salaried person starts paying any tax at all under the new regime is a gross salary of ₹12,75,000.

Is TDS deducted on salary every month or at the end of the year?

Every month. Your employer estimates your total income for the financial year, computes the tax on it, and deducts roughly one twelfth each month. The amount changes during the year when the estimate changes, which is why an increment, a bonus or a late investment declaration all shift your monthly deduction.

What is Section 392 of the Income-tax Act, 2025?

It is the provision requiring employers to deduct tax at source from salary, and it took effect on 1 April 2026 when the Income-tax Act, 2025 replaced the 1961 Act. It corresponds to what was Section 192 of the old Act. Salary paid up to 31 March 2026 is governed by Section 192; salary paid on or after 1 April 2026 by Section 392. The obligation itself is substantively unchanged.

Can I change my tax regime during the financial year?

You can change the declaration you give your employer, subject to their payroll cut-offs, and they will adjust your remaining months. More importantly, a salaried employee without business income can choose either regime when filing the return, regardless of what was declared for TDS. If the wrong regime was applied all year, you claim the difference as a refund rather than losing it.

How much deduction do I need for the old regime to be worth it?

At a gross salary of ₹18,00,000, about ₹6.42 lakh of deductions, which in practice means a large HRA claim, a home loan, or both, on top of a full ₹1,50,000 of 80C. Below roughly ₹12.75 lakh of gross salary the question does not arise, because the new regime produces nil tax. Between those points the old regime rarely wins without significant rent or interest.

Why did my TDS suddenly increase in February and March?

Almost always because the annual estimate was revised upward and the remaining months absorb the whole correction. The usual causes are an investment declaration that was never substantiated with proof, a bonus paid late in the year, or an increment. It is arithmetic catching up rather than a new deduction.

Is HRA exemption available in the new regime?

No. HRA exemption, LTA, the deductions under Chapter VI-A including 80C and 80D, and most allowance-based exemptions are all old-regime benefits. The new regime offers the higher standard deduction of ₹75,000, employer NPS contributions within limits, and the larger rebate instead. A salary structure built around exempt allowances delivers nothing to an employee on the default regime.

Where This Leaves You

For employees: if your gross salary is under ₹12.75 lakh, the answer is the default and you can stop reading. Above that, the old regime is worth a calculation only if you pay serious metro rent or a home loan, and the calculation should use your real numbers rather than a generic comparison table. Whatever you declare in April is not binding at filing, so a declaration made in a hurry is recoverable.

For employers: the two failures that actually cost money are not implementing marginal relief and not collecting Form 12B from mid-year joiners. Both are silent, both affect a lot of people, and neither shows up until somebody files a return and asks a question you cannot answer.

Run your own position in our free TDS calculator, and check the HRA piece separately in the HRA calculator if you are anywhere near the break-even. If you want to see how the deduction lands on the document your employees actually read, the payslip generator will build it. If the underlying problem is that your annual estimate, your investment declarations and your payslips live in three different systems, that is what our payroll management system is for. Book a free demo and bring your March payroll rather than your April one, because March is where the errors surface.

The remaining pieces: what the tax is actually computed on in CTC breakup, component by component, the exit payment in gratuity calculation in India, and where the deduction has to be disclosed in payslip format and mandatory components. For the filing and deposit obligations around it, see our Indian payroll compliance guide.