Old or new tax regime for FY 2026-27: a worked comparison for salary, rent and business income

Budget 2026 left the slabs of both regimes unchanged for FY 2026-27, and the Income-tax Act, 2025 that took effect on 1 April 2026 carries the same structure under new section numbers. So the question for this year is the same as last year, and it can be answered with arithmetic: does the old regime's list of deductions add up to enough to beat the new regime's lower rates?

The two regimes side by side

Rebate is available to residents only; NRIs get neither. Cess of 4% applies in both.

Worked examples (salaried, resident)

Figures include standard deduction and 4% cess; rounded. HRA is shown as the exempt amount, which depends on rent paid, salary and city.

The pattern holds across incomes: the new regime wins unless old-regime deductions reach roughly ₹5.5 lakh at ₹15 lakh of salary and about ₹8 lakh at ₹25 lakh. Where salary of up to ₹12.75 lakh is the only income, the new regime produces no tax at all and nothing in the old regime can beat that. The taxpayers who still benefit from the old regime are those with a home loan, high rent in a metro and full section 123 (80C) and NPS contributions — a specific and shrinking group.

Rental income

The 30% standard deduction on rent and the deduction of the full interest on a loan against a let-out property are available in both regimes. The old regime additionally allows the loss from a self-occupied house (interest up to ₹2 lakh) to be set off against salary; the new regime does not, and losses under house property cannot be set off against other income under it. A landlord with a large loan on the house he lives in is the classic old-regime case.

Business and professional income

For salaried and other non-business taxpayers, the regime is chosen each year in the return. A taxpayer with business or professional income who wants the old regime must file Form 10-IEA before the return due date, and they can switch back to the new regime only once; after that they cannot choose the old regime again while they have business income. Presumptive taxpayers under section 58 (44AD and 44ADA of the 1961 Act) have the same one-time rule. Without business income, a belated return is processed under the new regime whatever the form says, because the old regime can be chosen only in a return filed by the due date — one more reason to file on time.

Making the choice for FY 2026-27

Employees should give their employer the declaration early in the year so TDS is computed on the right regime — the choice given to the employer is not binding in the return, but the mismatch creates a cash-flow problem. Compute both regimes on actual figures in March, not on assumptions. And note that investments made only for section 123 (80C) stop being worthwhile once the new regime is the better answer; the money may be better placed elsewhere.

Questions we are asked

Can NRIs claim the section 156 (87A) rebate under the new tax regime? No. The section 156 (87A) rebate is for resident individuals only: under the new regime it removes the tax where taxable income is up to ₹12 lakh, and under the old regime it gives up to ₹12,500 where income is up to ₹5 lakh.

Can I set off a self-occupied home loan interest loss against salary under the new tax regime? No. The loss from a self-occupied house (interest up to ₹2 lakh) can be set off against salary only in the old regime; under the new regime, house property losses cannot be set off against other income.

Is the tax regime I declare to my employer binding when I file my return? No. The choice given to the employer is not binding in the return, but a mismatch creates a cash-flow problem, so employees should give the declaration early in the year so TDS is computed on the right regime.

Which tax regime applies if I file a belated income tax return? Usually the new regime. Without business income, the old regime can be chosen only in a return filed by the due date, so a belated return is processed under the new regime; with business income, it turns on a Form 10-IEA filed by that date.

Ibrahim Khan · I. H. Khan and Associates
Tax, GST and business setup advisors — Mumbai and Thane. Contact us to discuss your situation.

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