New Tax Regime Explained: Tax Slabs, Zero Tax up to ₹12.75 Lakh, Deductions & Old vs New (FY 2026-27)

New Tax Regime FY 2026-27: Key Highlights

• The New Tax Regime is the default income tax system for individual taxpayers in India.
• Income up to ₹4 lakh falls under the nil tax slab for FY 2026-27.
• Salaried employees receive a Standard Deduction of ₹75,000 under the New Tax Regime.
• Eligible salaried individuals with a gross annual salary of up to ₹12.75 lakh generally pay zero income tax after the Standard Deduction and Section 87A rebate.
• Most popular deductions, including Section 80C, Section 80D, HRA and LTA, cannot be claimed under the New Tax Regime.

If you have recently started earning, changed jobs, or are preparing to file your Income Tax Return (ITR), you have probably come across the New Tax Regime. Many taxpayers are unsure about how it works, whether it is better than the Old Tax Regime, and whether they can really pay zero income tax on a salary of up to ₹12.75 lakh.

The confusion usually comes from complicated tax terms and legal language. However, the basic idea behind the New Tax Regime is quite simple. The government offers lower income tax rates in exchange for giving up most tax-saving deductions and exemptions.

This guide explains everything you need to know about the New Tax Regime for FY 2026-27 (AY 2027-28) in simple English. Whether you are a salaried employee, a freelancer or a business owner, this article will help you understand how the system works and whether it is the right choice for you.

What Is the New Tax Regime?

The New Tax Regime is a simplified income tax system introduced by the Government of India. Instead of encouraging taxpayers to save tax by investing in different schemes, it offers lower income tax rates with fewer deductions and exemptions.

Earlier, many taxpayers reduced their tax by investing in products such as the Public Provident Fund (PPF), Equity Linked Savings Scheme (ELSS), National Savings Certificate (NSC), life insurance policies or by claiming benefits like House Rent Allowance (HRA) and home loan interest deductions.

Under the New Tax Regime, most of these deductions are not available. In return, the government charges lower tax rates across different income slabs, making tax calculation much simpler.

Think of it this way. Instead of asking you to invest money just to save tax, the government gives you lower tax rates and fewer conditions to meet. This makes the New Tax Regime easier for many taxpayers, especially those who do not claim several deductions every year.

Today, the New Tax Regime is also the default tax regime. This means your income tax is generally calculated under this system unless you choose to opt for the Old Tax Regime, where eligible.

How Does the New Tax Regime Work?

Many people believe that once their income reaches a particular tax slab, their entire income is taxed at that rate. That is not how income tax works in India.

India follows a progressive tax system. This means your income is divided into different portions, and each portion is taxed according to the applicable slab.

For example, if your taxable income is ₹15 lakh, the entire amount is not taxed at 15%.

Instead, different parts of your income fall into different tax slabs. The first portion is taxed at 0%, the next portion at 5%, then 10%, and so on.

This approach ensures that taxpayers with lower incomes pay less tax while those with higher incomes gradually pay more.

Understanding this one concept helps clear one of the biggest misconceptions about income tax in India.

New Tax Regime Tax Slabs for FY 2026-27 (AY 2027-28)

The Government has revised the income tax slabs under the New Tax Regime for the Financial Year 2026-27. These slabs determine how much tax you pay based on your taxable income.

Annual Taxable Income	Income Tax Rate
Up to ₹4,00,000	Nil
₹4,00,001 to ₹8,00,000	5%
₹8,00,001 to ₹12,00,000	10%
₹12,00,001 to ₹16,00,000	15%
₹16,00,001 to ₹20,00,000	20%
₹20,00,001 to ₹24,00,000	25%
Above ₹24,00,000	30%

After calculating your income tax using these slabs, the government also applies a 4% Health and Education Cess on the final tax amount. In addition, high-income taxpayers may also have to pay a surcharge if their income crosses the prescribed limits.

How Income Tax Is Calculated Under the New Tax Regime

Let's understand this with a simple example.

Suppose your taxable income is ₹10 lakh.

Your tax is calculated in stages rather than charging one rate on the entire income.

Income Portion	Tax Rate	Tax Amount
First ₹4,00,000	0%	₹0
Next ₹4,00,000	5%	₹20,000
Remaining ₹2,00,000	10%	₹20,000
Total	-	₹40,000

This example shows why your entire income is never taxed at the highest slab applicable to you. Only the income that falls within a particular slab is taxed at that slab's rate.

Why Do Some People Pay Zero Income Tax up to ₹12.75 Lakh?

One of the biggest advantages of the New Tax Regime is that many salaried employees can legally pay zero income tax even if their annual salary is as high as ₹12.75 lakh.

This is possible because of two important benefits available under the New Tax Regime:

• Standard Deduction of ₹75,000.
• Section 87A tax rebate.

When these two benefits are applied together, the taxable income of an eligible salaried employee earning ₹12.75 lakh becomes ₹12 lakh. The income tax calculated on ₹12 lakh is then offset by the Section 87A rebate, reducing the final income tax liability to zero.

Let's understand how this works step by step.

Step 1: Standard Deduction

Every eligible salaried employee automatically receives a Standard Deduction of ₹75,000. You do not need to invest money or submit any bills to claim this benefit.

The deduction is simply reduced from your salary before your taxable income is calculated.

Particulars	Amount
Gross Annual Salary	₹12,75,000
Less: Standard Deduction	₹75,000
Taxable Income	₹12,00,000

After claiming the Standard Deduction, your taxable income reduces from ₹12.75 lakh to ₹12 lakh.

Step 2: Section 87A Rebate

Once your taxable income has been calculated, the government checks whether you qualify for the Section 87A rebate.

If your taxable income is up to ₹12 lakh under the New Tax Regime, the rebate can reduce your income tax liability to zero.

In simple words, the government gives eligible taxpayers a tax discount after calculating their tax. This discount is known as the Section 87A rebate.

That is why many salaried employees with a gross annual salary of up to ₹12.75 lakh generally do not have to pay any income tax under the New Tax Regime.

What Is the Standard Deduction Under the New Tax Regime?

The Standard Deduction is one of the few tax benefits that continues under the New Tax Regime. Unlike many other deductions, you do not have to invest money or submit any documents to claim it.

For FY 2026-27, eligible salaried employees receive a Standard Deduction of ₹75,000. This amount is automatically reduced from your annual salary before your income tax is calculated.

You can think of it as a fixed tax benefit available to every eligible salaried employee, regardless of whether they invest in tax-saving schemes.

For example, if your annual salary is ₹10 lakh, your taxable income becomes ₹9.25 lakh after claiming the Standard Deduction.

Particulars	Amount
Gross Annual Salary	₹10,00,000
Standard Deduction	₹75,000
Taxable Income	₹9,25,000

Since the deduction is automatic, you generally do not have to upload investment proofs or bills to claim this benefit while filing your Income Tax Return.

What Is the Section 87A Rebate?

Many taxpayers confuse a tax deduction with a tax rebate. Although both help reduce your tax burden, they work differently.

A tax deduction reduces your taxable income before tax is calculated.

A tax rebate reduces the tax payable after your income tax has already been calculated.

Under the New Tax Regime, eligible resident individuals whose taxable income is up to ₹12 lakh can claim the Section 87A rebate.

In simple terms, the government calculates your tax first and then provides a rebate that can reduce your final tax liability to zero, provided you meet the eligibility conditions.

This is the main reason why salaried employees earning up to ₹12.75 lakh generally do not have to pay any income tax.

What Happens If Your Income Is Slightly Above ₹12 Lakh?

Many people worry that earning even a few thousand rupees above ₹12 lakh will suddenly result in a very high tax bill.

Fortunately, the tax system includes a provision known as marginal relief.

Marginal relief ensures that if your taxable income exceeds the rebate limit by a small amount, the additional tax payable should not be more than the additional income you earned above the threshold.

For example, suppose your taxable income is ₹12,02,000.

Your income is only ₹2,000 higher than the rebate limit. Marginal relief helps ensure that your additional tax does not become disproportionately high simply because you crossed the limit by a small amount.

This provision makes the transition between tax slabs much smoother for taxpayers.

Which Deductions Are Still Available Under the New Tax Regime?

One of the biggest myths about the New Tax Regime is that no deductions are allowed.

That is not entirely correct.

Although many popular deductions have been removed, a few important tax benefits are still available.

Deduction or Benefit	Available Under the New Tax Regime?
Standard Deduction (₹75,000)	✅ Yes
Employer's NPS Contribution under Section 80CCD(2)	✅ Yes
Transport Allowance for Eligible Persons with Disabilities	✅ Yes
Conveyance Allowance for Official Duties	✅ Yes
Daily Allowance During Official Travel	✅ Yes
Interest Deduction for Let-out Property (Subject to Rules)	✅ Yes

For most salaried employees, the Standard Deduction remains the most valuable benefit available under the New Tax Regime.

Which Deductions Are Not Available Under the New Tax Regime?

The lower tax rates offered under the New Tax Regime come with one important trade-off.

Most deductions and exemptions that taxpayers commonly claimed under the Old Tax Regime cannot be claimed.

Deduction or Exemption	Available Under the New Tax Regime?
Section 80C (PPF, ELSS, Life Insurance, NSC, Tax Saver FD, Tuition Fees)	❌ No
Section 80D (Health Insurance Premium)	❌ No
House Rent Allowance (HRA)	❌ No
Leave Travel Allowance (LTA)	❌ No
Home Loan Interest for Self-Occupied Property	❌ No
Professional Tax Deduction	❌ No
Most Chapter VI-A Deductions	❌ No

If you regularly claim several of these deductions, it is worth comparing your tax under both regimes before making a final decision.

Salary Examples Under the New Tax Regime

The following examples assume that you are a salaried employee eligible for the ₹75,000 Standard Deduction. Your final tax liability may differ depending on your income, employer's NPS contribution, surcharge or other applicable provisions.

Annual Salary of ₹8 Lakh

After the Standard Deduction, your taxable income becomes ₹7.25 lakh. Since your taxable income remains below ₹12 lakh, the Section 87A rebate generally reduces your income tax liability to zero.

Annual Salary of ₹10 Lakh

Your taxable income becomes ₹9.25 lakh after the Standard Deduction. As it remains below ₹12 lakh, you generally do not have to pay income tax after the rebate is applied.

Annual Salary of ₹12 Lakh

Your taxable income becomes ₹11.25 lakh. Since this is still below the rebate threshold, your income tax is generally reduced to zero.

Annual Salary of ₹12.75 Lakh

After claiming the Standard Deduction, your taxable income becomes exactly ₹12 lakh. The Section 87A rebate offsets the calculated tax, resulting in zero income tax.

Annual Salary of ₹15 Lakh

Your taxable income becomes ₹14.25 lakh after the Standard Deduction. Since your taxable income exceeds the rebate limit, income tax becomes payable according to the applicable slab rates.

Annual Salary of ₹20 Lakh

Your taxable income becomes ₹19.25 lakh after the Standard Deduction. In this case, the Section 87A rebate is not available, and your tax is calculated according to the applicable income tax slabs.

New Tax Regime vs Old Tax Regime

Many taxpayers wonder which tax regime is better. The answer depends on your income, investments and the deductions you claim during the financial year.

If you claim only a few deductions, the New Tax Regime may help you save more tax because of its lower tax rates. However, if you regularly invest under Section 80C, claim HRA or pay interest on a home loan, the Old Tax Regime may still work in your favour.

Feature	New Tax Regime	Old Tax Regime
Income Tax Rates	Lower	Higher
Standard Deduction	✅ Available	✅ Available
Section 80C Deduction	❌ Not Available	✅ Available
Section 80D Deduction	❌ Not Available	✅ Available
HRA Exemption	❌ Not Available	✅ Available
Home Loan Interest (Self-Occupied)	❌ Not Available	✅ Available
Investment Proof Required	Usually No	Usually Yes
Best Suited For	Taxpayers with fewer deductions	Taxpayers claiming multiple deductions

There is no single answer that fits everyone. Before filing your Income Tax Return, compare your tax liability under both regimes. The option that leaves more money in your pocket is usually the better choice.

Can You Switch Between the New and Old Tax Regime?

Yes, but the rules depend on how you earn your income.

If you are a salaried employee, you can usually choose between the New Tax Regime and the Old Tax Regime every financial year while filing your Income Tax Return (ITR). This gives you the flexibility to select the regime that helps you save more tax each year.

For example, if you do not have many tax-saving investments this year, the New Tax Regime may be the better option. If you take a home loan or start claiming deductions under Section 80C or Section 80D in the future, you may find that the Old Tax Regime saves you more money.

However, the rules are different for individuals who have income from a business or profession. Once they opt out of the New Tax Regime, switching back and forth between the two regimes is more restricted. If you run a business or work as a professional, it is advisable to review the applicable rules before making your decision.

Who Should Choose the New Tax Regime?

The New Tax Regime is designed to simplify income tax for people who do not claim many deductions. Although it is not the right choice for everyone, it can be beneficial in several situations.

You may find the New Tax Regime suitable if you:

• Have recently started your career.
• Do not invest much under Section 80C.
• Do not claim House Rent Allowance (HRA).
• Do not have a self-occupied home loan.
• Prefer a simple tax filing process.
• Want lower tax rates without maintaining investment proofs.

Many young professionals choose the New Tax Regime because it allows them to make investment decisions based on their financial goals instead of investing only to reduce taxes.

Who Should Consider the Old Tax Regime?

The Old Tax Regime may still be a better option if you regularly claim multiple deductions and exemptions.

You may benefit from the Old Tax Regime if you:

• Invest the full amount under Section 80C every year.
• Claim deductions for health insurance under Section 80D.
• Receive House Rent Allowance (HRA).
• Pay interest on a self-occupied home loan.
• Claim several tax deductions that significantly reduce your taxable income.

Even though the Old Tax Regime has higher tax rates, these deductions can sometimes reduce your total tax liability more than the lower tax rates offered under the New Tax Regime.

Common Mistakes People Make While Choosing a Tax Regime

Choosing between the Old and New Tax Regime is easier when you avoid a few common mistakes.

1. Thinking Your Entire Income Is Taxed at One Rate

Many people assume that if their income falls in the 15% tax slab, their entire income is taxed at 15%.

This is incorrect.

India follows a slab-based tax system, where different portions of your income are taxed at different rates.

2. Confusing Gross Salary with Taxable Income

Your gross salary is the total salary you earn before deductions.

Your taxable income is the amount on which your income tax is actually calculated after applying eligible deductions, such as the Standard Deduction.

These two figures are often different.

3. Assuming the New Tax Regime Is Always Better

Lower tax rates do not automatically mean lower taxes.

If you claim substantial deductions through HRA, Section 80C investments, health insurance or home loan interest, the Old Tax Regime may still result in a lower tax bill.

4. Investing Only to Save Tax

Many taxpayers purchase financial products simply to reduce their taxes.

While tax savings are useful, investments should also match your financial goals, risk tolerance and future needs.

5. Forgetting the Standard Deduction

Many salaried employees calculate their tax using their entire salary and forget that the ₹75,000 Standard Deduction automatically reduces their taxable income.

This often leads to an incorrect estimate of their tax liability.

Frequently Asked Questions (FAQs)

Is the New Tax Regime compulsory?

No. The New Tax Regime is the default tax system, but eligible taxpayers can still choose the Old Tax Regime if it offers greater tax savings.

What is the basic exemption limit under the New Tax Regime?

For FY 2026-27, income up to ₹4 lakh falls under the nil tax slab.

Why do salaried employees pay zero tax up to ₹12.75 lakh?

Eligible salaried employees receive a Standard Deduction of ₹75,000. This reduces a gross salary of ₹12.75 lakh to a taxable income of ₹12 lakh. The Section 87A rebate then generally reduces the calculated income tax to zero.

Can I claim Section 80C under the New Tax Regime?

No. Most tax-saving investments covered under Section 80C, including PPF, ELSS, NSC, Tax Saver Fixed Deposits and life insurance premiums, are generally not available under the New Tax Regime.

Can I claim HRA under the New Tax Regime?

No. House Rent Allowance (HRA) exemption is generally not available under the New Tax Regime.

Can I claim a home loan deduction?

Interest paid on a self-occupied home loan generally cannot be claimed under the New Tax Regime. However, deductions relating to a let-out property may still be available under applicable rules.

Is the Standard Deduction available?

Yes. Eligible salaried employees receive a Standard Deduction of ₹75,000 under the New Tax Regime.

Can I change my tax regime every year?

Most salaried employees can choose between the Old and New Tax Regime every financial year while filing their Income Tax Return. Different rules apply to taxpayers with business or professional income.

Which tax regime is better?

There is no universal answer. The better option depends on your income, deductions and financial situation. Comparing your tax liability under both regimes before filing your ITR is the best way to decide.

Final Thoughts

The New Tax Regime has made income tax simpler for many taxpayers by offering lower tax rates and reducing the need to maintain multiple investment proofs. It is especially useful for salaried employees and young professionals who do not claim many deductions.

At the same time, the Old Tax Regime continues to benefit taxpayers who regularly claim deductions through tax-saving investments, health insurance premiums, House Rent Allowance or home loan interest.

Before filing your Income Tax Return, compare your tax under both regimes using your actual income and eligible deductions. Spending a few minutes on this comparison can help you choose the option that legally reduces your tax liability.