Every April, without fail, someone on your team walks up and says, “Boss, which tax regime should I choose?” And every April, HR ends up acting as part-time tax advisor. In 2026, the stakes got higher — because if your employee never tells you which regime they want, you are legally required to deduct TDS on the new tax regime by default. Get that wrong and the employee files their ITR, demands a refund, and wonders why HR “messed up” their taxes.
This guide cuts through the confusion. You will know exactly how the two regimes differ, which one saves more tax at different salary levels, what Form 12BAA is and why it matters, and the three payroll mistakes that trip up HR teams across India every year.
- The new tax regime is the default from FY 2023-24 onwards. If an employee does not submit Form 12BAA, you must deduct TDS under the new regime.
- In FY 2026-27, salaried employees with taxable income up to ₹12.75 lakh pay zero tax under the new regime (standard deduction of ₹75,000 + Section 87A rebate of ₹60,000).
- The old regime is still worth it for employees with large HRA exemptions, home loan interest deductions, or maxed-out 80C investments.
- Employees must opt into the old regime each financial year via Form 12BAA. They can switch back at ITR filing time, but TDS gets calculated on the regime declared to you.
What Is the New Tax Regime and Why Is It Now the Default?
The new tax regime was introduced in Budget 2020 as an optional, lower-rate structure. Budget 2023 flipped the switch: from FY 2023-24, the new regime became the default for salaried individuals under Section 115BAC of the Income Tax Act. The government simplified the slabs, raised the exemption limit to ₹4 lakh, increased the standard deduction to ₹75,000 (from ₹50,000 under the old regime), and made the Section 87A rebate generous enough to wipe out tax entirely on income up to ₹12 lakh.
For HR, this change has a direct operational consequence: if an employee stays silent, you deduct TDS on the new regime. Period.
Income Tax Slabs for FY 2026-27: Side by Side
Budget 2026 made no changes to tax slabs. The following table applies for the entire financial year (April 2026 – March 2027):
| Taxable Income (₹) | New Regime Rate | Old Regime Rate |
|---|---|---|
| Up to ₹2,50,000 | Nil | Nil |
| ₹2,50,001 – ₹4,00,000 | Nil | 5% |
| ₹4,00,001 – ₹5,00,000 | 5% | 5% |
| ₹5,00,001 – ₹8,00,000 | 5% | 20% |
| ₹8,00,001 – ₹10,00,000 | 10% | 20% |
| ₹10,00,001 – ₹12,00,000 | 10% | 30% |
| ₹12,00,001 – ₹16,00,000 | 15% | 30% |
| ₹16,00,001 – ₹20,00,000 | 20% | 30% |
| ₹20,00,001 – ₹24,00,000 | 25% | 30% |
| Above ₹24,00,000 | 30% | 30% |
Add 4% Health and Education Cess on tax payable. Surcharge applies above ₹50 lakh. Old regime standard deduction: ₹50,000. New regime standard deduction: ₹75,000. Section 87A rebate: ₹60,000 (new regime, income ≤ ₹12L) / ₹12,500 (old regime, income ≤ ₹5L).
Which Regime Is Better? Real Salary Examples
The honest answer is: it depends on how many deductions your employee has. Here are three real scenarios that cover most of your workforce.
Scenario 1 — Gross CTC ₹12.75 Lakh, Few Investments
Under the new regime: standard deduction ₹75,000 → taxable income ₹12 lakh → Section 87A rebate covers the entire tax → zero tax payable. Under the old regime with the same profile (₹50,000 standard deduction, just basic 80C of ₹1 lakh): taxable income ≈ ₹11.25 lakh → tax ≈ ₹1,06,250 → with 4% cess, around ₹1,10,500. The new regime wins by a wide margin.
Scenario 2 — Gross CTC ₹15 Lakh, Moderate Deductions
Typical mid-level employee: ₹75,000 standard deduction (new) vs ₹50,000 (old), 80C ₹1.5 lakh, 80D health insurance ₹25,000, HRA ₹1.2 lakh exempt.
- New regime: taxable income ₹14.25 lakh → tax ≈ ₹97,500 (incl. cess)
- Old regime: deductions ₹3.45 lakh → taxable ₹11.55 lakh → tax ≈ ₹1,65,360 (incl. cess)
- Winner: New regime saves ₹67,860
Scenario 3 — Gross CTC ₹18 Lakh, Heavy Home Loan + High Rent
Senior employee in Bengaluru or Delhi NCR: 80C ₹1.5 lakh, HRA exempt ₹2.4 lakh, home loan interest (Section 24b) ₹2 lakh, 80D ₹50,000.
- New regime: only standard deduction available → taxable ₹17.25 lakh → tax ≈ ₹1,82,250 (incl. cess)
- Old regime: total deductions ₹6.4 lakh → taxable ₹11.6 lakh → tax ≈ ₹1,67,400 (incl. cess)
- Winner: Old regime saves ₹14,850
The pattern: the old regime wins only when employees have significant HRA exemptions combined with home loan interest deductions. For everyone else, especially employees earning below ₹15 lakh with minimal investments, the new regime is almost always better in 2026.
What Is Form 12BAA and Why HR Cannot Ignore It
Form 12BAA is the declaration form through which an employee formally tells their employer to deduct TDS under the old tax regime. It was notified by CBDT in October 2024 and replaced the older practice of submitting a simple letter or Form 12BB for regime selection.
Here is what the process looks like in practice:
- At the start of FY 2026-27 (April 2026), you should have collected Form 12BAA from all employees who want the old regime.
- If an employee did not submit Form 12BAA, they are on the new regime for TDS purposes — no exceptions.
- Employees can submit Form 12BAA mid-year (say in October) if they realise the old regime saves them more tax. You update TDS calculations from that month going forward and re-estimate the annual shortfall or excess.
- At filing time, employees can always switch regimes on their ITR regardless of what they told you. But any TDS already deposited under the wrong regime creates a refund situation — which they will blame you for.
The bottom line: collect declarations in April, store them digitally, and revisit mid-year around October–November when employees see their actual investment proofs.
Deductions You Can and Cannot Claim in Each Regime
| Deduction / Exemption | New Regime | Old Regime |
|---|---|---|
| Standard Deduction | ✅ ₹75,000 | ✅ ₹50,000 |
| Section 87A Rebate | ✅ ₹60,000 (up to ₹12L income) | ✅ ₹12,500 (up to ₹5L income) |
| HRA Exemption (Section 10(13A)) | ❌ Not available | ✅ Available |
| LTA Exemption | ❌ Not available | ✅ Available |
| Section 80C (PF, LIC, ELSS, etc.) | ❌ Not available | ✅ Up to ₹1,50,000 |
| Section 80D (Health Insurance) | ❌ Not available | ✅ Up to ₹25,000 (₹50,000 for senior citizens) |
| Home Loan Interest (Section 24b) | ❌ Not available (self-occupied) | ✅ Up to ₹2,00,000 |
| Professional Tax Deduction (Sec 16(iii)) | ❌ Not available | ✅ Available |
| NPS Employer Contribution (Sec 80CCD(2)) | ✅ Available (up to 10% of Basic) | ✅ Available |
| Gratuity, VRS Exemptions | ✅ Available | ✅ Available |
Note that Section 80CCD(2) — the employer’s NPS contribution — is one of the few deductions available in the new regime. If your company contributes to employee NPS accounts, that benefit still works under either regime and is worth mentioning to your team.
Common Mistakes HR Makes with Tax Regime TDS
1. Defaulting old employees to the new regime without informing them. Many companies that updated their payroll systems for FY 2024-25 silently moved everyone to the new regime. Employees who were claiming HRA + home loan suddenly got higher take-home (less TDS), loved it — then got hit with a massive self-assessment tax demand in July when they filed their ITR. Guess who got the angry calls.
2. Not recalculating TDS when an employee switches regimes mid-year. If someone submits Form 12BAA in September to switch to the old regime, you cannot just adjust October’s TDS. You need to estimate the year’s total tax on the old regime and recompute the monthly TDS spread over the remaining months. Most manual payroll setups miss this step entirely.
3. Forgetting that Form 12BAA must be resubmitted every year. A Form 12BAA from FY 2025-26 does not carry over. If your employee from last year who was on the old regime does not submit a fresh Form 12BAA for FY 2026-27, they are legally on the new regime again. You cannot assume continuity.
4. Ignoring the Section 16(iii) professional tax impact. Under the old regime, professional tax (₹2,400 to ₹2,500 a year in most states) is deductible from income. Under the new regime, it is not. Small difference, but when you are doing precise TDS calculations, missing it creates a mismatch that shows up in Form 26AS reconciliation.
Break-Even Calculator: When Does the Old Regime Win?
As a practical thumb rule for your team: the old regime becomes worth it only when total deductions (HRA + 80C + 80D + home loan interest + other) exceed the following levels at each income bracket:
| Annual Gross CTC | Minimum Deductions Needed for Old Regime to Win | Most Likely Regime |
|---|---|---|
| Up to ₹10 lakh | Almost never beneficial | 🟢 New Regime |
| ₹10L – ₹15L | More than ₹3.5 lakh in deductions | 🟢 New Regime (for most) |
| ₹15L – ₹20L | More than ₹4.5 lakh in deductions (HRA + home loan needed) | 🟡 Depends |
| ₹20L – ₹30L | More than ₹5.5 lakh, including home loan interest | 🔴 Run numbers carefully |
| Above ₹30L | Old regime almost always loses due to higher new regime slab caps | 🟢 New Regime |
FAQ
Q1. If my employee forgets to submit Form 12BAA, can I let them opt for the old regime later in the year?
Yes. An employee can submit Form 12BAA at any point during the financial year. Once you receive it, you recalculate TDS for the remaining months based on the old regime, adjusting for any TDS already deposited under the new regime. You cannot revise already-deposited TDS, but you spread the correction across future months.
Q2. Does the new regime apply even if an employee has a home loan?
Yes, the new regime is the default regardless of whether an employee has a home loan. However, under the new regime, the home loan interest deduction under Section 24b is not available for self-occupied property. If this deduction is significant for the employee, they should opt for the old regime by submitting Form 12BAA.
Q3. What if an employee switches regimes mid-year? How does it affect TDS?
When an employee switches regime (by submitting or withdrawing Form 12BAA), you must recompute the projected annual tax under the new regime choice. The remaining months’ TDS is adjusted to ensure the total TDS for the year equals the revised annual tax liability. Payroll software like EZHRM handles this automatically.
Q4. Can an employee choose the new regime for TDS but the old regime when filing ITR?
Yes, a salaried employee can switch regimes at ITR filing time regardless of what they declared to their employer. If they switch to the old regime and claim more deductions, excess TDS already deposited gets refunded by the Income Tax Department. However, this creates a cash flow gap during the year.
Q5. Does professional tax deduction matter when choosing a regime?
Marginally. Professional tax (usually ₹2,400–₹2,500 annually) is deductible under the old regime’s Section 16(iii) but not under the new regime. At lower income brackets, this rarely changes the regime decision. At higher income brackets (30% slab), it saves around ₹750 in tax — not a deciding factor, but worth noting in precise TDS calculations.
Q6. My company contributes to NPS for employees. Does this deduction work under both regimes?
Yes. The employer’s NPS contribution under Section 80CCD(2) — up to 10% of Basic + DA for private sector employees — is deductible under both the old and the new tax regime. This is one of the few deductions that works in the new regime and is worth structuring in CTC for employees who are on the new regime.
Closing Note
The regime decision gets made once a year, but the TDS impact plays out every month. A payroll system that auto-applies the right regime, flags employees who haven’t submitted Form 12BAA, and recalculates TDS when an employee switches mid-year saves you a lot of embarrassment — and a lot of employee grievances in July. EZHRM handles all of this inside its TDS & Form 16 module, so your team is never guessing which regime to apply.