New Tax Regime vs Old Tax Regime (Section 115BAC) – India

Every April, millions of salaried employees in India face a choice that directly affects how much tax is deducted from every payslip for the entire financial year. New Tax Regime or Old Tax Regime. Lower rates with fewer deductions, or higher rates with the full menu of exemptions and deductions they have spent the year accumulating.

It sounds like a straightforward comparison. In practice it is anything but – because the right answer depends entirely on the individual employee’s salary structure, their investment habits, their housing situation, their loan obligations, and a dozen other personal variables that payroll teams cannot assume or predict.

What payroll teams can do – and must do – is build a process that captures each employee’s declaration at the start of the year, applies it correctly throughout, allows for the mid-year switch the law now permits in certain circumstances, and handles the year-end reconciliation cleanly.

This guide covers both regimes in full – rates, deductions, exemptions, the default rules, and everything an employer needs to know to run regime-aware payroll correctly.

Mercans manages Indian payroll across both tax regimes, automating regime-based withholding calculations, TDS deductions, and Form 16 generation for employers of all sizes operating in India.

The Legislative Foundation – What Is Section 115BAC?

Section 115BAC was introduced into the Income Tax Act, 1961 by the Finance Act 2020, creating an alternative tax regime for individuals and Hindu Undivided Families (HUFs). Initially optional – with the Old Regime as the default – the regime landscape shifted significantly with the Finance Act 2023, which made the New Tax Regime the default from the Assessment Year 2024-25 onward.

This reversal matters enormously for payroll. An employee who says nothing, signs nothing, and declares nothing is now automatically in the New Regime. Under the pre-2023 position, silence meant the Old Regime. The default has flipped, and payroll teams that have not updated their onboarding processes may be applying the wrong regime to employees who assumed their historical declarations were still in force.

Slab Rates – Side by Side

New Tax Regime Slabs (AY 2024-25 onward)

The New Regime also provides a tax rebate under Section 87A of up to Rs. 25,000 for individuals with taxable income up to Rs. 7,00,000 – effectively making income up to Rs. 7 lakh tax-free in practice. Additionally, a standard deduction of Rs. 75,000 is available to salaried employees under the New Regime from AY 2025-26, up from Rs. 50,000 previously.

Old Tax Regime Slabs (Below 60 years)

Under the Old Regime, the Section 87A rebate is available for income up to Rs. 5,00,000, providing up to Rs. 12,500 in tax relief. Senior citizens (60 to 79 years) and super senior citizens (80 years and above) have higher basic exemption limits under the Old Regime – Rs. 3,00,000 and Rs. 5,00,000 respectively.

In both regimes, a 4% Health and Education Cess applies on the total income tax and surcharge.

The Core Difference – Deductions and Exemptions

This is where the two regimes diverge most dramatically, and where the employee’s individual circumstances determine which regime is genuinely better for them.

What the New Regime Gives Up

Employees opting for the New Tax Regime cannot claim most of the exemptions and deductions that have historically formed the backbone of Indian tax planning:

• Section 80C deductions (up to Rs. 1,50,000): PPF, ELSS, life insurance premiums, home loan principal repayment, tuition fees
• Section 80D: health insurance premium deductions
• Section 80E: interest on education loan
• Section 80G: donations to specified funds and charitable institutions
• Section 80TTA/80TTB: deductions on savings account interest
• House Rent Allowance (HRA) exemption under Section 10(13A)
• Leave Travel Allowance (LTA) exemption
• Children’s Education Allowance
• Hostel Allowance
• Professional Tax deduction under Section 16(iii): though standard deduction is available
• Home loan interest deduction under Section 24(b) for self-occupied property

What the New Regime Retains

Despite the long list of forfeited deductions, the New Regime is not entirely without concessions:

• Standard deduction of Rs. 75,000 for salaried employees
• Employer’s contribution to NPS under Section 80CCD(2) – up to 14% of salary for central government employees, 10% for others – this deduction is available under both regimes and is one of the most important planning tools for high earners choosing the New Regime
• Gratuity exemption under Section 10(10)
• Leave encashment exemption under Section 10(10AA)
• Retrenchment compensation exemption
• Conveyance allowance for actual travel expenses for official duties
• Transport allowance for specially-abled employees

What the Old Regime Retains

Everything – the full spectrum of deductions and exemptions listed above, plus others. The Old Regime is the comprehensive framework built over decades of Indian tax legislation. For employees with significant 80C investments, HRA entitlements, home loan interest deductions, and multiple other deductions, the Old Regime often results in meaningfully lower tax outflow despite the higher headline slab rates.

Which Regime Is Better – The Breakeven Analysis

There is no universal answer, but there are patterns.

The New Regime tends to favour:

• Younger employees early in their careers with limited investments
• Employees without home loans or in company-provided accommodation
• Employees with simple salary structures and minimal deductible expenses
• High earners above Rs. 15 lakh whose deductions are insufficient to offset the slab rate difference

The Old Regime tends to favour:

• Employees with substantial Section 80C investments already in place
• Employees claiming HRA – particularly in high-rent cities like Mumbai, Delhi, and Bengaluru
• Employees with active home loan interest deductions
• Employees with significant 80D health insurance premiums and other deductions

As a rough illustration – an employee earning Rs. 12,00,000 annually who can claim Rs. 1,50,000 in 80C deductions, Rs. 25,000 in 80D premiums, Rs. 2,00,000 in home loan interest, and Rs. 75,000 standard deduction reduces their taxable income to approximately Rs. 7,50,000 under the Old Regime. The tax on that is meaningfully lower than the New Regime tax on the full Rs. 12,00,000 after standard deduction. For an employee with none of those deductions, the New Regime’s lower slab rates win.

Payroll teams cannot make this calculation for each employee – but they can and should provide regime comparison workings at the start of each financial year so employees can make an informed declaration.

The Default Rule and Declaration Process

From AY 2024-25 onward:

• Default regime: New Tax Regime
• Opting out: An employee who wishes to use the Old Regime must explicitly declare this to their employer at the start of the financial year
• Mid-year switch: An employee can request a change of regime during the financial year – most employers allow this once, typically before the second quarter TDS recalculation
• Final settlement: At the time of filing their personal income tax return, employees can switch regimes again – independently of what they declared to their employer. This means an employee whose employer withheld TDS under the New Regime can still file their return under the Old Regime and claim a refund for the difference, or vice versa

The employer’s obligation is to apply the regime the employee declared for payroll TDS purposes. The final tax liability is always settled through the employee’s personal income tax return.

The Declaration Form

Most employers collect regime declarations through a structured form at the beginning of each April. The form should capture:

• The regime the employee is opting for
• If Old Regime – the deductions they intend to claim (to allow the employer to compute projected TDS correctly throughout the year)
• Acknowledgement that the declaration is their own responsibility
• Date and employee signature

Employer Obligations – TDS Under Both Regimes

Under Section 192 of the Income Tax Act, employers are required to deduct TDS (Tax Deducted at Source) from employees’ salaries based on the estimated income and applicable deductions for the full financial year, spread across the remaining pay periods.

For regime-aware payroll, this means:

• Collecting regime declarations from all employees at the start of April
• Applying the correct slab rates for the declared regime
• Incorporating declared deductions and exemptions (for Old Regime employees) into the projected annual tax calculation
• Spreading the projected annual TDS liability across the remaining pay periods
• Recalculating at key points during the year – typically when the employee submits actual investment proof or when a salary change occurs
• Performing a year-end TDS reconciliation in February/March to ensure the full year’s tax has been correctly withheld
• Issuing Form 16 to all employees by 15 June following the end of the financial year, showing total income, deductions, and TDS deducted under the applicable regime

A common failure is not recalculating TDS when investment proofs are submitted in January/February. If the projections at the start of the year assumed Rs. 1,50,000 in 80C investments but the employee only submits proof of Rs. 80,000, the TDS calculation must be revised upward for the final months.

Surcharge Applicability Under Both Regimes

For high-income earners, surcharge applies on top of the basic income tax:

The New Regime caps the maximum surcharge at 25% – a meaningful advantage for very high earners. Under the Old Regime, the 37% surcharge on income above Rs. 5 crore makes the effective marginal rate significantly higher. This surcharge cap alone can make the New Regime more attractive for top-bracket earners even after accounting for forfeited deductions.

Form 16 – Regime-Specific Reporting

Form 16 is the TDS certificate issued by the employer to the employee. It has two parts:

• Part A: TDS deposited with the government, generated from TRACES
• Part B: Detailed computation of taxable income, deductions claimed, and tax payable

For employees under the Old Regime, Part B will include the full deduction schedule – 80C, 80D, HRA exemption, and so on. For New Regime employees, the deduction section will reflect only the permitted items – primarily the standard deduction and any eligible NPS employer contributions.

Issuing an incorrect Form 16 – particularly mismatching the regime applied in payroll with the declarations made by the employee – creates downstream problems when the employee files their return. Reconciliation errors between Form 26AS (the ATO’s TDS statement) and the Form 16 trigger notices and scrutiny from the Income Tax Department.

How Mercans Manages Regime-Based Payroll in India

Running payroll across both tax regimes simultaneously – for hundreds or thousands of employees, each with different declarations, different deduction profiles, and different salary structures – requires a payroll engine that is both technically precise and operationally flexible.

Mercans’ India payroll services are built for exactly this:

• Structured regime declaration collection at the start of each financial year
• Correct TDS computation under both regimes, updated for the latest Finance Act rates and thresholds
• Mid-year TDS recalculations when declarations change or investment proofs are submitted
• Year-end TDS reconciliation and adjustment in February and March
• ATO-compliant Form 16 generation under the correct regime for each employee
• Payroll processing that correctly handles HRA, LTA, NPS employer contributions, and all regime-specific components
• Compliance with TDS filing deadlines – quarterly TDS returns (Form 24Q) filed by the stipulated dates

For multinational employers managing Indian payroll as part of a regional or global payroll consolidation, Mercans’ global payroll platform delivers India-specific compliance depth within a unified reporting framework. Explore the full range of services at mercans.com.

Frequently Asked Questions

Can an employee switch between the New and Old Regime during the financial year?

Yes, with some nuance. During the financial year, an employee can inform their employer of a change in regime – most employers process this once per year, typically before the second quarter recalculation. The employer then adjusts the TDS calculation prospectively. Separately and independently, at the time of filing their personal income tax return, the employee can choose whichever regime produces the better outcome for that year – regardless of what was declared to the employer. Salaried employees without business income can switch regimes freely at the return-filing stage. The TDS already deducted under the employer-applied regime is credited, and any difference is either refunded or paid as self-assessment tax.

If the New Regime is now the default, what happens to employees who declared the Old Regime last year?

Previous year declarations do not carry forward automatically. At the start of each financial year, employers should collect fresh declarations from all employees. An employee who was on the Old Regime last year and wants to remain on it must explicitly re-declare that preference. An employee who says nothing is in the New Regime by default. Payroll teams that assume continuity from prior year declarations – without collecting fresh forms – are likely mis-applying the regime for a portion of their workforce and creating TDS errors that will surface at year-end or when employees file returns.

Is the employer’s NPS contribution deductible under the New Regime?

Yes – this is one of the most important planning points for employees on the New Regime. Under Section 80CCD(2), the employer’s contribution to an employee’s National Pension System (NPS) account is deductible from taxable income under both regimes. The deduction is capped at 14% of salary for central government employees and 10% for private sector employees. For high earners in the New Regime who have given up most other deductions, maximising the employer NPS contribution is one of the primary remaining tax optimisation levers. Employers can facilitate this through structured salary packages – Mercans’ payroll specialists can advise on compliant NPS structuring within payroll.

How should employers handle employees who do not submit a regime declaration at all?

Under the current default rules, silence equals New Regime. If an employee does not submit a declaration by the employer’s stipulated deadline, the employer should apply the New Tax Regime to their TDS calculations. It is good practice to document this – noting that no declaration was received and the New Regime was applied by default – in case the employee later disputes their Form 16 or TDS deductions. Employers should send reminders and set clear deadlines for declarations at the start of April each year. A well-designed onboarding and annual declaration process eliminates most of these ambiguities before they become year-end problems.

For an employee earning Rs. 10,00,000 annually with standard deductions only, which regime results in lower tax?

At Rs. 10,00,000 gross salary with only the standard deduction of Rs. 75,000 available under both regimes, the comparison looks approximately like this. Under the New Regime, taxable income is Rs. 9,25,000, resulting in tax of approximately Rs. 62,500 before cess. Under the Old Regime, taxable income is Rs. 9,25,000 (same standard deduction), resulting in tax of approximately Rs. 1,12,500 before cess – because the 20% slab kicks in at Rs. 5,00,000 under the Old Regime versus the graduated structure under the New Regime. For an employee with no other deductions, the New Regime wins at this income level. The calculus changes substantially once meaningful 80C investments, HRA, and home loan interest deductions enter the picture – each deduction claimed under the Old Regime shifts the breakeven point upward.