The two-regime system is one of the more confusing features of Indian income tax, and it lands squarely on employers because the choice of regime determines how much TDS you deduct from each employee's salary. With the new Income Tax Act, 2025 now in force, and the new regime firmly established as the default, employers need a clear handle on how the two regimes differ and what their obligations are. This guide explains it from the employer's side.
The two regimes in brief
India operates two parallel income tax regimes, and employees can be taxed under either.
The new regime offers lower slab rates and a more generous rebate, but in exchange it strips away almost all of the deductions and exemptions that employees were traditionally used to — no HRA exemption, no Section 80C deduction for investments, no 80D for medical insurance, and so on. It is a simpler, lower-rate, fewer-deductions system.
The old regime keeps all those deductions and exemptions — HRA, 80C, 80D, and the rest — but charges higher slab rates. It rewards employees who have significant deductions to claim (large investments, high rent, home loan interest) with the ability to reduce their taxable income substantially, at the cost of higher rates on what remains.
The essential trade-off: the new regime gives lower rates but few deductions; the old regime gives higher rates but many deductions. Which produces a lower tax bill depends entirely on how much an individual employee invests and claims.
The new regime is now the default
This is the single most important operational point for employers. The new regime is the default. If an employee does not actively opt for the old regime, you calculate their TDS under the new regime.
This matters because silence means new regime, not old. An employer cannot assume employees want the old regime they may have used in the past — unless an employee explicitly elects the old regime, the new regime applies. Getting this default right is essential, because applying the wrong regime means deducting the wrong amount of TDS all year.
What this means at TDS time
Because the regime determines the TDS, employers have a clear process obligation at the start of the year (and when employees join). You need to ask each employee which regime they want to be taxed under, record their choice, and then compute their TDS accordingly through the year. An employee on the new regime has their TDS calculated on the lower slabs with the standard deduction but without the other exemptions; an employee on the old regime has their TDS calculated on the higher slabs but with their declared investments and exemptions reducing the taxable amount.
This makes the collection of regime elections and, for old-regime employees, investment declarations, a key payroll process. For old-regime employees, you also need their proof of investments to allow the deductions they have claimed, and there is a true-up later in the year if declarations and actual proofs differ. For new-regime employees, the process is simpler because there are far fewer deductions to account for.
The numbers that anchor the new regime for FY 2026–27
The new regime for FY 2026–27 carries some specific figures worth knowing, because they shape who benefits from it. The new regime offers a standard deduction, and a rebate that makes income up to a defined threshold effectively tax-free — the combination of the rebate and the standard deduction means a salaried employee earning up to a certain level pays no tax at all under the new regime. This generous tax-free threshold makes the new regime particularly attractive for employees at lower and middle income levels, who may have little to gain from the old regime's deductions. The slab rates themselves were set in the preceding budget and carried forward unchanged into FY 2026–27. As the exact rebate and standard-deduction figures are set by budget and can be revised, employers should confirm the current numbers, but the structural point holds: the new regime's rebate makes it the better choice for many employees without significant deductions.
How to think about which suits an employee
While the employee chooses, employers are often asked which regime is better, so it helps to understand the logic. Broadly, an employee with substantial deductions — large 80C investments, significant HRA because they pay high rent, home loan interest, medical insurance — may find the old regime produces a lower tax bill, because those deductions reduce taxable income enough to outweigh the higher rates. An employee without significant deductions — who does not invest much, does not pay high rent, has no home loan — typically does better under the new regime, because they have little to deduct and benefit from the lower rates and the rebate.
The honest answer to "which is better" is "it depends on the individual's deductions," and the only way to know for certain is to compute the tax both ways for that employee. Many employees benefit from doing this calculation rather than guessing. As an employer, you are not obliged to advise, but enabling employees to compare is helpful.
Common regime-related mistakes
The recurring errors include:
Assuming employees are on the old regime by default, when the new regime is the default and silence means new.
Failing to collect each employee's regime election, so the wrong regime is applied.
Applying old-regime deductions for an employee who is actually on the new regime, or vice versa.
Not collecting investment proofs from old-regime employees, then having to claw back deductions at the year-end true-up.
Calculating TDS on the wrong regime all year and creating a large correction at the end.
Why regime handling is easier on connected payroll
The regime choice ripples through the entire year's TDS for each employee — it determines the slabs, which deductions apply, what proofs are needed, and the year-end true-up. When regime elections, investment declarations, proofs, and TDS computation are tracked across spreadsheets or disconnected tools, applying the right regime to each employee consistently all year, and handling the true-up correctly, is a manual burden where mistakes compound over twelve months.
When payroll sits on a single database, each employee's regime election is recorded once and drives their TDS computation automatically through the year, old-regime declarations and proofs are tracked against the same record, and the year-end true-up flows from the same data. There is no risk of applying the wrong regime inconsistently across months because the choice lives with the employee's record and governs every calculation. This is part of how Helion handles Indian payroll — the regime choice captured once and applied correctly all year from one source of truth, with declarations and the true-up handled coherently. For an employer managing two regimes across a workforce, that connected design removes the risk of regime errors quietly accumulating over the year.
This guide reflects the general position on the new and old tax regimes in India for FY 2026–27 under the new Income Tax Act, 2025. Slab rates, the rebate, and the standard deduction are set by budget and can change. This is general information for employers and employees, not a substitute for advice from a qualified tax professional on a specific situation.