Tax regime declaration last date for salaried employees is here: Know 6 points before informing HR

Salaried employees can choose between the new and old tax regimes every year, depending on what suits them the best. If an employee doesn’t declare his/her choice, then the employer deducts applicable taxes from the salary as per the new tax regime.

“Salaried taxpayers are required to inform their employers about their choice of tax regime at the beginning of the financial year to enable the employers to determine their tax liabilities and appropriate TDS deductions for the year,” said CA Dr Suresh Surana.

“In case the taxpayer fails to specify their choice of tax regime to the employer, they would be subjected to withholding (TDS deductions) as per the default tax regime, i.e. new tax regime,” he added.

If you are a salaried employee, you must have received an email from your HR department this month, asking to confirm your tax regime selection for FY 2025-26 (AY 2026-27) in the next few days.

As the last date to declare the tax regime is approaching, this article explains six key points about the differences between the old and new regimes that salaried employees should consider before informing their HR departments. The details mentioned below are based on inputs from Dr Surana.

1. Tax slab and rates

The old tax regime offers a basic tax exemption limit of ₹2,50,000. The highest tax slab rate in the old regime is 30% applicable on income above ₹10,00,000. Further, the old regime has four tax slabs.

In contrast, the new tax regime is wider in scope, with its seven tax slabs and rates ranging from 5% to 30%. It also offers a basic exemption limit of ₹4,00,000 from FY 2025-26 and the highest tax rate of 30% is applicable on income above ₹24,00,000. The tax rates under both regimes are as follows:

2. Tax rebate under Section 87A

Under the old tax regime, resident individuals with total income up to ₹5,00,000 are subjected to a Nil effective tax rate by way of claiming full rebate under Section 87A of the Income Tax Act, 1961.

However, from FY 2025-26, individuals opting for the new tax regime can claim a full tax rebate of up to ₹60,000 under this section on total income up to ₹12,00,000.

3. Marginal relief

Under the new regime, marginal relief under section 87A ensures that individuals with income marginally exceeding ₹12 lakh are not subjected to a disproportionately high tax burden.

The marginal relief provision limits the additional tax payable to the exact amount by which the income exceeds the rebate threshold, thereby maintaining tax equity. For instance, an individual earning marginally above ₹12,00,000 will pay only the excess amount as tax, thereby maintaining a net income (post-tax) equal to that of an individual earning exactly ₹12,00,000.

This benefit is not available in the old regime. However, the old regime offers marginal relief in relation to a surcharge on income over ₹50 lakh.

4. Surcharge rates

The highest tax surcharge rate is 25% under the new tax regime for total income exceeding ₹5 crore. This reduces the effective tax rate of HNIs from 42.744% to 39%. In contrast, the highest surcharge rate is 37% under the old regime.

5. Tax deductions and exemptions

There are no restrictions on claiming the benefit of tax deductions and exemptions under the old tax regime. For instance, a taxpayer with investments in tax-saving instruments, who pays premiums on life or a medical insurance policy, children’s school fee, home loan principal repayment, etc., can avail the benefit of the deduction for house rent allowance, leave travel allowance, etc, under the old tax regime.

However, the new tax regime permits only certain specified deductions such as the standard deduction on salary of ₹75,000, deduction for employer’s contribution to National Pension System (NPS), and Employees Provident Fund (EPF).

6. What if you fail to decide?

Salaried individuals can switch between old and new tax regimes on a year-on-year basis. However, they are required to inform their choice of tax regime to employers at the beginning of the financial year. In case of failure to declare the tax regime, the employer deducts applicable taxes as per the new tax regime. However, employees can change the tax regime at the time of filing their income tax returns and claim tax refunds.