TDS on salary: old vs new tax regime for FY 2026-27

Every employer deducts tax at source (TDS) on salary and deposits it monthly. Since the introduction of the new tax regime, payroll has to support two parallel systems and let each employee choose. Getting the deduction right through the year, and truing it up at the end, is what keeps Form 16 clean and employees happy.

Two regimes, one payroll

India now has two personal tax regimes. The new regime is the default, with lower slab rates but almost no deductions. The old regime has higher rates but allows the familiar deductions, such as 80C, HRA exemption and home loan interest. Employees can choose, and payroll must compute TDS accordingly.

The new regime slabs

Indicative slabs for FY 2026-27 under the new regime are below. Confirm the current year's numbers in the Finance Act before finalising payroll.

Taxable income	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%

Two features make the new regime attractive for many employees:

• A standard deduction of ₹75,000 from salary.
• A Section 87A rebate that effectively makes tax nil for resident individuals with taxable income up to ₹12,00,000.

So a salaried employee with taxable income at or below ₹12 lakh may pay no tax at all under the new regime.

The old regime

The old regime uses slabs of 5%, 20% and 30%, with a basic exemption up to ₹2,50,000, a standard deduction of ₹50,000, and an 87A rebate that makes tax nil up to ₹5,00,000 of taxable income. Its advantage is the deductions:

• Section 80C investments up to ₹1,50,000 (EPF, PPF, life insurance, ELSS, and more).
• HRA exemption under Section 10(13A).
• Home loan interest under Section 24.
• 80D health insurance, 80CCD(1B) NPS, and others.

A simple way to help employees choose

There is no universal answer. The rule of thumb:

• Employees with large deductions (high HRA, a home loan, full 80C, health insurance) often still come out ahead on the old regime.
• Employees with few deductions usually pay less under the new regime, thanks to the lower rates and the larger standard deduction.

The practical approach is to let each employee declare their regime and their proposed deductions at the start of the year, compute TDS on that basis, then true up as proofs come in. Many employers allow one switch during the year.

Worked example

Consider a CTC that yields a gross salary of ₹11,50,000, with an employee who has few deductions. Under the new regime, after the ₹75,000 standard deduction, taxable income is about ₹10,75,000, which is below the ₹12 lakh rebate limit, so TDS is nil. The same employee under the old regime, without significant deductions, would pay tax on income above ₹2.5 lakh at the higher slab rates. For this profile, the new regime clearly wins.

Common mistakes to avoid

• Not spreading TDS evenly across the year, causing a large deduction in March.
• Ignoring the employee's declared regime and deductions.
• Forgetting to true up when declared investments are not actually made.
• Missing the higher TDS where PAN is not available.

Frequently asked questions

Which regime is the default? The new regime.

Can an employee switch regimes mid-year? Employers usually allow one change; the final position is settled when filing the return.

Does the new regime allow any deductions? Very few; the main relief is the standard deduction and the 87A rebate.

Key takeaways

• The new regime is the default, with lower rates and a ₹75,000 standard deduction.
• The 87A rebate makes tax nil up to ₹12 lakh taxable under the new regime.
• The old regime still helps employees with substantial deductions.
• Spread TDS across the year and true up with proofs.

NeevHR computes TDS under both regimes from each employee's declaration, spreads it across the year, and reconciles through Form 24Q and Form 16.