If you thought the old vs new tax regime debate was settled, think again.
Just when the government seemed determined to push taxpayers toward the new regime, the newly notified Income Tax Rules, 2026 have quietly reopened the contest. By increasing limits for several exemptions, the old regime has regained relevance.
And now, as a salaried individual, you are back to doing what you hoped was over: choosing.
FY27 reset
Every April, employers ask for investment declarations. This year, that exercise carries more weight than it has in some time.
For a while, the new regime looked like the clear winner — lower tax rates, fewer deductions to track, and less paperwork. It was designed to simplify compliance and gradually reduce dependence on exemptions.
But the equation has shifted.
Recent revisions have strengthened the old regime, narrowing the gap between the two systems. The old regime is no longer fading away quietly. It is putting up a fight.
What changed
The key lies in the revised Income Tax Rules, 2026.
Several salary-linked allowances — which had become nearly irrelevant — have been significantly enhanced. The children education allowance has increased from ₹100 per month per child to ₹3,000. The hostel allowance has moved from ₹300 to ₹9,000. For families, these are not cosmetic revisions; they meaningfully expand the exemption base.
More significantly, cities such as Bengaluru, Pune, Hyderabad and Ahmedabad have been reclassified at par with existing metros for House Rent Allowance (HRA) purposes. This increases the exemption cap from 40% to 50% of salary for individuals working in these cities — a substantial benefit for professionals paying high rents.
These advantages are available only under the old regime.
The implication is clear: the old regime is no longer just about Section 80C or insurance premiums. Salary structuring has become relevant again.
Who benefits
The old regime now primarily works for individuals with substantial, genuine expenses — high rent, children’s school or hostel fees, perhaps a car lease.
If these real expenses are already significant, they may be sufficient to cross the break-even threshold on their own. Additional deductions such as health insurance premiums or NPS contributions can supplement the calculation, but cannot drive it independently.
For incomes above ₹20 lakh, the break-even deduction amount is broadly around ₹8.5 lakh. Claiming deductions above this level would generally make the old regime more beneficial than the new regime.
At lower income levels, reaching this threshold becomes more difficult. Rent obligations are typically smaller in proportion to income, meaning HRA alone may not bridge the gap. The arithmetic becomes less compelling.
The tax trap
Do not invest merely to save tax.
This is where the old regime can quietly mislead taxpayers. The temptation to exhaust deductions often leads to investments misaligned with long-term financial goals — ULIPs, endowment policies, five-year fixed deposits. The graveyard of Section 80C is filled with products that made tax sense, but little financial sense.
Tax savings should be the byproduct of sound financial planning, not the primary objective.
If you choose the old regime, ensure your investments serve broader goals beyond tax efficiency. If they do not, the new regime may leave you financially better off, even if the headline tax number appears slightly higher.
Policy paradox
The government’s direction was clear: simplify the tax system, reduce reliance on exemptions, and gradually phase out the old regime.
With these recent changes, that transition has slowed.
From a policy standpoint, two parallel systems continue to coexist, requiring taxpayers to reassess their position each year.
From your standpoint, however, this complexity presents an opportunity.
You now have a genuine choice — and the ability to optimise rather than merely comply.
What should you do?
Begin by listing your actual expenses and exemptions — rent, school fees, hostel costs. Be realistic, not aspirational.
If these already approach the break-even level, compare your total tax liability under both regimes. Tax calculators are widely available, and a chartered accountant can run the numbers quickly. (Pro tip: Avoid relying solely on AI for precise tax computations; errors are still possible.)
Select the regime that minimises tax liability without forcing suboptimal financial decisions.
Once chosen, commit to it for the financial year. Align your investments, cash flows and expectations accordingly.
The debate may have returned, but the answer remains personal. There is no universally superior regime — only the one that works better for you.
Vijaykumar Puri, partner at VPRP & Co LLP, Chartered Accountants. Views are personal