EaseValueWhat Happened?
The Income Tax Act, 2025 has formally introduced Section 202, which completely replaces the old Section 115BAC (the Optional New Tax Regime) effective from 1 April 2026. This applies to Assessment Year 2026-27 onwards. The new section brings revised tax slabs, a higher standard deduction of ₹75,000, a new rebate limit of ₹60,000, and clearer opt-in/opt-out provisions for taxpayers choosing between the new and old tax regimes.
Background & Legal Context
To understand this change, let's trace the history:
- Old Regime (till AY 2025-26): Governed by the Income Tax Act, 1961 with exemptions, deductions under Chapter VIA (Sections 80C-80U), and complex calculations that allowed professionals and business owners to reduce taxable income significantly.
- Section 115BAC (AY 2020-21 to 2025-26): Introduced the Optional New Tax Regime with fixed tax rates but NO exemptions or deductions (except rebate under Section 87A). It was optional—taxpayers could choose either regime every financial year.
- Section 202 (New Act, 2025 — AY 2026-27 onwards): Replaces 115BAC with a more refined structure. The new regime is now the default tax regime for individuals, though the old regime remains available as an opt-out choice.
Key Legal Difference: Under the old Income Tax Act, 1961, taxpayers had maximum flexibility. Section 202 in the new Act, 2025 shifts the philosophy—the new (simpler) regime is the starting point; the old (complex) regime requires a conscious choice.
New Section 202 Features — What Changed?
1. New Tax Slabs (AY 2026-27):
- ₹0 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 ₹20,00,000: 15%
- ₹20,00,001 to ₹50,00,000: 20%
- Above ₹50,00,000: 30%
Note: These slabs are marginally lower than the old 115BAC structure, providing relief to middle-income earners.
2. Standard Deduction — ₹75,000 (Increased from ₹50,000): All individuals earning salary/pension income get an automatic ₹75,000 deduction under Section 202. This is the biggest relief for salaried employees. No need to claim House Rent Allowance (HRA) or any other exemption separately.
3. Rebate under Section 202 — ₹60,000 (New Limit): Individuals with total income up to ₹5,00,000 get a rebate of ₹60,000 (increased from ₹50,000 under old 115BAC). This means zero income tax liability for earning individuals below ₹5,00,000, even before considering surcharge or cess.
4. No Exemptions or Deductions: Under Section 202, you CANNOT claim:
- Section 80C (LIC, PPF, ELSS, tuition fees) — ₹1,50,000 deduction
- Section 80D (Medical insurance) — ₹25,000 deduction
- Section 80E (Education loan interest)
- Section 80G (Charitable donations)
- Home loan interest under Section 24(b) — max ₹2,00,000
This is a trade-off: you gain lower tax rates but lose deductions.
5. Option to Opt Out and Choose Old Regime: Despite Section 202 being the new default, taxpayers can still opt for the old tax regime under the Income Tax Act, 1961. This is crucial for:
- Senior citizens (age 60+) with medical claims
- Self-employed professionals claiming heavy deductions
- Individuals with home loan interest ₹2,00,000+ annually
- Anyone claiming Section 80C deductions exceeding ₹1,50,000
What Does This Mean for You?
For Salaried Employees (AY 2026-27): The ₹75,000 standard deduction is a game-changer. Most salaried individuals will pay significantly less tax under Section 202. Example: A person earning ₹8,00,000 with ₹4,50,000 HRA (who paid ₹30,000+ tax under old regime) may pay only ₹6,000-8,000 under Section 202.
For Self-Employed & Professionals: The loss of Section 80C (₹1,50,000), Section 80D (₹25,000), and home loan interest deduction makes the old regime MORE attractive. If you claim total deductions ₹3,00,000+, the old regime is likely cheaper.
For Senior Citizens (60+): DO NOT automatically accept Section 202. Claim medical deductions (Section 80D, up to ₹1,00,000 if disabled) under the old regime and compare your tax liability. You'll save more.
For Investors in Mutual Funds & Insurance: If you invest in ELSS (Equity Linked Savings Scheme) for the ₹1,50,000 Section 80C deduction, stay in the old regime. The tax savings from deductions outweigh Section 202's lower rates.
For Home Loan Borrowers: If you've taken a home loan with ₹2,00,000+ annual interest, use the old regime to claim full interest deduction. Section 202 offers no relief here.
What Should You Do Now?
Step 1: Calculate Your Tax Under Both Regimes (AY 2026-27): Use ITR-1 (for salaried) or ITR-2 (for business/professionals) forms to compute tax under:
- Section 202 (new regime)
- Old Income Tax Act, 1961 regime
Choose whichever results in lower tax liability.
Step 2: Review Your Current Deductions: Audit your Section 80C, 80D, 80E, and home loan interest claims for FY 2025-26 (AY 2026-27). If total deductions exceed ₹2,50,000, the old regime is safer.
Step 3: Update Your Financial Planning: If currently investing in PPF/ELSS for tax deductions, continue doing so but file under the old regime from AY 2026-27. If NOT invested, Section 202 is simpler and tax-efficient.
Step 4: Make Your Formal Election: When filing ITR for AY 2026-27 (March 2027), explicitly choose your preferred regime. The choice applies for that financial year; you can switch next year if needed.
Step 5: Consult Your Tax Advisor: Given the complexity, have a CA compare Section 202 vs. old regime for your specific income structure before finalizing your tax return.
Key Takeaways
- Section 202 is now the default tax regime from 1 April 2026 (AY 2026-27): Replaces Section 115BAC with simpler slabs and higher standard deduction (₹75,000) and rebate (₹60,000).
- No exemptions or deductions under Section 202: You lose Section 80C (₹1,50,000), Section 80D (₹25,000), and home loan interest relief—weigh this carefully.
- Old regime remains optional: Professionals, senior citizens, and home loan borrowers can still opt out of Section 202 and use the old Income Tax Act, 1961 regime for greater tax savings.
- Salaried employees likely benefit most from Section 202: The ₹75,000 standard deduction and lower tax rates reduce tax burden significantly without claiming deductions.
- File your ITR carefully in March 2027: Explicitly elect your preferred regime; consult a CA to ensure you're not overpaying tax under the wrong regime.
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