Income Tax (New Regime) for Government Employees – FY 2025-26
Overview of the New Tax Regime
The New Tax Regime introduced under Section 115BAC of the Income Tax Act offers simplified tax slabs with lower rates compared to the old regime. Starting from FY 2025-26, it is the default regime for all taxpayers, including central and state government employees. The key advantage is reduced tax liability through broader income slabs and enhanced rebate provisions under Section 87A.
Unlike the old regime, the new regime does not allow most deductions like Section 80C (investments), 80D (health insurance), HRA, or LTA. However, standard deduction of ₹75,000 for salaried employees is available. The regime is designed to benefit taxpayers with fewer investments and lower paperwork requirements.
Tax Slabs for FY 2025–26 (AY 2026-27)
The Finance Act 2025 significantly relaxed the tax slabs under the new regime. The basic exemption limit has been increased to ₹4 lakh, and progressive rates apply to higher income brackets.
| Income Slab (₹) | Tax Rate |
|---|---|
| Up to ₹4,00,000 | Nil |
| ₹4,00,001 – ₹8,00,000 | 5% |
| ₹8,00,001 – ₹12,00,000 | 10% |
| ₹12,00,001 – ₹16,00,000 | 15% |
| ₹16,00,001 – ₹20,00,000 | 20% |
| ₹20,00,001 – ₹24,00,000 | 25% |
| Above ₹24,00,000 | 30% |
Note: Standard deduction of ₹75,000 is available for salaried employees under the new regime.
Deductions and Rebate under Section 87A
Section 87A Rebate (FY 2025-26)
Section 87A offers significant tax relief to individuals with lower income. For FY 2025-26 under the new regime, the rebate has been enhanced:
- Maximum rebate: ₹60,000 (increased from ₹25,000)
- Applicable for taxable income up to ₹12,00,000
- Effectively, salaried employees earning up to ₹12.75 lakh pay zero tax (after ₹75,000 standard deduction)
- Rebate applies only to income taxed at normal slab rates (not special rates like capital gains)
Deductions Allowed in New Regime
The new regime allows very limited deductions compared to the old regime:
- Standard Deduction: ₹75,000 for salaried employees and pensioners
- Employer's NPS Contribution (Section 80CCD(2)): Up to 14% of salary for government employees
- Section 80JJAA: Deduction for new employment (for employers)
- Deductions like 80C, 80D, 80E, HRA, LTA are NOT allowed under the new regime
Comparison: Old vs New Regime
Understanding the differences between the two regimes helps government employees choose the most beneficial option. Here's a comprehensive comparison:
| Feature | Old Regime | New Regime (FY 2025-26) |
|---|---|---|
| Basic Exemption | ₹2.5 lakh | ₹4 lakh |
| Tax Slabs | 3 slabs (5%, 20%, 30%) | 7 slabs (0%, 5%, 10%, 15%, 20%, 25%, 30%) |
| Standard Deduction | ₹50,000 | ₹75,000 |
| Section 80C | Up to ₹1.5 lakh | Not allowed |
| HRA Exemption | Allowed | Not allowed |
| Section 80D (Health Insurance) | Up to ₹25,000 (₹50,000 for senior citizens) | Not allowed |
| Section 87A Rebate | ₹12,500 (income up to ₹5 lakh) | ₹60,000 (income up to ₹12 lakh) |
| LTA (Leave Travel Allowance) | Allowed | Not allowed |
| Default Regime | Optional | Yes (default from FY 2023-24) |
Tip: Salaried employees can switch between regimes each year while filing ITR. Business owners can switch only once.
Tax Saving Tips for Government Employees
Even though the new regime limits deductions, government employees can still optimize their tax liability through smart planning:
- Maximize NPS contributions: Employer's contribution to NPS (up to 14% of salary for govt. employees) is still deductible under Section 80CCD(2) in the new regime.
- Compare both regimes: Use tax calculators to determine which regime saves more tax based on your salary structure and investments.
- Optimize salary structure: Discuss with your employer to structure components like NPS contribution to maximize tax benefits.
- Claim standard deduction: Ensure the ₹75,000 standard deduction is applied correctly while computing taxable income.
- Plan for Section 87A: If your income is close to ₹12 lakh, consider reducing taxable income through allowed deductions to avail the full rebate.
- Consider old regime for high deductions: If you claim substantial HRA, 80C, or home loan interest, the old regime might be more beneficial.
- File ITR on time: Ensure timely filing to avoid penalties and claim all eligible rebates and deductions.
Frequently Asked Questions (FAQs)
1. Is the new tax regime mandatory for government employees?
No, the new regime is the default, but government employees can opt for the old regime while filing their Income Tax Return (ITR) if it's more beneficial based on their deductions and exemptions.
2. Can I switch between old and new regime every year?
Yes, salaried employees (including government employees) can switch between the two regimes each financial year while filing their ITR. However, business owners can switch only once.
3. What is the income limit for zero tax under the new regime?
For FY 2025-26, individuals with taxable income up to ₹12 lakh pay zero tax due to the enhanced Section 87A rebate of ₹60,000. Salaried employees earning up to ₹12.75 lakh (including ₹75,000 standard deduction) effectively have no tax liability.
4. Are HRA and LTA allowed in the new regime?
No, HRA (House Rent Allowance) and LTA (Leave Travel Allowance) exemptions are not available under the new tax regime. These are only allowed in the old regime.
5. Can I claim Section 80C deductions in the new regime?
No, Section 80C deductions (for investments in PPF, ELSS, life insurance, etc.) are not allowed under the new regime. However, employer's NPS contribution under Section 80CCD(2) is still allowed.
6. Which regime is better for government employees?
It depends on your salary structure and deductions. If you have minimal investments and don't claim HRA, the new regime is usually better due to lower tax rates and higher rebate. If you claim substantial deductions (80C, 80D, HRA), calculate tax under both regimes before deciding.