Budget 2026 Changes for Salaried Persons

Key Changes Summary

The new tax regime remains the default for individual taxpayers, including salaried employees, with unchanged slab rates compared to FY 2025‑26. The basic exemption in the new regime stays at ₹4 lakh and the top 30% rate still starts above ₹24 lakh.

Standard deduction of ₹75,000 continues for salaried individuals and pensioners under the new regime, with no change announced in Budget 2026. This means salaried taxpayers can still have effective tax‑free salary income up to ₹12.75 lakh after considering the Section 87A rebate.

The Section 87A rebate structure under the new regime is retained, offering a rebate of up to ₹60,000 so that taxable income up to ₹12 lakh attracts zero tax. For incomes just above this level, marginal tax outgo rises, so precise TDS projections become important.

Under the old regime, slab rates and major deduction rules continue unchanged, but it is no longer the default and must be actively chosen by the employee each year. Popular deductions like Section 80C, 80D, HRA and home loan interest remain available only in this regime.

The government has reiterated its intent to gradually encourage migration to the new regime, but has stopped short of phasing out the old system in this Budget, so HR must support both options in payroll.

New Tax Regime: What Continues in FY 2026‑27

Slab Structure and Zero‑Tax Threshold

Under the new regime for FY 2026‑27, individual taxpayers are taxed at progressive rates starting from 5% above the ₹4 lakh basic exemption and going up to 30% beyond ₹24 lakh of taxable income. With the enhanced Section 87A rebate, residents with taxable income up to ₹12 lakh continue to pay zero tax in this regime.

For salaried individuals, the standard deduction of ₹75,000 further increases the effective tax‑free salary level to ₹12.75 lakh, since the rebate is computed after reducing this deduction from gross salary.

Deductions and Exemptions

The new regime continues with its simplified approach:

• Most traditional exemptions (HRA, LTA, standard 80C investments, etc.) are not available.
• A limited set of benefits remains: employer contributions to NPS/EPF within caps, interest on home loans for let‑out property, and the standard deduction.

For many salaried employees who do not invest aggressively in tax‑saving instruments or do not receive substantial HRA or housing‑loan benefits, this regime still tends to be more attractive because of lower effective tax and minimal documentation.

Who Benefits from the New Regime

• New employees who have not yet built a large investment portfolio.
• Mid‑income earners (₹8–12 lakh range) with limited 80C/80D savings and no home loan.
• Employees who prefer higher in‑hand salary with fewer year‑end proofs.

Old Tax Regime: Still an Option

Slabs and Deductions

The old regime's basic exemption of ₹2.5 lakh and 30% rate beyond ₹10 lakh remain the same in FY 2026‑27. What makes this regime attractive is the ability to claim:

• Section 80C investments (EPF, PPF, ELSS, life insurance, home loan principal, etc.).
• HRA exemption for rented accommodation.
• LTA, Section 80D (health insurance), NPS, home‑loan interest and other specified deductions.

The standard deduction of ₹50,000 remains available in the old regime.

Who Should Stay with Old Regime

Typically, the old regime may still deliver lower tax for employees who:

• Fully utilise Section 80C (₹1.5 lakh) and additional NPS
• Enjoy significant HRA exemption or home‑loan interest deduction
• Have other admissible deductions such as health insurance or education loans

Impact on Payroll and TDS

Regime Selection and Declarations

Because the new regime remains the default, employers must treat employees as being under this regime unless they formally opt for the old one. HR needs a clear yearly process for:

• Capturing each employee's chosen regime at the start of the financial year.
• Allowing or restricting changes during the year, in line with policy and CBDT guidance.
• Documenting the choice for audit and Form 16 generation.

If no choice is communicated, TDS should be computed under the new regime; employees can still switch when filing their return, but this may cause refund situations.

TDS Calculation Changes

For FY 2026‑27, payroll teams must:

• Configure the new‑regime slabs correctly so benefits of the higher zero‑tax threshold flow into monthly TDS.
• Ensure standard deduction of ₹75,000 is applied in the new regime and ₹50,000 in the old regime.
• Accurately factor exemptions and deductions for old‑regime employees based on declarations.

Careful validation is important around the ₹12–13 lakh income band, where slight errors can wrongly push employees above or below the rebate threshold.

Communication with Employees

HR should plan a focused communication drive after payroll configuration is updated:

• Share simple explainer mailers comparing old vs new regime for typical salary profiles.
• Provide scenario‑based illustrations (single earner, dual‑income couple, employee with home loan, etc.).
• Clearly explain the last date for regime selection, investment declarations, and proof submission to avoid last‑minute TDS spikes.

How HR Pearls Helps

Automated Tax Rule Updates

HR Pearls is automatically updated with the latest FY 2026‑27 slabs, rebates and standard deduction rules for both regimes, so HR does not need to manually adjust each bracket or calculate surcharge/cess. The system stores regime‑wise configurations and immediately applies them from the effective payroll period onwards, reducing the risk of outdated tax tables driving incorrect TDS.

Regime‑Wise Projection and Comparison

HR Pearls generates side‑by‑side tax projections under the old and new regimes for each employee, using their actual salary structure and declared investments. Employees can log into the ESS portal to:

• View projected annual tax and monthly TDS under each regime.
• Experiment with planned 80C/80D/NPS contributions in the old regime to see if it still beats the new one.
• Lock their chosen regime online, which flows directly into the payroll engine without manual entry.

This interactive comparison is critical in a year where slabs are unchanged but employees' personal situations and investments may have shifted.

Smarter TDS and Compliance

HR Pearls:

• Distinguishes between old and new regime employees for Form 16, Part B, and produces regime‑appropriate break‑ups and annexures.
• Offers validation reports that flag negative tax, unusual TDS swings, or mismatches between annual projections and actual payroll.
• For organisations with multiple locations or entities, consolidated dashboards show regime‑wise distributions and overall compliance status.

Employee Experience and Self‑Service

HR Pearls improves the employee experience around tax:

• ESS widgets summarise current regime, projected annual income, estimated tax, and net‑of‑tax in‑hand salary.
• Employees receive alerts before key cut‑offs—such as declaration deadlines and proof submission dates—reducing last‑minute confusion.
• Simple help‑articles and in‑product tips can link to this Budget 2026 explainer, so employees understand why their April and May payslips look different from the previous year.