New tax regime vs old: Which works better for ₹25 lakh to ₹1 crore salaries after draft rules 2026?

While most of the social media chatter around the old regime changes proposed in the draft rules is technically correct, one big question remains: Who will actually benefit from these changes? This is especially important to understand as the new tax regime is already too lucrative for many taxpayers to ignore.

In today's article, I will try to answer this question and provide some example calculations of tax liability under both the old tax regime and the new tax regime after incorporating the changes proposed in the draft rules.

But first, it is important to keep three important points in mind:

1. These draft rules, as the name suggests, are still draft rules. Meaning, they are not applicable as of now. Anything that is being said based on the draft rules may change and reflect differently in the final rules.

2. You cannot make your tax planning based on these draft rules. Wait for the final rules. Anyway, they will be applicable from April 1, 2026, and may help you plan your taxes for FY 2026-27. For the current financial year (2025-26), the Income-tax Rules 1962 remain relevant.

3. The draft rules have revised some allowances and perquisites. Let's assume these changes are finally implemented. Even then, you will benefit from them under the old tax regime only if they are part of your salary package. So, before getting excited over any claims of tax savings through revised allowances, you should check whether your employer actually offers those allowances.

That said, let's look at some of the key changes proposed in the draft rules before heading to the calculations:

How will the proposed rules help you save

There are two important points to note here:

First, the proposed rules may help if an employee opts for the old tax regime.

Generally, the old regime is helpful when you can claim a lot of deductions. Otherwise, the new tax regime is better due to lower slab rates and higher rebate for eligible taxpayers.

Second, the proposed rules will help only if your employer provides such allowances as part of your salary package and you are eligible to claim it.

For instance, the hostel allowance allowed per year per child is now ₹1,08,000. If you have admitted your child to a hostel, this amount will be tax-free under the old regime if it is also a part of your salary package. For two children, the tax-free limit will double to ₹2,16,000.

Similarly, the education allowance allowed per year per child is now ₹36000. If you have admitted your child to a school, this amount will be tax-free under the old regime if it is also a part of your salary package. For two children, the tax-free limit will double to ₹72,000 per year.

Let's understand with examples of four employees: A, B, C, D

• Each employee has two school-going children and they receive the education allowance as part of their salary package.

• Salaries of employees A, B, C and D are ₹25 lakh, ₹35 lakh, ₹55 lakh and ₹1 crore respectively. Their annual basic salaries are ₹12.5 lakh, ₹17.5 lakh, ₹27.5 lakh and ₹50 lakh respectively.

• Each employee is eligible to claim a Section 80C deduction of ₹1,50,000.

• Each employee is eligible to claim an additional deduction of ₹50,000 for contributing to NPS.

• Each employee is eligible to claim a Section 80D deduction of ₹25,000.

• The employer of each employee is contributing 14% of their basic salary towards NPS (which is eligible for tax relief but only under the new tax regime)

• Each employee is eligible for a standard deduction of ₹50,000 under the old regime or ₹75,000 under the new regime.

• Each employee is eligible for 50% HRA exemption under draft rules as they are all working from Bengaluru. They are paying a rent of ₹60,000 each.

Tax calculation under the old tax regime as per draft rules 2026

Tax calculation under the old tax regime as per Income-tax rules 1962

Tax calculation under the new tax regime

How to navigate your taxes after the proposed rules

Before making any decision, you should wait for the announcement of the final Income-tax Rules 2026

Even after the proposed revised allowances under the old tax regime are implemented, the new tax regime may work better for those who cannot avail such allowances and other deductions. You have seen this in the tables above

If your employer provides the revised allowances, you will benefit from them in the old tax regime after the implementation of the draft rules. But whether to opt for the old tax regime or not will also depend on your other deductions and exemptions.