# Old or new tax regime: what payroll has to do with an employee's choice

Published 6 October 2026 by The PayLoom team. https://payloom.in/blog/old-vs-new-tax-regime-payroll-tds

> The new regime is the default for salary TDS; an employee who wants the old regime's deductions has to tell the employer, and payroll then projects tax on that basis every month, collects proofs before the last quarter and spreads any change over the months that remain.

Every salaried employee in India is taxed under one of two regimes. The choice belongs to the employee, but the work of applying it falls on payroll, which has to deduct the right amount of tax from salary every month. Get the regime wrong, or leave the projection untouched for months, and the correction lands in the last quarter as a deduction large enough to generate complaints.

Note: Slabs and limits below applied from April 2025, and Budget 2026 kept them unchanged for 2026-27. The Income-tax Act, 2025 replaced the 1961 Act from 1 April 2026 and renumbered its sections, so old references such as section 80C now point to new sections. Check the current Finance Act before configuring a tax year.

## The two regimes in brief

- New regime: the default. Lower slab rates, a standard deduction of ₹75,000, and very few other deductions; the employer's contribution to NPS is one that remains. A rebate means no tax on taxable income up to ₹12 lakh, which is a salary of ₹12.75 lakh after the standard deduction.
- Old regime: higher slab rates, a standard deduction of ₹50,000, and the familiar exemptions and deductions, including house rent allowance, the ₹1.5 lakh limit for investments such as PF, PPF and life insurance, health insurance premiums and home loan interest.

## New regime slabs

- Up to ₹4 lakh: nil
- ₹4 to 8 lakh: 5%
- ₹8 to 12 lakh: 10%
- ₹12 to 16 lakh: 15%
- ₹16 to 20 lakh: 20%
- ₹20 to 24 lakh: 25%
- Above ₹24 lakh: 30%

Health and education cess of 4% is added to the tax under both regimes, and surcharge applies at higher incomes.

## How the choice reaches payroll

Payroll applies the new regime unless the employee says otherwise. An employee who wants the old regime tells the employer at the start of the year, and that choice is used for TDS for the rest of the year. It does not bind the employee's return: someone with only salary income can still pick the other regime when they file, and settle the difference as a refund or extra tax. Payroll's job is to deduct on the declared basis, not to pick the cheaper one.

## Working out monthly TDS

1. Project salary for the whole year: what has been paid so far, plus the current monthly salary for the months left, plus bonuses and increments already approved.
2. Subtract the standard deduction, and under the old regime the declared exemptions and deductions.
3. Apply the slabs, the rebate if it applies, and cess, to get the tax for the year.
4. Subtract the tax already deducted this year, and divide what is left by the months remaining.

For an employee on ₹18 lakh a year under the new regime, taxable income is ₹17.25 lakh after the standard deduction. Tax comes to ₹1,45,000, or ₹1,50,800 with cess, which is about ₹12,567 a month. The same employee under the old regime, claiming ₹2.4 lakh of house rent exemption, ₹1.5 lakh of investments and ₹25,000 of health insurance, has taxable income of ₹13.35 lakh and tax of ₹2,21,520 with cess. For most salaries the old regime only wins when deductions are very large.

## Declarations and proofs

- Collect declarations at the start of the year, or at joining, and use them for the projection straight away.
- Ask for proofs before the last quarter, usually by January. Rent receipts are needed for house rent exemption, and the landlord's PAN once annual rent passes ₹1 lakh.
- When proofs fall short of the declaration, recalculate on what was proved. The shortfall is spread over the remaining months, which is why proofs should not be left until March.
- For joiners, ask for salary and tax from the previous employer this year, so the projection covers the whole year and not just your months.

## Where it usually goes wrong

- Projecting once in April and never again, so raises and bonuses push the extra tax into the last month.
- Ignoring income from a previous employer, so both employers apply the lower slabs and the employee owes tax at filing.
- Treating the rebate as a flat exemption, and deducting nothing for someone whose income rises past the limit mid year.
- Accepting a regime change in the middle of the year and recalculating everything already deducted.

## How PayLoom does it

The regime choice sits on the employee record, so the run reads it instead of asking for it each month. Salary changes and bonuses are dated entries on the same record, so they reach the projection without being keyed in twice, and when tax moves because of a raise, the variance review names the raise as the cause before the run is approved.