Salary Tax Planning Under Income-tax Act 2025: TY 2026-27 Guide

Contents

1. Introduction: Salary Tax Planning Under the New Law
2. The Income-tax Act, 2025: What Changed for Salaried Employees
   1. From Assessment Year to Tax Year: The Terminology Shift
   2. New Statutory Forms Every Employee Must Know
3. Section 202: The Default New Tax Regime Explained
   1. Tax Slabs and the ₹12.75 Lakh Zero-Tax Threshold
   2. The Section 156 Rebate and the Cliff-Edge Rule
   3. Surcharge Cap: The High-Income Advantage
4. Permissible Deductions Under the New Regime
   1. Standard Deduction (Section 19)
   2. Employer NPS Contribution (Section 124)
   3. Home Loan Interest on Let-Out Property
5. CTC Restructuring: The Primary Tax-Saving Lever
   1. Meal Vouchers Under Rule 15(5)(a)
   2. Telecom and Professional Development Reimbursements
   3. Company Car Perquisites Under the Revised Rules
   4. Employer Gifts and Concessional Loans
6. Modelling Zero Tax on a ₹15 Lakh Salary
7. Terminal Benefits: Leave Encashment and Gratuity
8. The Old Tax Regime: When It Still Wins
   1. Expanded HRA Cities and Education Allowances
   2. The Breakeven Calculus
9. Who Is Impacted?
10. Timeline of Key Legislative Changes
11. Key Deadlines and Cut-off Dates
12. You May Also Like
13. Frequently Asked Questions (FAQs)
14. References & Official Sources
15. Conclusion

Introduction: Salary Tax Planning Under the New Law

Salary tax planning for Tax Year 2026-27 is no longer a year-end exercise — it is a pre-April decision that can legally reduce your tax outgo to zero. With the Income-tax Act, 2025 in force from 1 April 2026, India's direct tax framework has undergone its most sweeping structural change in over six decades, replacing the Income-tax Act, 1961 entirely. For salaried employees, this means new section numbers, new compliance forms, and a fundamentally different approach to optimizing take-home pay.

The good news is that the government has explicitly not used this rewrite to raise tax rates. The actual slab rates, deduction limits, and rebate amounts for Tax Year 2026-27 are identical to those of the previous year. What has changed dramatically is the administrative architecture — the forms you receive, the sections your payslip references, and critically, the perquisite valuations your employer must use when computing your monthly TDS. For anyone earning between ₹12 lakh and ₹20 lakh, the difference between proactive CTC restructuring and passive acceptance could easily be ₹1 lakh or more in annual tax savings.

This guide is written specifically for salaried professionals, HR and payroll administrators, and tax practitioners navigating Tax Year 2026-27 under the new Act. It walks through every legitimate lever available — from the Section 124 employer NPS deduction to the newly enhanced ₹200 meal voucher exemption — and shows you, with worked numbers, exactly how to use them.

Under the Income-tax Act, 2025, tax optimisation for salaried employees is a pre-tax, pre-April exercise — not a post-tax scramble in January.

💡 Quick Tip

Submit your Form 124 (the new replacement for Form 12BB) to your HR or payroll department between April and June every year. Delaying this declaration gives your employer the statutory right to default to higher TDS deductions, locking up your money as a refund you must wait a year to recover.

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The Income-tax Act, 2025: What Changed for Salaried Employees

The Income-tax Act, 2025 received Presidential assent and replaces the Income-tax Act, 1961 with effect from 1 April 2026. The new law does not introduce new taxes or alter the fundamental tax mathematics — it restructures, consolidates, and modernises the legal scaffolding. The statute has been streamlined from approximately 819 sections to 536 sections organised across 23 chapters and 16 schedules, while the total number of compliance forms has been reduced from 399 to 190. For salaried individuals, the daily operational impact of this change is most visible in three areas: the vocabulary used for the tax period, the forms issued by employers and banks, and the rules governing how non-cash benefits (perquisites) are valued.

Note: The Income-tax Rules, 1962, have also been replaced by the Income-tax Rules, 2026, notified by the CBDT on 20 March 2026. These new rules govern perquisite valuations, allowance limits, and compliance procedures effective from 1 April 2026.

From Assessment Year to Tax Year: The Terminology Shift

One of the most significant conceptual changes in the new Act is the elimination of the dual-period system of "Previous Year" and "Assessment Year." Under the old 1961 Act, income earned in one financial year (Previous Year) was assessed for tax in the following year (Assessment Year). This split consistently caused confusion, particularly for advance tax calculations and return filing. The 2025 Act replaces both terms with a single, unified concept: the Tax Year.

A Tax Year is defined as the twelve-month period from 1 April to 31 March. All income earned, accrued, or received between 1 April 2026 and 31 March 2027 is simply assessed and filed under Tax Year 2026-27. This "one year, one label" framework applies to returns, notices, Form 130, and all TDS compliance going forward. However, a critical dual-Act boundary applies during the 2026 calendar year: returns filed in July 2026 for FY 2025-26 are filed under the old 1961 Act using Form 16 and old section references. From April 2026 onwards, all new salary TDS, advance tax, and forms fall under the new 2025 Act.

Warning: Do not use new section numbers (such as Section 392 for TDS on salary or Section 202 for the new tax regime) in your July 2026 ITR filing for FY 2025-26. That return remains governed by the old Income-tax Act, 1961, with its original section numbering.

New Statutory Forms Every Employee Must Know

The comprehensive renumbering of statutory forms under the new Act directly affects every salaried employee's compliance workflow. Professional familiarity with the new form designations is essential to avoid filing errors and TDS mismatch notices. The table below maps the most critical forms for salaried taxpayers:

Key transition point: For FY 2025-26, your employer issues Form 16 (deadline 15 June 2026). For Tax Year 2026-27, your employer will issue Form 130 (deadline 15 June 2027). You will receive Form 16 in June 2026 and Form 130 in June 2027 — there is no overlap or duplication.

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Section 202: The Default New Tax Regime Explained

Under the Income-tax Act, 2025, the concessional, lower-rate tax framework — previously housed under Section 115BAC of the old Act — has been migrated and consolidated into Section 202. This regime continues as the default tax model for individuals, HUFs, AOPs, BOIs, and artificial juridical persons. Salaried employees who prefer the old deduction-heavy framework must actively opt out by filing an election within their ITR before the applicable due date (generally 31 July for non-audit cases).

Tax Slabs and the ₹12.75 Lakh Zero-Tax Threshold

The slab rates under the Section 202 default regime for Tax Year 2026-27 are unchanged from the previous year. The following table presents the complete slab structure:

For salaried employees, the gross salary from which tax is calculated is first reduced by the mandatory Standard Deduction of ₹75,000 under Section 19. This means a gross salary of up to ₹12,75,000 produces a net taxable income of exactly ₹12,00,000, which — after applying the Section 156 rebate — results in zero tax payable. The ₹12.75 lakh effective zero-tax threshold is one of the most important practical numbers for middle-income salaried taxpayers to know.

The Section 156 Rebate and the Cliff-Edge Rule

The Section 156 rebate under the 2025 Act directly replaces the Section 87A rebate of the old Act. Resident individuals whose total taxable income does not exceed ₹12,00,000 are entitled to a direct rebate of up to ₹60,000 against their computed income tax. The mechanics for a gross salary of ₹12,75,000 work as follows:

1. Gross Salary: ₹12,75,000
2. Less Standard Deduction (Section 19): ₹75,000 → Net Taxable Income = ₹12,00,000
3. Tax on ₹12,00,000: ₹0 (first ₹4L) + ₹20,000 (next ₹4L at 5%) + ₹40,000 (final ₹4L at 10%) = ₹60,000
4. Less Section 156 Rebate: ₹60,000
5. Net Tax Payable: NIL

Critical Warning — The Cliff Edge: If taxable income exceeds ₹12,00,000 by even ₹1, the entire ₹60,000 Section 156 rebate is forfeited. A taxable income of ₹12,00,010 results in a tax liability reverting to standard slab computation (subject to marginal relief provisions). This cliff-edge dynamic makes precise CTC structuring — covered in detail below — vitally important for anyone earning between ₹12 lakh and ₹16 lakh.

Surcharge Cap: The High-Income Advantage

For employees earning above ₹50 lakh, the new Section 202 regime offers a powerful structural advantage: the maximum surcharge rate is capped at 25%. Under the residual old tax regime, taxpayers with income above ₹5 crore face a surcharge as high as 37%. The 2025 Act's surcharge brackets under the new regime are as follows:

The 25% surcharge cap translates into a peak effective tax rate of 39% under the new regime (30% slab + 25% surcharge + 4% cess), compared to approximately 42.7% under the old regime for the highest income brackets. This differential of nearly 4 percentage points acts as a significant built-in incentive for high-net-worth salaried professionals to remain in the default Section 202 framework.

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Permissible Deductions Under the New Regime

The philosophical cornerstone of the Section 202 regime is the elimination of complex, investment-linked deductions in exchange for lower base rates and a higher zero-tax corridor. Traditional deductions such as Section 123 (formerly 80C — PPF, ELSS, life insurance), Section 126 (formerly 80D — health insurance premiums), HRA, and LTA are all unavailable under the new regime. However, a curated set of deductions remains available, and aggressive optimisation of these is what separates a tax-efficient CTC from a poorly structured one.

Standard Deduction (Section 19)

The standard deduction is codified under Section 19 of the 2025 Act (formerly Section 16(ia) of the 1961 Act). For salaried employees and pensioners opting for the new regime, the deduction stands at ₹75,000 — compared to ₹50,000 under the old regime. This deduction is unconditional, requires no documentary proof, and is applied automatically by the employer in monthly TDS calculations. It is available to every salaried individual and pensioner regardless of income level.

Employer NPS Contribution (Section 124)

While personal investment deductions under Chapter VI-A equivalents are barred under the new regime, employer contributions to an employee's National Pension System (NPS) Tier-I account are fully deductible. Under Section 124 of the 2025 Act (the equivalent of the old Section 80CCD(2)), an employer may contribute up to 14% of the employee's Basic Salary plus Dearness Allowance (DA) directly into their NPS account, and this entire amount is excluded from the employee's taxable income.

This 14% ceiling is a uniform limit for all employees — government and private sector alike — effective from 1 April 2026. For a mid-level executive with a basic salary of ₹20,00,000, a 14% employer NPS contribution equals ₹2,80,000 in annual tax-free income. An employee in the 30% bracket saves ₹84,000 in pure tax outgo through this single mechanism.

Aggregate Cap: The combined employer contribution to NPS, EPF, and any approved superannuation fund must not exceed ₹7,50,000 in a single Tax Year to retain its exempt status. Contributions above this aggregate ceiling are treated as a taxable perquisite. Voluntary employee contributions to NPS Tier-II do not qualify for any deduction under the new regime.

Home Loan Interest on Let-Out Property

While the popular deduction for home loan interest on a self-occupied property is unavailable under the new regime, taxpayers with rented-out (let-out) property retain a valuable deduction. The actual interest paid on a loan taken for acquiring or constructing a let-out property can be claimed against the rental income under the head "Income from House Property." There is no upper monetary ceiling on this deduction for let-out properties, meaning the full interest amount can offset rental receipts.

However, a critical restriction applies: if the interest paid exceeds the rental income received, the resulting loss under "Income from House Property" cannot be set off against salary income under the new regime. Such losses may only be carried forward to subsequent Tax Years for set-off exclusively against future house property income.

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CTC Restructuring: The Primary Tax-Saving Lever

With post-tax investment deductions unavailable under the default regime, the locus of salary tax planning has definitively shifted to how the pre-tax Cost to Company (CTC) is structured. Salary restructuring — the legal reorganisation of taxable basic pay into tax-efficient allowance and perquisite components — is now the primary mechanism for reducing tax liabilities under the Income-tax Act, 2025. Employees must negotiate these structural changes with their payroll departments before the start of the financial year, as mid-year restructuring is typically rejected by HR administrators.

Prerequisite: Before any restructuring can take effect for salary TDS purposes, the employee must submit a completed Form 124 (the new equivalent of Form 12BB) to their employer. This declaration triggers the employer's obligation to adjust monthly TDS based on the restructured salary components rather than defaulting to the maximum applicable rate.

Meal Vouchers Under Rule 15(5)(a)

The meal voucher exemption has been transformed from a marginal benefit into a serious tax-planning tool under the Income-tax Rules, 2026. Rule 15(5)(a) raises the tax-free limit from ₹50 per meal to ₹200 per meal, and — crucially — explicitly extends this exemption to both the old and new tax regimes from 1 April 2026. The annual math for a standard working pattern is compelling:

Strict compliance conditions apply: the vouchers must be non-transferable, provided by the employer, usable only at eating outlets for food and non-alcoholic beverages, and applicable only during working hours. Sodexo, Pluxee, and Zeta digital food cards that meet these conditions are eligible vehicles for this benefit.

Telecom and Professional Development Reimbursements

Reimbursements for mobile phone bills and home broadband internet usage for official purposes remain outside the scope of taxable perquisites when supported by actual bills. Structuring between ₹1,200 and ₹2,500 per month (₹14,400 to ₹30,000 annually) into a telecom reimbursement allowance within the CTC removes this slice of income from the marginal tax base entirely. Similarly, allowances for professional certifications, industry memberships, and job-relevant academic material that are funded directly by the employer are not classified as taxable salary — effectively giving the employee a tax-free raise for career development expenditure they would otherwise fund from post-tax income.

Company Car Perquisites Under the Revised Rules

Rule 15 of the Income-tax Rules, 2026 (replacing Rule 3 of the old 1962 Rules) has significantly revised the taxable perquisite values for employer-provided vehicles. The new values reflect nearly a threefold increase over the outdated benchmarks that had not been revised in decades:

While the perquisite value has increased, integrating a car lease into the CTC often remains substantially more tax-efficient than purchasing a vehicle with post-tax salary. Under a corporate lease, the employer deducts the lease rental from the CTC on a pre-tax basis, and the employee is only taxed on the statutory perquisite value (e.g., ₹7,000 + ₹3,000 = ₹10,000 per month for a high-end car with a driver). Compared to funding equivalent EMIs from post-tax income at the 30% bracket, the corporate lease route generates meaningful tax arbitrage. Notably, Electric Vehicles are explicitly placed in the lower ≤1.6L perquisite bracket regardless of battery capacity, incentivising green fleet choices.

Employer Gifts and Concessional Loans

The Income-tax Rules, 2026, have updated two further perquisite thresholds that favour employees. The annual limit for tax-free non-cash gifts, festival vouchers, and employer tokens has been tripled from ₹5,000 to ₹15,000 per Tax Year — confirmed by the CBDT notification. For interest-free personal loans from employers, the aggregate principal ceiling for complete tax exemption has been increased tenfold from ₹20,000 to ₹2,00,000. Loans for specified medical treatments remain exempt without any monetary ceiling.

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Modelling Zero Tax on a ₹15 Lakh Salary

To demonstrate the combined power of these structural levers, consider an employee with a gross CTC of ₹15,00,000 under the default new regime. Without any planning, the taxable income after the standard deduction would be ₹14,25,000 — firmly above the ₹12 lakh rebate threshold, attracting a tax liability of approximately ₹1,50,000 to ₹1,70,000. By proactively restructuring the CTC before April 1, this liability can be engineered down to zero:

This illustrates that a ₹15 lakh CTC can be legally structured to achieve a 0% effective tax rate, exclusively through mechanisms permitted under the new law. The numbers above use rounded assumptions for basic salary and NPS contribution base; actual figures will vary depending on the specific CTC structure. All restructuring must be declared through Form 124 and effected through the employer's payroll system before the start of the Tax Year.

Important: The professional development allowance must be for actual, job-relevant expenses. Employers are entitled to demand receipts. This component works best for employees who genuinely incur costs for certifications, subscriptions, or technical training in their line of work.

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Terminal Benefits: Leave Encashment and Gratuity

When a salaried professional retires or reaches superannuation, terminal payouts — leave encashment and gratuity — can represent a significant lump-sum. Without proper understanding of the applicable exemptions, a single year's receipt of these amounts could push the taxpayer into the highest slab, eroding decades of accumulated entitlements. Fortunately, the Income-tax Act, 2025, preserves robust historical exemptions for both categories, and these exemptions are available under both the old and new tax regimes.

For leave encashment received at the time of retirement or superannuation, private-sector employees are entitled to an exemption of up to the lower of: (a) ₹25,00,000 (the statutory lifetime ceiling), (b) the actual amount received, (c) ten months' average salary (Basic + DA), or (d) the cash equivalent of unutilised leave, capped at 30 days per completed year of service. The ₹25,00,000 ceiling operates as a lifetime limit — amounts claimed in earlier jobs reduce the headroom available at retirement.

For gratuity, private-sector employees covered by the Payment of Gratuity Act, 1972, enjoy an exemption up to ₹20,00,000 as a lifetime ceiling. Government employees enjoy 100% tax-free gratuity with no monetary ceiling.

The "Independent Shields" Strategy: The ₹25 lakh leave encashment exemption and the ₹20 lakh gratuity exemption are governed by entirely separate provisions and do not reduce each other's limits. A private-sector retiree receiving ₹18 lakh in gratuity and ₹22 lakh in leave encashment can shelter the entire ₹40 lakh payout tax-free — both components fall beneath their respective independent ceilings.

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The Old Tax Regime: When It Still Wins

The old tax regime has not been abolished under the 2025 Act — it remains available as an opt-out option, requiring an active annual election within the ITR before 31 July. For most salaried employees, the new regime will be mathematically superior. However, for specific demographic profiles — particularly high-rent urban professionals with significant investment portfolios — the old regime can still deliver lower effective tax. The Income-tax Rules, 2026, have introduced several important inflation adjustments that are exclusively available under the old regime.

Expanded HRA Cities and Education Allowances

House Rent Allowance remains one of the most powerful tools in the old regime. Historically, the 50% HRA exemption (of Basic Salary) was reserved for only four metros: Mumbai, Delhi, Kolkata, and Chennai. The 2026 Rules formally expand the 50% bracket to include Bengaluru, Hyderabad, Pune, and Ahmedabad, recognising the dramatically elevated rental costs in these tech and industrial hubs. Employees in these cities who were previously capped at a 40% exemption now access a materially larger tax shield — provided they remain in the old regime.

Child-related education expenses have also been revised upward dramatically under the old regime. The monthly per-child children's education allowance has jumped from ₹100 to ₹3,000 (up to two children, yielding ₹72,000 per year). The hostel allowance has surged from ₹300 per month to ₹9,000 per month per child — for two children in hostels, this creates an annual exemption of ₹2,16,000, a deduction that was previously negligible.

The Breakeven Calculus

The decision to opt out of the new regime is purely a mathematical exercise. The old regime offers lower slab entry points and steeper early rates, but allows the full complement of deductions. As a general heuristic, the old regime becomes superior when a taxpayer can simultaneously claim: maximum Section 123 deductions (formerly 80C, ₹1.5 lakh), full HRA (especially at the new 50% rate for expanded cities), home loan interest on a self-occupied property (capped at ₹2 lakh), and the newly expanded education allowances. Employees should run a parallel simulation before each Tax Year's ITR filing to verify which regime produces the lower liability based on their actual financial architecture.

Caution: Salaried employees without business income may switch regimes freely each year. However, if you have business income, you can exercise the option only once, and the switch applies to all subsequent years unless you permanently exit business income. Verify your category before making the election.

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Who Is Impacted?

The changes introduced by the Income-tax Act, 2025 and the Income-tax Rules, 2026 affect virtually every salaried individual in India. The nature and scale of impact differ by income level and employment profile:

• Middle-income salaried employees (₹8L – ₹15L): The most directly impacted group, as the ₹12.75 lakh zero-tax threshold and the Section 156 rebate cliff-edge require active CTC structuring to avoid unnecessary tax. Meal vouchers and employer NPS are their primary levers.
• High-income executives and senior management (above ₹15L): Benefit from the 25% surcharge cap and have the most to gain from comprehensive CTC restructuring — corporate car leases, NPS at 14%, and professional development allowances can collectively save ₹3–5 lakh in annual tax.
• HR, payroll, and accounts teams: Must transition all payroll systems from old form numbers (Form 16, 12BB, 26AS) to new form references (Form 130, 124, 168) from April 2026 and update TDS computation to use new section references under the 2025 Act.
• Employees with company-provided cars: Face higher taxable perquisite values under the revised Rule 15 — from ₹1,800 to ₹5,000 per month for smaller cars — impacting monthly TDS from April 2026. CTC restructuring may be needed to offset the increase.
• Near-retirement employees: Should plan terminal payouts (gratuity and leave encashment) carefully to maximise the independent ₹20 lakh and ₹25 lakh exemption shields before retirement.
• Urban IT and tech professionals in Bengaluru, Hyderabad, Pune, Ahmedabad: For the first time eligible for the 50% HRA exemption bracket (previously capped at 40%), making the old regime significantly more attractive if they pay high rents.

Not significantly impacted: Employees earning below ₹7.75 lakh (after standard deduction), whose entire tax liability was already zero or near-zero under the old regime as well.

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Timeline of Key Legislative Changes

Understanding how we arrived at the current framework helps contextualise both the reforms and their practical implications for tax planning.

1. 1961: The Income-tax Act, 1961 enacted, establishing India's comprehensive direct tax framework with over 800 sections and hundreds of forms — a structure that would grow increasingly complex over the following six decades.
2. Budget 2020: The "New Tax Regime" introduced under Section 115BAC of the 1961 Act as an optional, lower-rate, deduction-free alternative. Take-up was initially limited due to reluctance to abandon established deductions.
3. Budget 2023: The new tax regime made the default regime. Standard deduction of ₹50,000 extended to the new regime. Section 87A rebate increased, effectively making income up to ₹7 lakh tax-free.
4. Budget 2024: Section 87A rebate enhanced to ₹60,000 with a revised ₹12 lakh rebate threshold. Standard deduction raised to ₹75,000 for new regime employees. Employer NPS deduction limit standardised at 14% for all employees.
5. August 2025: The Income-tax (No. 2) Bill, 2025 passed by the Lok Sabha, receiving Presidential assent. The new Income-tax Act, 2025 formally enacted.
6. March 2026: CBDT notifies the Income-tax Rules, 2026. Key changes include revised perquisite valuations under Rule 15 (meal voucher ₹200/meal, car perquisites updated, gift threshold ₹15,000, loan threshold ₹2 lakh), HRA city expansions, and education allowance revisions.
7. 1 April 2026: Income-tax Act, 2025 and Income-tax Rules, 2026 come into force. Tax Year 2026-27 begins. All salary TDS governed by new Act; new section references apply.

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Key Deadlines and Cut-off Dates

Missing these dates can result in excess TDS deduction, interest liability, penalties, or forfeiture of refunds. Calendar them well in advance.

Filing Alert: Do not file your ITR for AY 2026-27 (FY 2025-26) the moment the portal opens in May. Wait until after 31 May 2026 for employer TDS deposits to complete and Form 168 to fully populate. Early filing on incomplete pre-filled data risks TDS credit mismatches, automated notices, and delayed refunds.

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Frequently Asked Questions (FAQs) on Salary Tax Planning Under the Income-tax Act, 2025

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Conclusion: Act Before April, Not After March

The Income-tax Act, 2025 has not raised your taxes — but it has fundamentally changed when and how you must act to minimise them. Under the old framework, tax planning was largely a reactive, year-end exercise of parking money in 80C instruments. Under the new law, especially for the majority of salaried employees in the default Section 202 regime, effective tax planning is a pre-April salary structure decision. The difference between a well-structured ₹15 lakh CTC and an unstructured one of identical gross value can be the difference between a zero-tax year and a ₹1.5 lakh outgo — without any change in the law or your total compensation.

The levers are clear and well-confirmed: the ₹75,000 standard deduction, the 14% employer NPS contribution under Section 124, the new ₹200/meal voucher exemption under Rule 15(5)(a) available in both regimes, updated telecom and professional development components, the enhanced gift and loan thresholds, and the powerful Section 156 rebate for incomes structured to ₹12 lakh. For senior management, the 25% surcharge cap is an additional, built-in incentive to stay in the new regime. And for those with significant urban rent obligations or heavy investment portfolios, the old regime's newly expanded HRA cities and education allowances may still produce a superior outcome. Run the numbers for your specific situation, file your Form 124 early, and engage a qualified tax professional if restructuring your CTC involves significant sums.