Income Tax — Old vs New Regime

From FY 2023–24, the New Tax Regime is the default for all salaried individuals including Central Government employees. You must explicitly opt in to the Old Regime each year when filing your ITR. The key change for FY 2025–26: the §87A rebate threshold under the New Regime has been raised to ₹12 lakh taxable income, meaning any government employee with taxable income below ₹12 lakh pays zero income tax under the New Regime. With a ₹75,000 standard deduction, this means gross salary up to ₹12.75 lakh can be tax-free.

Which Regime Is Better for Central Government Employees?

Choose the New Regime if your gross CTC is below ₹12.75 lakh (zero tax after rebate) or if you have minimal Old-Regime deductions. Choose the Old Regime if you have a combination of HRA exemption, ₹1.5 lakh of 80C investments (PPF, ELSS, life insurance), home loan interest under Section 24(b), and the additional ₹50,000 NPS deduction under 80CCD(1B). For a Level 10+ government employee with all these deductions, the Old Regime can save ₹30,000–80,000 per year over the New Regime.

The 80CCD(2) Deduction — Available in Both Regimes

The government's 14% NPS employer contribution is deductible under Section 80CCD(2) in both Old and New Regimes, with no upper cap. This is uniquely powerful: for a Level 10 employee with basic of ₹56,100 and DA of 60%, the gross base is ~₹89,760 and the government NPS contribution is ~₹12,566/month = ₹1,50,792 annual deduction with no ceiling. Use our NPS pension calculator to see how this contribution grows over your service years.

HRA Exemption — Only Under Old Regime

If you live in rented accommodation and claim HRA exemption under Section 10(13A), you must use the Old Regime — the New Regime does not allow HRA exemption. The exemption is the minimum of: actual HRA received, 50% of basic+DA (metro cities) or 40% (others), and rent paid minus 10% of basic+DA. For a metro city employee at Level 7, HRA can be ₹15,000–25,000/month, making the Old Regime significantly cheaper. Check your HRA entitlement and run both scenarios in the calculator above.

Tax on DA Arrears — Section 89(1) Relief

When DA is revised and arrears are paid, they are added to your gross salary in the year of receipt. If this pushes you into a higher slab, file Form 10E on the Income Tax portal to claim Section 89(1) relief before filing your ITR. See the DA arrears calculator to estimate your arrears and assess whether relief is needed.