For most salaried people and small taxpayers, the New Tax Regime is now the default and often works out cheaper because of its higher exemption slab and larger rebate. But if you run a business or profession in Kerala and genuinely use deductions like home-loan interest, 80C investments, health insurance and rent, the Old Tax Regime can still save more. The right answer depends on how many deductions you actually claim, and business/profession taxpayers must make the choice carefully because switching between regimes is restricted.
What the two regimes look like for AY 2026-27
Under the Finance Act 2023, the New Tax Regime under Section 115BAC became the default from AY 2024-25 onward, and it continues as the default for AY 2026-27. You are taxed under the new regime unless you specifically opt out.
Under the New Tax Regime, income up to Rs. 4,00,000 is nil, then 5% on Rs. 4,00,001-8,00,000, 10% on Rs. 8,00,001-12,00,000, 15% on Rs. 12,00,001-16,00,000, 20% on Rs. 16,00,001-20,00,000, 25% on Rs. 20,00,001-24,00,000, and 30% above Rs. 24,00,000. The trade-off is that most common deductions and exemptions are not available.
The Old Tax Regime keeps the familiar structure with a basic exemption up to Rs. 2,50,000 (higher for senior citizens), but lets you claim deductions such as Section 80C investments, 80D health insurance, home-loan interest under Section 24(b), and others. Health and Education cess of 4% applies on top of the tax under both regimes.
The rebate is the deciding factor for many small taxpayers
The rebate under Section 87A is where the two regimes differ sharply. In the New Tax Regime, a resident individual can get a rebate of up to Rs. 60,000, effectively making tax nil where taxable income does not exceed Rs. 12,00,000. In the Old Tax Regime, the 87A rebate is up to Rs. 12,500, available only where taxable income does not exceed Rs. 5,00,000.
For a Kerala shop owner, freelancer or small proprietor whose taxable income lands under about Rs. 12 lakh and who does not have heavy deductions, the New Tax Regime usually wins outright because of this rebate. If you have a big home loan, substantial 80C savings and insurance, run the numbers both ways before deciding.
The catch for business and profession income: Form 10-IEA
This is the part small business owners most often get wrong. If you have income from business or profession and you want to opt out of the default New Tax Regime into the Old Tax Regime, you cannot simply tick a box in the return. You must furnish Form 10-IEA on or before the due date under Section 139(1) for filing your return.
The same Form 10-IEA is used later if you want to withdraw that option and go back to the default New Tax Regime. Importantly, for taxpayers with business or profession income, the option to move out of the old regime and re-enter the new regime is available only once in a lifetime, and only in a subsequent assessment year. So the choice is not casual - it locks you in more than it does for a purely salaried person, who can switch each year directly in the return.
A simple way to decide
Start with the New Tax Regime as your baseline, since it is the default. Then total up the deductions you can genuinely prove - 80C, 80D, home-loan interest, NPS and so on - and re-compute your tax under the Old Tax Regime. Whichever produces lower tax after the 4% cess is your answer. For business and profession income, factor in that choosing old means filing Form 10-IEA on time and accepting the one-time switch-back limit.
FAQs
Q1. Which regime is the default for AY 2026-27?
The New Tax Regime under Section 115BAC is the default. You are taxed under it automatically unless you opt out.
Q2. I have only salary income. Can I switch regimes every year?
Yes. Non-business taxpayers can choose the regime each year directly in the ITR, provided the return is filed by the due date under Section 139(1).
Q3. I run a small business. How do I choose the Old Tax Regime?
You must file Form 10-IEA on or before the due date under Section 139(1). Business/profession taxpayers get only one lifetime opportunity to switch back to the new regime later.
Q4. Is my income up to Rs. 12 lakh fully tax-free under the new regime?
A resident individual gets a rebate up to Rs. 60,000 where taxable income does not exceed Rs. 12,00,000, which can bring the tax to nil - but surcharge, special-rate incomes and other conditions can change the outcome, so compute your specific case.
Note: Figures above reflect the AY 2026-27 slabs, rebate and rules as published on the Income Tax Department portal (incometax.gov.in). This article is for general educational purposes and is not individual tax advice.
Choosing a regime and filing Form 10-IEA correctly is exactly the kind of year-round planning where a Virtual CFO or compliance partner helps a growing business avoid a costly one-way mistake. For questions on tax-regime planning and ITR filing, Saiph Business Solutions LLP can be reached at sajin@saiph.in | www.saiph.in.
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