The old regime takes a bit more effort to work through. You have to track your deductions and submit proofs to justify your claims. The new regime, by contrast, removes that layer of involvement–you just pay tax at a lower slab rate without the need for documentation.
But the equation has changed because of the massive revision in allowance limits available under the old regime. The Income Tax Rules now provide much higher thresholds for salary components such as education and hostel allowances. When you combine these with HRA, the standard deduction, and the usual Section 123 (Section 80C deductions) and Section 126 (Section 80D deductions), you can now shelter a huge chunk of your income from tax.
I’ve worked through the numbers, and a ₹17.5 lakh salary can actually be brought down to zero tax in the old regime.
More importantly, this isn’t some rare edge case, either. It works if you have two children, live in a rented house, and make standard investments such as EPF/PPF contributions, health insurance, and a home loan. These are things most salaried employees already do. The old regime just gives you credit for them.
Let’s look at the allowances and their revised limits.
What are the allowances salaried employees can claim?
Until recently, salary allowances offered very limited tax benefit. The children’s education allowance was capped at ₹100 per month per child, which is barely ₹1,200 a year. Similarly, hostel allowance was ₹300 per month, that’s as low as ₹3,600 a year for a child. While employers kept these components in your CTC, they were largely symbolic because their overall impact on your tax liability was negligible.
That’s all changed. As I mentioned earlier, the Income Tax Rules, 2026 have increased these limits to better reflect the modern cost of living:
| Allowance | Old limit | New limit | Annual benefit (2 children) |
|---|---|---|---|
| Education allowance | ₹100/month per child | ₹3,000/month per child | ₹72,000/year |
| Hostel allowance | ₹300/month per child | ₹9,000/month per child | ₹2,16,000/year |
| Food coupons/Meal card | ₹50/meal a day | ₹200/meal a day | ₹60,000/year |
If you have two children in school, that’s ₹2.88 lakh in additional tax-free income just from education and hostel allowances before you even touch HRA, Section 123 (which was Section 80C), or home loan interest.
When you combine these with HRA and other Section 10 exemptions, you can pull a ₹17.5 lakh gross salary down to a taxable income of under ₹10 lakh. From there, your standard deduction can further reduce your tax liability to zero.
Let’s work this out with the numbers.
If you’re earning ₹17,50,000 CTC, living in a metro city, raising two children, and managing a home loan, here’s how the calculation works in the old regime.
We’ll start with the exemptions that directly reduce your salary income.
The exemptions
| Particulars | Amount |
|---|---|
| Annual salary | ₹17,50,000 |
| Less: Standard deduction | (₹50,000) |
| Less: HRA exemption (rent in metro ₹60,000/month) | (₹4,50,000) |
| Less: Child education allowance (2 children) | (₹72,000) |
| Less: Hostel expenditure allowance (2 children) | (₹2,16,000) |
| Gross total income | ₹9,62,000 |
After these exemptions, your gross total income is reduced to ₹9,62,000. From here, we apply the deductions that will further pull down your taxable income.
The deductions
| Particulars | Amount |
|---|---|
| Gross total income | ₹9,62,000 |
| Less: EPF, PPF, LIC, ELSS, fees | (₹1,50,000) |
| Less: Health insurance (₹25k self + ₹50k parents) | (₹75,000) |
| Less: Home loan interest (self-occupied) | (₹2,00,000) |
| Less: NPS (self-contribution) | (₹50,000) |
| Net taxable income | ₹4,87,000 |
By utilizing these standard deductions and exemptions, your taxable income drops to ₹4,87,000.
Now, let’s calculate the tax on this amount.
Tax calculation under the old regime
Here are the applicable slab rates under the old regime:
| Slab rate | Tax |
|---|---|
| Up to ₹2,50,000 | Nil |
| ₹2,50,001 - ₹5,00,000 | 5% of income exceeding ₹2,50,000 |
| ₹5,00,001 - ₹10,00,000 | ₹12,500 + 20% of income exceeding ₹5,00,000 |
| Above ₹10,00,001 | ₹1,12,500 + 30% of income exceeding ₹10,00,000 |
Since your taxable income is ₹4,87,000, you fall comfortably within the 5% bracket. Here’s our calculation:
- The basic exemption limit in the old regime is ₹2.5 lakh, so only the remaining ₹2,37,000 (₹4,87,000 − ₹2,50,000) is taxed.
- When taxed at 5% on ₹2,37,000, this comes to ₹11,850.
- Under Section 156, a rebate of up to ₹12,500 is available when your total income does not exceed ₹5 lakh.
Because the calculated tax (₹11,850) is fully covered by the rebate, your final tax liability comes down to ₹0.
How does this compare with the new regime?
If you compare this to the new regime where the same ₹17.5 lakh salary (after ₹75,000 standard deduction) would attract ₹1,87,500 in tax. Here’s the comparison:
| Particulars | Old regime (full deductions) | New regime |
|---|---|---|
| Gross salary | ₹17,50,000 | ₹17,50,000 |
| Less: Exemptions & deductions | ₹12,63,000 | ₹75,000 (std deduction only) |
| Taxable income | ₹4,87,000 | ₹16,75,000 |
| Tax before rebate | ₹11,850 | ₹1,92,500 |
| Less: Section 156 rebate | ₹11,850 | ₹0 |
| Tax payable | ₹0 | ₹1,87,500 |
| Savings | ₹1,87,500 | ₹0 |
If you’re curious about the other side of the fence, I’ve also broken down how the new regime works here: How to pay zero tax in the new regime on CTC up to ₹16.75 lakh
