New Tax Regime as Default: What It Means for Employer TDS

Under the Income-tax Act, 2025 the new tax regime is the default, with the old regime available only on explicit opt-in. For employers, this reverses the default assumption in payroll TDS: absent a valid election, salary TDS is computed under the new regime. The provision, formerly Section 115BAC, is now Section 202.

The operational change

The substantive rates are not the story — the default is. Where an employee makes no declaration, the employer must compute under the new regime rather than treating the old regime as the baseline.

That has three consequences in payroll.

The declaration process must actively capture an opt-in rather than a set of investment proofs. An employee who submits deduction proofs without electing the old regime has not, on the face of it, opted in.

Employees who benefit from the old regime — typically those with substantial housing loan interest or large deductions — will be under-credited unless they elect affirmatively. The communication burden sits with the employer in practice, even where the legal obligation does not.

Mid-year joiners and employees switching employers need the election captured afresh.

Practical guidance for employers

Redesign the declaration form so the regime election is a distinct, mandatory field rather than an inference from submitted proofs.

Communicate the default expressly. An employee who assumes the old regime applies automatically and discovers otherwise at year end will treat it as a payroll error, whatever the legal position.

Run both computations for employees with material deductions and share the comparison. This is inexpensive, materially improves the employee experience, and reduces year-end disputes.

Document the election. Where an employee later claims the wrong regime was applied, the retained declaration is the answer.

Related reading

• the 2025 Act overview — Income-tax Act, 2025 vs the 1961 Act: What Actually Changed
• audit thresholds — Tax Audit Limit AY 2026-27: Section 44AB Thresholds Explained
• payroll and filing calendar — Compliance Calendar FY 2026-27: Income Tax, GST, FEMA and ROC