Assessment Year (AY) 2025–26 corresponds to income earned during Financial Year (FY) 2024–25. Central Government employees can choose between two tax regimes — the Old Regime, which allows multiple exemptions and deductions, and the New Regime, which offers lower slab rates but fewer exemptions. The taxpayer can opt for whichever yields a lower tax liability.
For salary calculation, Basic Pay and Dearness Allowance (DA) form the core of “salary.” DA is fully taxable, while allowances such as HRA, Transport Allowance, and LTC have conditional exemptions.
Tax Slabs and Rates – AY 2025–26
Old (Existing) Regime
- Up to ₹2,50,000 – Nil
- ₹2,50,001 to ₹5,00,000 – 5%
- ₹5,00,001 to ₹10,00,000 – 20%
- Above ₹10,00,000 – 30%
- Health and Education Cess – 4% on income tax
New Regime (Section 115BAC)
The new regime features concessional tax rates with limited exemptions and deductions. Salaried taxpayers can choose between the old and new regimes each year while filing their return.
Key Exemptions and Deductions for Central Government Employees
Standard Deduction
A flat deduction of ₹50,000 is available from salary income under both regimes for AY 2025–26.
House Rent Allowance (HRA)
Exemption is calculated as the least of the following:
- Actual HRA received,
- Rent paid minus 10% of salary, or
- 50% of salary (for metros) / 40% (for non-metros).
Salary for this purpose includes Basic Pay and DA (if DA forms part of retirement benefits).
Transport Allowance
Transport Allowance is taxable, except for certain categories (such as differently-abled employees) where a limited exemption is available.
Dearness Allowance (DA)
DA is fully taxable when it forms part of salary. The Department of Expenditure revises DA periodically; these changes directly affect taxable salary and HRA computation.
Chapter VI-A Deductions (Old Regime)
Employees opting for the old regime can claim deductions such as:
- Section 80C – Investments in EPF, PPF, LIC, ELSS, etc. (up to ₹1.5 lakh)
- Section 80CCD(1B) – Additional ₹50,000 for NPS contributions
- Section 80D – Medical insurance premium
Under the new regime, most of these deductions are not allowed.
TDS for Central Government Employees
TDS is deducted monthly by the Drawing and Disbursing Officer (DDO) based on projected annual income after considering declared exemptions and deductions. Employees must submit Form 12BB along with rent receipts, insurance proofs, and investment declarations on time to ensure accurate TDS computation.
Worked Example: Tax Computation
Assumptions
- Basic Pay: ₹60,000 per month → ₹7,20,000 per year
- DA: 55% of Basic → ₹3,96,000 per year
- HRA: ₹24,000 per month → ₹2,88,000 per year
- Other Allowances: ₹20,000 per month → ₹2,40,000 per year
- Rent paid: ₹20,000 per month → ₹2,40,000 per year
- Regime: Old
Gross Salary:
Basic (7,20,000) + DA (3,96,000) + HRA (2,88,000) + Other Allowances (2,40,000) = ₹16,44,000
HRA Exemption:
- Actual HRA = ₹2,88,000
- Rent paid minus 10% of salary = ₹2,40,000 – ₹1,11,600 = ₹1,28,400
- 40% of salary = ₹4,46,400
Least = ₹1,28,400 → HRA exemption ₹1,28,400
Taxable HRA = ₹2,88,000 – ₹1,28,400 = ₹1,59,600
Taxable Salary:
₹16,44,000 – ₹1,28,400 = ₹15,15,600
Less Standard Deduction ₹50,000
Net Taxable Income: ₹14,65,600
Tax under Old Regime:
- ₹0 to ₹2,50,000 – Nil
- ₹2,50,001 to ₹5,00,000 → ₹12,500
- ₹5,00,001 to ₹10,00,000 → ₹1,00,000
- ₹10,00,001 to ₹14,65,600 → ₹1,39,680
Total Tax: ₹2,52,180
Health & Education Cess (4%) → ₹10,087
Total Payable Tax: ₹2,62,267 (approx.)
Practical Tips for Central Government Employees
- Rising DA increases the salary base for HRA, which can reduce exemption.
- Compare tax liability under both regimes before finalizing declarations.
- Submit Form 12BB early to your DDO to avoid excess TDS.
- Track DA revisions and DoE circulars since they impact salary calculations.
- Check if the Section 87A rebate applies — it can provide full relief for taxable income up to the prescribed limit.
Filing Checklist
- Collect Form 16 from the DDO after March 2025.
- Ensure rent receipts, 80C, 80D, and NPS proofs are ready.
- Verify DA percentage and pay slips for accuracy.
- Use the Income Tax Department’s online calculator or ITR utility to compare both regimes.
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 2025–26 corresponds to income earned during Financial Year (FY) 2024–25. Central Government employees can choose between two tax regimes — the Old Regime, which allows multiple exemptions and deductions, and the New Regime, which offers lower slab rates but fewer exemptions. The taxpayer can opt for whichever yields a lower tax liability.){kind=link}