New versus old tax regime: what HR and payroll must actually do

Employees choose their tax regime, but payroll lives with the choice. Every regime decision changes how monthly TDS is computed, which declarations matter, and what proof collection looks like in January. HR teams that treat regime choice as a one-line form field in April save themselves a very noisy February.

The lay of the land

India currently runs two personal tax regimes side by side. The new regime offers lower slab rates but drops most exemptions and deductions; the old regime keeps higher rates along with HRA exemption, 80C, 80D and the rest. The new regime is the default: an employee who says nothing is taxed under it. Employees with salary income can generally indicate a different choice to their employer for TDS purposes each year, with the final election made when they file their return.

None of this is HR's decision to make. What is HR's job is running a clean process around it.

Duty one: set the default and announce it

At the start of the financial year, tell employees three things in one message: the default regime that applies if they do nothing, the deadline to indicate their choice for TDS purposes, and what information you need from them. Silence is a choice with consequences; make sure everyone knows what silence means.

Record each employee's selection somewhere durable, with a timestamp. When an employee insists in December that they "definitely picked old regime in April", you want a record, not a memory contest.

Duty two: collect the choice with the declaration, on a schedule

Regime choice and investment declaration belong in the same workflow, because one determines whether the other matters. An employee opting for the new regime has little reason to declare 80C investments or rent for TDS purposes; an old-regime employee has every reason to declare carefully and to run their numbers through an HRA calculator first.

A workable calendar: choice plus declaration in April with a hard deadline, a mid-year revision window if your policy allows switching for TDS purposes, and proof collection in December to January for old-regime employees. ZekoHR ties regime selection to the TDS declaration flow, so a declaration is always evaluated under the regime the employee actually chose, and proofs are only chased from people whose regime makes them relevant.

Duty three: compute TDS accordingly, month by month

What changes in the payroll engine per regime:

• Slab rates and rebate differ, so the annual tax projection differs even for identical salaries.
• Exemptions: HRA exemption, LTA and several allowance exemptions apply under the old regime, not the new one.
• Deductions: 80C, 80D and most of Chapter VI-A apply under the old regime; the new regime keeps only a short list, notably the employer's NPS contribution. Standard deduction is available under both.

Practically, this means two employees on the same CTC can have different TDS from month one. Your payroll system must compute each employee under their own regime, not apply one setting company-wide. This is worth verifying explicitly during your monthly pre-checks before finalizing: a regime recorded wrongly for even one employee produces twelve months of wrong deductions.

Duty four: handle the year-end honestly

For old-regime employees, verify proofs and recompute the final months' TDS on verified amounts, as covered in our piece on TDS declarations. For new-regime employees, year-end is quieter, which is part of the regime's appeal, but check for the items that still apply.

Then make sure Form 16 reflects the regime actually applied. Mismatches between what payroll deducted and what the employee files under are not automatically HR's problem, but they generate questions HR will be asked, so keep the records that answer them.

What not to do

Do not advise employees which regime to pick. Point them to calculators and a comparison, state the deadlines, and stop there. Individual tax outcomes depend on facts you do not know: their rent, their loans, their family's insurance. HR's role is a clean process and correct computation, not tax planning. The line between "here is how the process works" and "here is what you should choose" is the line between helpful and liable.

This article is general information, not tax advice. Regime rules, rates and switching conditions change; employees and employers should confirm current provisions with a qualified tax professional.