Legal Ways to Pay Less Tax in FY 2026-27
The single biggest decision in tax planning for an Indian small business owner this year is
which tax regime to file under. In the new regime, a resident individual with
taxable income up to ₹12 lakh pays no tax at all after the rebate. The old regime beats it only
when your deductions are large. On a ₹15 lakh income, they must cross roughly ₹5.4 lakh.
Zero Tax (New Regime)
Up to ₹12 Lakh
Section 123 Limit
₹1.5 Lakh (Old Regime Only)
Section 44AD Turnover Limit
₹2 Crore
Key takeaways
The new regime is the default. The old regime is available only if you ask for
it.
Section 80C is now Section 123 under the Income-tax Act, 2025. The ₹1.5 lakh limit
is unchanged, and it works only in the old regime.
If your turnover is small, presumptive taxation (44AD or 44ADA) can remove the need
for books and an audit, but it carries a five-year commitment.
Business owners can switch from the old regime back to the new one only
once.
Most of the saving comes from running the business cleanly: digital payments,
timely supplier payments, and proper records.
Which law applies to you right now
The Income-tax Act, 2025 replaced the 1961 Act from 1 April 2026. Income you earn from that date
falls in "Tax Year 2026-27." Your return for FY 2025-26, which you filed this year, was still
governed by the 1961 Act. The tax slabs did not change in Budget 2026, so only the section
numbers moved.
I cite 1961 numbers where the new numbering is not yet widely settled. The rules behind them
continue.
Step 1: Choose the regime before you choose investments
Most people do this backwards. They buy tax-saving products in March and only then check whether
the old regime benefits them.
| Feature |
New regime (default) |
Old regime (opt-in) |
| Zero-tax income (with rebate) |
Up to ₹12 lakh |
Up to ₹5 lakh |
| Slab structure |
Nil to ₹4 lakh, then 5%, 10%, 15%, 20%, 25% in ₹4 lakh steps, and 30% above ₹24
lakh
|
Nil to ₹2.5 lakh, 5% to ₹5 lakh, 20% to ₹10 lakh, 30% above
|
| Section 123 (old 80C), up to ₹1.5 lakh |
Not allowed |
Allowed |
| Health insurance (80D) |
Not allowed |
Allowed |
| Home loan interest, self-occupied (₹2 lakh cap) |
Not allowed |
Allowed |
| Standard deduction (salary income) |
₹75,000 |
₹50,000 |
Two points
are easy to miss. Health and education cess of 4% is added on top of the tax in both regimes.
The new-regime rebate also does not shelter special-rate income, such as certain capital gains,
so check your return if you sold investments this year.
A worked comparison
Say your business profit is ₹15 lakh and you have no salary.
New regime: Tax on the slabs is ₹20,000 (4–8 lakh) + ₹40,000 (8–12
lakh) + ₹45,000 (12–15 lakh) = ₹1,05,000, or ₹1,09,200 with cess.
Old regime, with generous deductions: Suppose you claim ₹1.5 lakh
under Section 123, ₹50,000 in NPS, ₹25,000 in health insurance, and ₹2 lakh of home
loan interest, ₹4.25 lakh in all. Taxable income falls to ₹10.75 lakh. Tax is
₹12,500 + ₹1,00,000 + ₹22,500 = ₹1,35,000, or ₹1,40,400 with cess.
The old regime still loses, even with that stack. Working it backwards, the old regime only ties
the new one when taxable income falls to about ₹9.6 lakh, which needs around ₹5.4 lakh of
deductions at a ₹15 lakh income. Few small business owners reach that without a large home loan.
This is my
calculation from the published slabs. Run your own numbers on the official calculator at
incometax.gov.in before committing.
The switching rule that catches business owners
A person with only salary or pension income can pick a regime afresh each year when filing. A
person with business income cannot. If you opt out of the new regime and later return to it, you
cannot go back to the old one again. Treat the first opt-out as a decision you may be living
with for a long time.
Step 2: Check whether presumptive taxation fits
Presumptive taxation lets you declare a fixed share of turnover as profit instead of tracking
every expense.
Section 44AD (traders and small businesses): 8% of turnover, or 6%
on digital receipts. The turnover limit is ₹2 crore, rising to ₹3 crore if cash
receipts stay within 5%.
Section 44ADA (specified professionals): 50% of gross receipts as
income. The limit is ₹50 lakh, or ₹75 lakh with the same digital-receipts
condition.
Under 44AD, a business with ₹1.5 crore turnover, mostly digital, would declare ₹9 lakh as
income. If your real margin is lower, the scheme costs you tax. If your real margin is higher,
it saves you tax and removes the audit.
The catch is the continuity rule. If you leave the scheme, you cannot use it again for five
years. If you also declare less than the presumptive rate while your income is above the basic
exemption limit, books and a tax audit under Section 44AB become mandatory. Commentary on the
new Act places these provisions together under Section 58. Confirm the numbering with your
adviser before you cite it in a filing.
Choose the
scheme only after estimating your real margin for the next several years. A low-margin trading
business can lose money on a high presumptive rate.
Step 3: Use Section 123 well if you stay in the old regime
Section 123, read with Schedule XV, is the old 80C basket under its new number. The ceiling is
₹1.5 lakh a year, available only if you opt for the old regime. Typical eligible items:
Public Provident Fund (15-year lock-in)
Equity-linked savings schemes (3-year lock-in)
National Savings Certificate (5 years)
Five-year tax-saving fixed deposits
Tuition fees for up to two children
Principal repaid on a home loan
Employee Provident Fund contributions
Because the cap is shared, the deciding factor is lock-in and risk, not the tax benefit, which
is identical. Money you will need for stock or equipment next year should not go into a 15-year
PPF just to fill the limit.
Outside Section 123, the old regime also offers:
NPS (extra ₹50,000): Carried forward in the new Act as Section
124(3), per commentary.
Health insurance (80D): Up to ₹25,000 for self, spouse and
children, plus up to ₹25,000 for parents (₹50,000 if they are senior
citizens).
Home loan interest: Up to ₹2 lakh on a self-occupied
property.
Step 4: Cut the tax bill inside the business
For many small owners this is where the larger savings sit, and none of it depends on the
regime.
Claim every legitimate expense, with proof. Rent, wages,
electricity, professional fees and interest on business loans reduce profit if they
are wholly for the business and recorded. An expense without a bill is the first
thing an assessing officer questions.
Claim depreciation on assets. Machinery, computers and vehicles
used in the business depreciate at prescribed rates. Under presumptive taxation,
depreciation is already assumed in the deemed profit, so you cannot claim it
separately.
Pay suppliers on time, especially micro and small enterprises. If
you owe money to a registered micro or small enterprise beyond the agreed period (45
days at most), the deduction for that payment is pushed to the year you actually
pay it. This rule, in Section 43B(h) of the 1961 Act, surprises owners who book
expenses in March and pay in May.
Avoid large cash payments. Paying more than ₹10,000 in cash to one
person in a day can lead to disallowance of the expense. Bank transfers and UPI also
qualify you for the 6% rate under 44AD and the higher turnover limit.
Pay advance tax. If your tax liability is ₹10,000 or more, advance
tax applies. Under 44AD a single payment by 15 March is enough. Interest charges for
missing it are an avoidable cost.
If you also draw a salary
A founder who is on a company payroll, or an owner advising staff, has a few extra levers. The
standard deduction is ₹75,000 in the new regime and ₹50,000 in the old. Employer contributions
to NPS get a deduction capped at 14% of salary in the new regime and 10% in the old (for
private-sector employers). Employees without a business can choose their regime every year, so
a switch costs them nothing.
Before 31 March 2027: a short checklist
1
Estimate your full-year profit now, in October, instead of in March.
2
Compare both regimes on that number. Use the calculator, not a rule of thumb.
3
If old regime wins, spread Section 123 and NPS contributions across months rather than a
March rush.
4
Clear dues to micro and small suppliers before year-end.
5
Move cash transactions to bank transfers or UPI.
6
Decide whether presumptive taxation suits you before the year starts, not after.
Frequently asked questions
For most, yes, especially below ₹12 lakh of taxable income, where tax is nil after
the rebate. The old regime wins only if deductions are very large. Compare both for
your own figures.
It became Section 123 under the Income-tax Act, 2025, from 1 April 2026. The ₹1.5
lakh limit and the list of eligible investments are the same. It is available only
under the old regime.
No. Neither the old 80C nor Section 123 can be claimed if you file under the
default new regime.
No. The old-regime opt-out for business income can be undone only once. After that
you cannot opt out again.
₹2 crore, extended to ₹3 crore when no more than 5% of receipts are in cash.
You can, but if you leave, you cannot use it again for five years. If you declare
below the presumptive rate while your income exceeds the exemption limit, a tax
audit becomes mandatory.
Yes. Using deductions, schemes and regime choices that the law provides is tax
planning. Hiding income or inflating expenses is evasion.
At the start of the year, or at the latest by mid-year, as now. Decisions on regime,
presumptive scheme and supplier payments cannot be fixed in the last week of March.