New Tax Regime
The new tax regime was introduced in the Union Budget 2020 and was made the default tax regime from the financial year 2023-24 onwards. It offers lower tax slab rates compared to the old regime, which makes it look attractive at first glance. However, it comes with the trade-off of foregoing most deductions and exemptions. Here is the revised tax slab structure under the new tax regime for FY 2025-26:
| New Regime |
Income Tax Slab |
Income Tax Rate |
|---|
| FY 2025-26 |
Up to ₹4,00,000 |
Nil |
| ₹4,00,001 - ₹8,00,000 |
5% |
| ₹8,00,001 - ₹12,00,000 |
₹20,000 + 10% |
| ₹12,00,001 - ₹16,00,000 |
₹60,000 + 15% |
| ₹16,00,001 - ₹20,00,000 |
₹1,20,000 + 20% |
| ₹20,00,001 - ₹24,00,000 |
₹2,00,000 + 25% |
| Above ₹24,00,000 |
₹3,00,000 + 30% |
One of the biggest advantages of the new tax regime is that income up to ₹12 lakh is effectively tax-free for resident individuals due to the enhanced rebate under Section 156 (Previously known as Section 87A of the Income Tax Act, 1961). For salaried employees, this limit goes up to ₹12.75 lakh when you include the standard deduction of ₹75,000. This regime has now become the default option for all taxpayers.
Old Tax Regime
The old tax regime has been the traditional way of computing income tax in India. It offers higher tax rates compared to the new regime, but allows taxpayers to claim a wide range of deductions and exemptions under various sections of the Income Tax Act. These include deductions under Section 123, 126 (Previously known as Section 80C and 80D of the Income Tax Act, 1961), HRA, LTA, and many others.
If you opt for the old regime, you will be taxed as per the following rates:
| Old Regime |
Income Tax Slab |
Income Tax Rate |
|---|
| FY 2025-26 |
Up to ₹2,50,000 |
Nil |
| ₹2,50,001 to ₹5,00,000 |
5% |
| ₹5,00,001 to ₹10,00,000 |
₹12,500 + 20% |
| Above ₹10,00,000 |
₹1,12,500 + 30% |
Under the old regime, taxpayers earning up to ₹5 lakh also get a rebate under Section 156, making their effective tax liability nil, provided they do not have any other special income.
Comparison of the Old and New Income Tax Regime
Here is a quick side-by-side look at how the two regimes differ from each other:
| Feature |
Old Tax Regime |
New Tax Regime |
|---|
| Tax Rates |
Higher |
Lower |
| Deductions & Exemptions |
Available (123, 126, HRA, etc.) |
Not available |
| Standard Deduction |
₹50,000 |
₹75,000 (from FY 2024-25) |
| Default Regime |
No (must be opted) |
Yes |
| Best For |
Those with high deductions |
Those with few investments |
| Flexibility to Switch |
Yes (annually for salaried) |
Yes (annually for salaried) |
Deductions & Exemptions Under the Old Tax Regime
The old tax regime allows a long list of deductions and exemptions that can bring down your taxable income significantly. Here are the major ones that salaried employees can take advantage of:
- Section 123: Up to ₹1.5 lakh deduction on investments like EPF, PPF, ELSS, NSC, life insurance premiums, home loan principal repayment, and tuition fees.
- Section 126: Deduction on health insurance premiums paid for self, spouse, children, and parents. Up to ₹25,000 for self and family, and an additional ₹25,000 to ₹50,000 for parents.
- House Rent Allowance (HRA): Exemption on HRA received from the employer, subject to certain conditions based on rent paid and salary.
- Leave Travel Allowance (LTA): Exemption on travel expenses for domestic travel, claimable twice in a block of four years.
- Standard Deduction: A flat deduction of ₹50,000 from salary income.
- Section 153 (Previously known as Section 80TTA or 80TTB of the Income Tax Act, 1961): Deduction on interest from savings accounts up to ₹10,000 (₹50,000 for senior citizens).
- Section 22 (Previously known as Section 24(b) of the Income Tax Act, 1961): Deduction on home loan interest up to ₹2 lakh for self-occupied property.
- Section 129 (Previously known as Section 80E of the Income Tax Act, 1961): Deduction on interest paid on education loans with no upper limit.
- Section 133 (Previously known as Section 80G of the Income Tax Act, 1961): Deductions on donations made to eligible charitable organisations.
These deductions, when added together, can bring down taxable income by ₹3.5 lakh to ₹5 lakh or even more for those with home loans, health insurance, and active investments.
Deductions & Exemptions Under New Tax Regime
The new tax regime is largely a clean-slate approach where most deductions are not allowed. However, a few exemptions and deductions are still available to salaried employees:
- Standard Deduction: For salaried individuals, both tax regimes offer a standard deduction against the salary income. The standard deduction as per the new tax regime is ₹75,000.
- Employer’s Contribution to NPS: Deduction under Section 124 (Previously known as Section 80CCD of the Income Tax Act, 1961) for employer’s contribution to the National Pension Scheme up to 10% of salary (14% for government employees).
- Gratuity and Leave Encashment: Exemptions on retirement benefits as per the Income Tax Act.
- Agniveer Corpus Fund: Deduction under Section 125 (Previously known as Section 80CCH of the Income Tax Act, 1961) for contributions made to the Agniveer Corpus Fund.
- Conveyance and Transport Allowances: Specific transport and conveyance allowances for specially-abled individuals and those working in the transport sector.
Most other popular deductions under Sections 123, 126, HRA, LTA, and home loan interest are not available under the new regime. This means if you are not making any investments or claiming these deductions, the new regime is automatically more straightforward and often more beneficial.
Tax Under Old Vs New Regime
The decision between the two regimes largely depends on how much you can claim as deductions. Here is a breakdown based on different deduction levels to help you understand which regime works better at which stage.
When Total Deductions Are ₹1.5 Lakhs Or Less: The New Tax Regime Will Be Beneficial
If your total eligible deductions are ₹1.5 lakh or less (which typically covers only the basic Section 123 investments), the new tax regime will likely save you more money. This is because the lower tax slab rates in the new regime outweigh the tax benefit of the limited deductions available in the old regime. Salaried employees who are just starting out, do not have a home loan, and have not invested beyond basic EPF contributions would generally benefit from the new regime.
When Total Deductions Are More Than ₹3.75 Lakhs: The Old Tax Regime Will Be Beneficial
If your total deductions exceed ₹3.75 lakh, the old tax regime becomes more favourable. This scenario applies to taxpayers who have a home loan (claiming ₹2 lakh interest deduction), health insurance for family and parents, full Section 123 (Previously known as Section 80C of the Income Tax Act, 1961) investments of ₹1.5 lakh, NPS contributions, and HRA claims. At this level, the tax savings from deductions in the old regime more than compensate for the higher slab rates, resulting in a lower tax outgo compared to the new regime.
When Total Deductions Are Between ₹1.5 Lakhs and ₹3.75 Lakhs: It Will Depend on Various Income Levels
This is the grey area where there is no answer that fits everyone. Whether the old or new regime is better depends on your exact income and the exact deduction amount. As a general rule:
- At lower income levels (say ₹7 to ₹10 lakh), the new regime often works out to be better even with moderate deductions.
- At higher income levels (₹15 lakh and above), the old regime starts making more sense as the marginal tax rate is high and deductions provide a bigger absolute saving.
- In the mid-range (₹10 lakh to ₹15 lakh), it is best to calculate your tax liability under both regimes and compare.
The wisest approach here is to simply do the maths using a tax calculator or take a call based on your actual deduction claims.
Old Vs New Regime Example
Let us take the example of Rohan, a salaried employee earning ₹12 lakh per annum. He pays ₹50,000 as a health insurance premium, contributes ₹1.5 lakh under Section 123, and pays ₹1.5 lakh as home loan interest. His total deductions amount to ₹3.5 lakh (including the standard deduction of ₹50,000 under the old regime).
| Particulars |
Old Tax Regime (₹) |
New Tax Regime (₹) |
|---|
| Gross Salary |
12,00,000 |
12,00,000 |
| Standard Deduction |
50,000 |
75,000 |
| 123 Deduction |
1,50,000 |
Not Available |
| 126 (Health Insurance) |
50,000 |
Not Available |
| Home Loan Interest (Sec 22) |
1,50,000 |
Not Available |
| Net Taxable Income |
8,00,000 |
11,25,000 |
| Approximate Tax Payable |
75,400 |
1,10,000 |
In Rohan’s case, the old tax regime is clearly more beneficial because his total deductions are over ₹3.5 lakh. This example shows how important it is to account for every deduction before picking a regime.
Old Tax Regime Vs New Tax Regime: Which Is Better?
There is no universal answer to this. The better regime depends entirely on your income level and how much you invest or claim as deductions. Here is a simplified guide:
- Go with the new tax regime if you have fewer investments, do not have a home loan, and are not claiming HRA or other major exemptions.
- Go with the old tax regime if you are an active investor with Section 123 investments, a home loan, health insurance for family and parents, and HRA claims that together exceed ₹3.75 lakh.
- If you earn below ₹7 lakh and have no significant deductions, the new regime is ideal since your tax liability will be nil after the Section 156 rebate.
- If you earn above ₹15 lakh and have high deductions, the old regime is more beneficial.
It is also worth noting that salaried employees can switch between the two regimes every year, which means you are not locked in. You can reassess at the start of every financial year and choose accordingly. Since the new regime is now the default, you will need to actively opt for the old regime if that is your preference.
Conclusion
Both tax regimes have their own merits, and the right choice depends on your specific financial situation. The new tax regime works well for individuals who prefer simplicity and do not have many deductions to claim. The old tax regime rewards those who have planned their finances well through insurance, investments, and home loans. Rather than going by what others around you are doing, it is best to calculate your tax liability under both regimes with your actual numbers. A small bit of planning at the beginning of the financial year can make a meaningful difference to your take-home pay. If you are unsure, a tax professional or a reliable tax calculator can help you make the right call.
FAQs on Old vs New Tax Regime
1
Which is better, the new tax regime or the old tax regime?
It depends entirely on your total investments and deductions. If you can claim major deductions like home loan interest and HRA, a total of more than ₹3.75 lakh, the old regime is usually better. If you have minimal investments, the new regime is your best option.
2
What is the old tax regime?
The old tax regime is the multi-tiered tax system that allows you to lower your taxable income by claiming over 70 tax exemptions and deductions, including Section 123, 126, HRA, and home loan interest.
3
What is the new tax regime?
The new tax regime is a simplified tax system featuring lower tax rates across more slabs. However, it requires you to give up almost all traditional exemptions and deductions available under the old system.
4
Is it possible to switch between the old and new tax regimes?
Yes. As a salaried individual, you can switch between the old and new tax regimes every single year when you file your Income Tax Return (ITR), provided you do not have any business income.
5
Which tax regime is better for a ₹7 lakh salary?
The new tax regime is far better for a ₹7 lakh salary. Under the new regime, any taxable income up to ₹12 lakh is completely tax-free due to the Section 156 rebate, meaning you will pay zero tax.
6
Which tax regime is better for a ₹10 lakh salary?
The new tax regime is generally better. After the ₹75,000 standard deduction, your income drops below the ₹12 lakh threshold, making your net tax liability zero. Under the old regime, you would need massive deductions to match that zero-tax benefit.
7
Which tax regime is better for ₹20 lakhs?
For an income of ₹20 lakh, the new tax regime is usually the winner unless you have exceptionally high deductions (well over ₹4 lakh) from a home loan, high rent, and medical insurance.
8
What are the deductions in the new tax regime?
Salaried individuals can only claim a standard deduction of ₹75,000 and the employer’s contribution to their NPS account under Section 124. Traditional benefits like 123, 126, and HRA are not available.
