Old Vs New Tax Regime: Which Is Better New Or Old Tax Regime For Salaried Employees?

The Indian tax system offers two regimes: the old regime, with various deductions and exemptions, and the new regime, with lower tax rates. The new tax regime, updated in Budget 2025, assigns zero tax liability for those earning up to ₹12 lakh but eliminates various Chapter VIA deductions. Choosing between the old vs new tax regime depends on income, deductions, and financial goals. While the new regime simplifies taxation, the old regime remains beneficial for those who claim multiple deduction

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The Indian tax area has evolved with the introduction of the new tax regime in the 2020 budget. This presents taxpayers with a crucial decision: remain anchored in the familiar territory of the old regime or explore the potentially lower tax burdens offered by the new one.

This blog will delve deeper into old vs new tax regimes, considering different income groups and scenarios. By the end, you will be equipped to identify the regime that minimizes your tax liability and maximizes your after-tax income.

New Tax Regime

Introduced in the 2020 budget, the new tax regime offers a simpler approach to filing with lower tax rates. However, it comes with a catch: you forfeit the deductions and exemptions available under the old regime. This means you cannot claim popular tax benefits like investments under Section 80C (PPF, ELSS mutual funds), medical insurance premiums ( Section 80D), or charitable donations (Section 80G).

The tax rates were again revised in Budget 2023, effectively eliminating tax liability for those earning up to ₹7 lakhs. The slabs were further changed in Budget 2025, which was presented on 1 February 2025. These new rates will be effective on the ITR filing deadline of July 2026 for FY 2025-26 (AY 2026-27).

The following table summarizes the tax rates under the new regime for financial years ending 2025 and 2026.

FY 2024-25		FY 2025-26
Income Slabs	Tax Rates	Income Slabs	Tax Rates
Upto ₹3 lakh	Nil	Upto ₹4 lakh	Nil
₹3 lakh - ₹7 lakh	5%	₹4 lakh - ₹8 lakh	5%
₹7 lakh - ₹10 lakh	10%	₹8 lakh - ₹12 lakh	10%
₹10 lakh - ₹12 lakh	15%	₹12 lakh - ₹16 lakh	15%
₹12 lakh - ₹15 lakh	20%	₹16 lakh - ₹20 lakh	20%
More than ₹15 lakh	30%	₹20 lakh - ₹24 lakh	25%
		Above ₹24 lakh	30%

Old Tax Regime

The old tax regime under the Income Tax Act 1961 offers a more traditional approach to taxation. Unlike the new regime, it allows taxpayers to claim various deductions and exemptions scattered throughout the Income Tax Act. These deductions significantly reduce your taxable income, thereby lowering your tax liability. Common examples include claiming benefits for rent (HRA), travel (LTA), and medical insurance premiums (Section 80D). Additionally, investments in specific instruments like PPF, ELSS mutual funds, and ULIP Plans under Section 80C qualify for tax deductions.

The old regime is ideal for individuals who heavily rely on these deductions to minimize their tax burden. However, it is important to note that claiming these deductions often involves maintaining detailed records and performing complex calculations, potentially making tax filing more complex.

If you opt for the old regime, you will be taxed as per the following rates:

Income Slab	Tax Rates
Upto ₹2.5 lakh	Nil
₹2.5 lakh - ₹5 lakh	5%
₹5 lakh - ₹10 lakh	20%
More than ₹10 lakh	30%

Comparison of Old and New Income Tax Regime

The key difference between old and new tax regimes is that the new regime offers lower tax slab rates. It has increased the basic exemption limit to ₹4 lakh, compared to ₹2.5 lakh under the old regime. However, the new regime eliminates several deductions and exemptions.

The slab rates under new vs old tax regimes are as follows:

Old Tax Regime	New Tax Regime
Old Tax Regime	FY 2024-25	FY 2025-26
Income Slabs	Tax Rate	Income Slabs	Tax Rate	Income Slabs	Tax Rate
Upto ₹2.5 lakh	Nil	Upto ₹3 lakh	Nil	Upto ₹4 lakh	Nil
₹2.5 lakh - ₹5 lakh	5%	₹3 lakh - ₹7 lakh	5%	₹4 lakh - ₹8 lakh	5%
₹5 lakh - ₹10 lakh	20%	₹7 lakh - ₹10 lakh	10%	₹8 lakh - ₹12 lakh	10%
More than ₹10 lakh	30%	₹10 lakh - ₹12 lakh	15%	₹12 lakh - ₹16 lakh	15%
		₹12 lakh - ₹15 lakh	20%	₹16 lakh - ₹20 lakh	20%
		More than ₹15 lakh	30%	₹20 lakh - ₹24 lakh	25%
				Above ₹24 lakh	30%

Another point that differentiates the old regime vs new regime is the provision of rebate under Section 87A. Under the old regime, individuals with an income of up to ₹5 lakh are eligible for a rebate, whereas the new regime extends this benefit to those earning up to ₹12 lakh.

Additionally, the standard deduction for salaried individuals has been increased from ₹50,000 to ₹75,000 in the new regime, providing further tax relief.

Deduction & Exemptions Under Old Tax Regime

The old tax regime allows taxpayers to claim multiple deductions and exemptions, reducing their taxable income. Key benefits include:

Standard Deduction: ₹50,000 for salaried individuals and pensioners.
House Rent Allowance (HRA): Exemptions available based on rent paid, salary, and city of residence.
Leave Travel Allowance (LTA): Exemption on travel expenses within India for employees.
Section 80C Deductions: Up to ₹1.5 lakh for investments in Public Provident Fund, Employee Provident Fund (EPF), life insurance, Equity Linked Savings Scheme, etc.
Section 80D: Health insurance premium deduction up to ₹25,000 (₹50,000 for senior citizens).
Home Loan Interest (Section 24b): Deduction up to ₹2 lakh on interest paid for a self-occupied property.
Section 80TTA: Deduction up to ₹10,000 on interest earned from savings accounts (for individuals below 60 years).
Section 80TTB: Deduction up to ₹50,000 on interest income from bank/post office deposits for senior citizens.
Other Exemptions: Standard allowances like meal coupons, phone bill reimbursements, and education allowance.

Please note that this list is not exhaustive. Chapter VIA details various other deductions that can be claimed by an assessee under the old regime, along with their limits.

Deduction & Exemptions Under New Tax Regime

The new tax regime offers lower tax rates but removes most deductions and exemptions. However, some key benefits remain for salaried individuals:

Standard Deduction: ₹75,000 for salaried individuals and pensioners.
Employer’s Contribution to National Pension Scheme (NPS) Under Section 80CCD(2): Deduction up to 10% of salary (14% for government employees).
Transport Allowance for Differently-abled Employees: Covers the expenses for traveling between place of residence and place of work.
Conveyance Allowance used for Official Purposes: Covers transportation expenses incurred during performing work-related activities. Allowance given for business tours and accommodation is also covered.
Daily Allowance: Given to meet day-to-day expenses incurred when working at a place other than the usual place of duty.
Home Loan Interest under Section 24b: Allowed in case the property is let out.
Gratuity and Other Retirement Benefits: Still exempt from tax as per prescribed limits.

Tax Under Old vs New Regime

The comparison between old vs new tax regime becomes crucial when assessing the tax implications at different income levels and deduction scenarios.

When Total Deductions are ₹1.5 Lakhs or Less: The New Tax Regime will be Beneficial

Salary earners with minimal deductions (under ₹1.5 lakhs), particularly those relying on House Rent Allowance (HRA), should favor the new tax regime. Its lower tax rates likely outweigh the standard deduction, simplifying filing and potentially minimizing your tax outgo.

When Total Deductions are More than ₹3.75 Lakhs: The Old Tax Regime will be Beneficial

Conversely, if deductions exceed ₹3.75 lakhs, sticking to the old tax regime is typically more advantageous, as it allows taxpayers to avail of a wider range of deductions and exemptions.

When Total Deductions are Between ₹1.5 Lakhs to ₹3.75 Lakhs: Will Depend on Various Income Levels

Consider using online tax calculators or consulting a tax advisor to compare your tax burden under both regimes. Remember, the new regime’s lower rates might be offset by lost deductions impacting your long-term financial goals (e.g., investments).

Old vs New Regime Example

Let us consider a hypothetical example to illustrate the difference in tax liability under the old and new tax regimes for individuals with varying income levels and deduction scenarios. A salaried professional with ₹10 lakhs annual income and ₹2 lakhs deductions (primarily HRA). Under the old regime, these deductions would lower their taxable income, potentially putting them in a lower tax bracket. However, calculations might be complex. On the other hand, the new regime’s lower tax rates can be beneficial despite the lack of deductions, offering a potentially simpler filing process. To make the best choice, they would need to calculate their tax liability under both regimes to see which minimizes their tax burden.

Old Tax Regime vs New Tax Regime, Which is Better?

The age-old question persists: which tax regime reigns supreme? The answer lies in the unique financial circumstances and goals of each taxpayer, as well as the trade-offs between lower tax rates and available deductions.

Conclusion

The decision between the old and new tax regimes is not a one-size-fits-all proposition. Taxpayers must carefully evaluate their options based on their unique financial circumstances and long term investment objectives. While the new tax regime offers lower tax rates, it comes with the trade-off of foregoing certain deductions, which could impact eligibility for an income tax refund . On the other hand, the old tax regime allows taxpayers to avail of a wider range of deductions but may result in a higher tax liability. Ultimately, the choice boils down to striking the right balance between tax optimization and financial planning.

FAQs on Old vs New Tax Regime

Which is better, new tax regime or old tax regime?

Selecting between new and old tax regimes depends on individual financial circumstances, including income level, investment portfolio, and availed deductions.

What is the old tax regime?

The old tax regime allows taxpayers to avail of various deductions and exemptions to lower their taxable income.

What is the new tax regime?

The new tax regime offers lower tax rates but requires taxpayers to forego certain deductions and exemptions.

Is it possible to switch between the old and new tax regimes?

Yes, taxpayers have the flexibility to switch between the old and new tax regimes based on their preferences and financial circumstances.

Which tax regime is better for a ₹7 lakh salary?

The optimal tax regime for a 7 lakhs salary depends on various factors, including deductions availed and long-term financial goals.

Which tax regime is better for a ₹10 lakh salary?

Similarly, the choice between tax regimes for a ₹10 lakh salary hinges on individual circumstances, including deductions and exemptions.

Which tax regime is better for 20 lakhs?

For individuals with a ₹20 lakhs income, the decision between tax regimes necessitates a thorough analysis of deductions, exemptions, and long-term tax-saving strategies.

What are the deductions in the new tax regime?

Under the new tax regime, taxpayers forgo deductions such as those under Section 80C, 80D, and 80G, among others, in exchange for lower tax rates.

Old Vs New Tax Regime: Which Is Better New Or Old Tax Regime For Salaried Employees?

New Tax Regime

Old Tax Regime

Comparison of Old and New Income Tax Regime

Deduction & Exemptions Under Old Tax Regime

Deduction & Exemptions Under New Tax Regime

Tax Under Old vs New Regime

When Total Deductions are ₹1.5 Lakhs or Less: The New Tax Regime will be Beneficial

When Total Deductions are More than ₹3.75 Lakhs: The Old Tax Regime will be Beneficial

When Total Deductions are Between ₹1.5 Lakhs to ₹3.75 Lakhs: Will Depend on Various Income Levels

Old vs New Regime Example

Old Tax Regime vs New Tax Regime, Which is Better?

Conclusion

FAQs on Old vs New Tax Regime

Which is better, new tax regime or old tax regime?

What is the old tax regime?

What is the new tax regime?

Is it possible to switch between the old and new tax regimes?

Which tax regime is better for a ₹7 lakh salary?

Which tax regime is better for a ₹10 lakh salary?

Which tax regime is better for 20 lakhs?

What are the deductions in the new tax regime?

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