Compare old and new tax regime
Compare Old and New Tax Regime: A Simple Guide
In this post, we will discuss the differences between the old and new tax regimes in India, their tax slabs, deductions, and which option might be better for you.
Let’s look at these sections in detail:
- What is the New Tax Regime?
- What is the Old Tax Regime?
- Old vs New: What Deductions Are Allowed?
- Which Regime Should You Choose?
- Are taxpayers allowed to switch between different tax regimes?
- New and Old Tax Regime Slabs: Comparison
- Advantages & Disadvantages of New Tax Regime
- Advantages & Disadvantages of Old Tax Regime
- Example
- Conclusion
- FAQs
What is the New Tax Regime?
A new tax slab system was introduced in the Budget 2020, effective from 1 April 2020. It offers lower tax rates but does not allow most deductions or exemptions (except section 80CCD(2)). Choosing this regime is optional.
Key Changes Made in Budget 2023
Budget 2023 brought essential updates to make the new tax regime more attractive.
Default Regime
The new regime is now the default. If employees do not inform their employer which regime they choose, TDS will be calculated under the new regime.
Tax Rate Changes for FY 2025-26
The basic exemption limit increased to Rs 4 lakh. The highest tax rate of 30 percent applies above Rs 15 lakh.
Tax Slabs for FY 2025-26
|
Range of Income (Rs.) |
Tax Rate |
|
0 to 4 lakh |
No tax |
|
4 to 8 lakh |
5 percent |
|
8 to 12 lakh |
10 percent |
|
12 to 16 lakh |
15 percent |
|
16 to 20 lakh |
20 percent |
|
20 to 24 lakh |
25 percent |
|
Above 24 lakh |
30 percent |
Rebate for FY 2025-26
Income up to Rs 12 lakh is tax-free due to a Rs 60,000 rebate under section 87A.
Standard Deduction
Salaried individuals get a Rs 75,000 standard deduction.
Lower Surcharge
Surcharge on income above Rs 5 crore reduced from 37 percent to 25 percent.
Leave Encashment Update
The tax-free leave encashment limit for non-government employees has been increased to Rs 25 lakh.
Insurance Policy Taxation
If the annual premium of a traditional insurance policy exceeds Rs 5 lakh, the income from it will not be tax-free.
What is the Old Tax Regime?
The old tax regime is the regular income tax system in India. It lets you reduce your taxable income through various deductions and exemptions. Some of the common benefits are:
Key features of the old tax regime
- Deductions:
- Section 80C: Investments like PPF, ELSS, NSC and others, up to Rs 1.5 lakh.
- Section 80D: Payment made for health insurance premiums.
- Section 24(b): Home loan interest deduction up to Rs 2 lakh.
- Exemptions:
- House Rent Allowance (HRA).
- Leave Travel Allowance (LTA).
- Standard deduction of Rs 50,000 for salaried people.
- Tax slabs for FY 2024-25:
|
Income |
Tax Rate |
|
Rs 0 to Rs 2.5 lakh |
Nil |
|
Rs 2.5 to Rs 5 lakh |
5 percent |
|
Rs 5 to Rs 10 lakh |
20 percent |
|
Above Rs 10 lakh |
30 percent |
Benefits of the old tax regime
It works well for people who use many deductions and exemptions. It also promotes saving and investing through various tax-saving options.
Old vs New: What Deductions Are Allowed?
In the old tax regime, taxpayers could claim many deductions, exemptions and allowances to reduce their taxable income. Some of the standard tax-saving options available are:
- Public Provident Fund
- Unit Linked Insurance Plans
- Equity Linked Savings Scheme
- Life insurance premium
- Employee Provident Fund
- Interest paid on a home loan under Section 24
- Standard deduction
- Children’s tuition fees
- Health insurance premium under Section 80D
- Investment in NPS
- Interest earnings under Section 80TTA and 80TTB
There are many more deductions and exemptions allowed under the old regime. Each of these also has its own limit on how much you can claim. You can use an income tax calculator to know exactly how much deduction you are eligible for.
Under the new tax regime, you can claim only a few specific deductions. Here is a simple list of what is allowed:
- Employer’s contribution to your NPS account under section 80CCD(2).
- Interest paid on a home loan for a house that is rented out under section 24(b). This interest can be deducted from rental income when calculating tax.
- Gratuity received in your career, up to a limit of ₹20 lakh for non-government employees.
- Payments received during voluntary retirement, up to ₹5 lakh.
- Leave encashment at the time of retirement, up to ₹3 lakh.
- Section 10(6): Salary received for working as an official in an embassy or high commission.
- Section 10(7): Allowances or perquisites received outside India from the Indian government for services given abroad.
- Section 10(10): Gratuity received on death or retirement.
- Section 10(10A): Commuted pension received.
- Section 10(10AA): Leave encashment received on retirement.
- Section 10(10B): Compensation received at the time of retrenchment.
- Section 10(10C): Amount received during voluntary retirement or termination of service.
- Section 10(10CC): Tax paid by the employer on a non monetary perquisite.
- Section 10(14)(i): Certain allowances received by employees covered under Rule 2BB.
- Section 10(14)(ii): Transport allowance given to a person with a disability.
- EIC: Exempt income received by judges covered under the rules for payment of salaries to Supreme Court and High Court judges.
Which Regime Should You Choose?
Choosing between the old and new tax regimes mainly depends on your income, the deductions you claim, and how you plan your investments. Here is a simple way to understand it:
- Deductions and Exemptions
In the old regime, you can use deductions like HRA, LTA, 80C investments, 80D health insurance and many others.
In the new regime, most of these are not available, but the tax rates are usually lower. - Income Level and Slabs
Check the tax slabs in both options. The new regime has more slabs with lower rates.
Compare your taxes in both to see where you save more. - Type of Income
If you are salaried and you make use of benefits like HRA, the old regime may help you save more.
If you do not claim many exemptions or do not want to invest only for tax purposes, the new regime is simpler and might suit you. - Standard Deduction
As per Budget 2025, the old regime provides a standard deduction of Rs 50,000, while the new regime provides Rs 75,000.
If you have a few other exemptions, the new regime may be better. - Long Term Planning
If you already invest in options covered under 80C, like PF or ELSS, the old regime can be helpful.If you want more flexibility without compulsory tax-saving investments, the new regime is easier. - Do a Quick Comparison
The best way is to calculate your tax under both regimes using your income and deductions. Choose the one where you pay less.
Tip: At the start of each financial year or before filing your return, do a quick check of your income and deductions.
Are taxpayers allowed to switch between different tax regimes?
Taxpayers, whether individuals or HUFs, can choose between the old and new tax regimes based on their income and financial situation. This choice depends on the type of income you earn during the year.
If you have income from a business or profession and choose the new tax regime in a particular year, the same option will continue for the next few years as well. You can return to the old tax regime only once in your lifetime if your situation changes. This option is available as long as you still have income from a business or profession.
If you do not have any business or professional income, then you can choose your tax regime every year. For salaried employees, the employer will deduct TDS under the regime you choose. So, it is better to tell your employer at the beginning of the financial year which regime you want to follow. This avoids any mismatch between the Form 16 issued by your employer and the details you need while filing your ITR.
You can also change your tax regime when you file your personal income tax return if needed.
New and Old Tax Regime Slabs: Comparison
|
Criteria |
Old Tax Regime |
New Tax Regime (Budget 2025) |
|
Basic Exemption Limit |
₹2.5 lakh |
₹12 lakh (₹12.75 lakh for salaried) |
|
Tax Slabs |
5 percent, 20 percent, 30 percent |
0 percent, 5 percent, 10 percent, 15 percent, 20 percent, 25 percent, 30 percent |
|
Deductions and Exemptions |
HRA, LTA, 80C, 80D, home loan interest and many others allowed |
Only standard deduction of ₹75,000 for salaried |
|
Compliance and Documentation |
Higher because you need to give proofs for investments, rent and other claims |
Very simple filing with minimal paperwork |
|
Best Suited For |
People who claim higher deductions, usually above ₹5 to ₹8 lakh |
People with fewer deductions or those who prefer a simple tax setup |
Advantages & Disadvantages of New Tax Regime
Advantages of the New Tax Regime
The new tax regime mainly helps by giving lower tax rates. This can reduce your overall tax and increase the amount you take home. It also has a simple structure, so you do not have to deal with many exemptions and deductions. This makes filing your taxes easier and reduces the work involved.
Disadvantages of the New Tax Regime
The new tax regime has some drawbacks because it gives only limited exemptions and deductions. While you still get benefits like the standard deduction, leave travel concession, and tax-free PF withdrawals, it does not offer the wide range of deductions that the old regime provided.
It also gives fewer options for tax planning. This may not be suitable for those who want to save more tax through planned investments and deductions.
Advantages & Disadvantages of Old Tax Regime
Advantages of the Old Tax Regime
The old tax regime is helpful for people who want to save more through different deductions and exemptions. You can reduce your taxable income by claiming benefits like the standard deduction, home loan interest, medical expenses, and education loan interest.
It also supports long-term savings, as you get tax benefits for investing in options such as PPF, NPS, and ELSS. So, if you prefer planned savings and want to build a secure financial future, the old regime can work well for you.
Disadvantages of the Old Tax Regime
The main drawback of the old tax regime is its complex structure, with too many deductions and exemptions. This makes it difficult for many taxpayers to understand and manage their finances.
It also offers less flexibility. Once you make investments and claim deductions, you cannot easily change your tax planning during the same financial year. Because of this, adjusting your tax strategy later becomes tough.
Example
Income Tax Old Regime vs New Regime 2025: Example Scenarios
Income of ₹13 lakh (salaried)
In the new regime, your tax will be zero or very low after the standard deduction of ₹75,000. So around ₹12.75 lakh is basically tax-free.
In the old regime, you can match or beat this only if you claim big deductions, mainly through 80C, HRA and other common exemptions.
Income of ₹20 lakh
Under the new regime, the slab between 16 to 20 lakh is taxed at 20 percent and you get only the standard deduction of ₹75,000.
Under the old regime, if you have substantial deductions like HRA, 80C, 80D and housing loan interest, you can bring your taxable income down and fall into a lower slab.
Income up to ₹12 to 13 lakh
With the new regime, there is almost no tax till ₹12 lakh for everyone and till ₹12.75 lakh for salaried employees.
With the old regime, you needed big exemptions like HRA or a mix of 80C and 80D to bring your tax close to zero, which is usually not easy.
For most people in this range, the new regime keeps things simple and usually results in very low or zero tax.
Income around ₹15 to 20 lakh
If you claim high deductions such as HRA, 80C, 80D, and home loan interest, the old regime can sometimes yield a better result. People who use all these benefits properly can significantly reduce their taxable income.
If your total deductions are not very high, the new regime is generally easier to follow and often cheaper.
Income above ₹24 to 25 lakh
In many cases, if your other deductions, aside from the standard deduction, stay below ₹8 lakh, the new regime usually results in a lower tax.
If you claim substantial deductions through HRA, 80C and housing loan interest, the old regime can still help. But this requires significant spending on rent, home loan EMIs, and planned investments.
Example: Income Above ₹24 Lakh – Old Tax Regime vs New Tax Regime
Let us take a salary of ₹35,00,000.
Your total deductions and exemptions can vary depending on factors such as HRA, LTA, 80C, 80D, and housing loan interest.
Standard deduction:
The old regime gave ₹50,000.
The new regime gives ₹75,000.
If your total deductions or exemptions are anywhere between ₹5.75 lakh and ₹9.5 lakh, your final tax amount will change accordingly. Once your deductions exceed ₹8 lakh, the old regime can be more beneficial.
The old regime helps because you can claim many deductions, such as HRA, LTA, 80C, and home loan interest.
The new regime allows a higher standard deduction of ₹75,000, but very few other deductions.
In short:
If your total deductions are below ₹8 lakh, the new regime usually gives a lower tax.
If your deductions exceed ₹8 lakh, the old regime may work out better.
Illustrative Examples for Income Below ₹24 Lakh: New vs Old Tax Regime
The second example considers three salary levels: ₹14 lakh, ₹18 lakh, and ₹22 lakh.
Under the old tax regime, each salary is subject to deductions such as HRA, LTA, 80C, and 80D, while under the new regime, only the standard deduction is available.
Here is the basic idea:
For ₹14 lakh income:
If you claim higher exemptions like HRA of ₹2.3 lakh, LTA of ₹25,000 and other deductions, your final tax under the old regime can be slightly higher or slightly lower based on the total amount you deduct.
For ₹18 lakh and ₹22 lakh income:
As your total deductions increase, the old regime can bring down your taxable income more, even though the slab rates are higher.
But if your deductions are limited, the new regime usually works out simpler and sometimes cheaper.
In the example shown, a person earning ₹14 lakh and claiming around ₹4.55 lakh in deductions under the old regime ends up with a taxable income of ₹8.95 lakh.
Under the new regime, the taxable income is higher at ₹13.25 lakh, but the tax rates are lower.
So the benefit in the old regime fully depends on how many deductions you actually claim. Each case can turn out differently based on your salary structure and exemptions.
Conclusion
Choosing between the old and new tax regimes really depends on what works best for you.
The old regime gives you more exemptions and deductions, so you can plan your taxes better and save more. But it is a bit complicated and not very flexible.
The new regime has lower tax rates and is much simpler to understand, but it offers very few exemptions, so you cannot do much tax planning.
It is better to look at your income, deductions and total tax you need to pay under both options before deciding. If you are unsure, you can always check with a tax expert to know which one suits you.
With this, we have reached the end of our post on old vs new tax regime. If you have any questions or need clarification on any point, feel free to share them in the comments below.
FAQs
Q. Which tax regime is better for salaried employees?
Ans: For salaried employees, the old tax regime is usually better, as they can claim many deductions and exemptions, such as HRA, LTA, and Section 80C. If they don’t have many deductions, the new tax regime, with its lower rates and simpler rules, may be more suitable.
Q. Which Tax Regime Is Better for Saving Tax?
Ans: If you have lots of deductions and exemptions like investments under Section 80C, HRA, LTA, or health insurance, the old tax regime is usually better for saving tax. Generally, if your deductions are around ₹5 to 8 lakh or more, you will end up paying less tax under the old regime. On the other hand, the new tax regime suits those who have few deductions. It offers lower tax rates and simpler filing, but does not give many options for tax savings.
Q. What is the best way to compare the old and new income tax regimes every year?
Ans: First, estimate your total income for the year and apply all eligible deductions like 80C and HRA under the old tax regime. Next, calculate your tax using the new regime’s slabs with fewer deductions. The option that gives you a lower tax is usually the better one.
Q. Can I claim 80C in the new tax regime?
Ans: No, you cannot claim Section 80C deductions under the new tax regime.
Q. Can we claim HRA and 80C in the new tax regime?
Ans: No, you cannot claim HRA or 80C exemptions under the new tax regime. If you want to use these benefits, you will need to choose the old tax regime. You can try an HRA calculator to see your savings under the old regime.
Q. Which tax regime is better for someone earning less than ₹6 lakh per year?
Ans: If you earn less than ₹6 lakh a year, the new tax regime is usually better because the tax rates are lower than the old regime.
Q. Is NPS tax-free under the new tax regime?
Ans: Yes. As per Section 80CCD(2) introduced in the Union Budget 2024, employees can claim a deduction of up to 14% of their basic salary invested in NPS.
