India’s income tax system offers taxpayers a choice between the Old Tax Regime and the New Tax Regime, each with distinct features affecting tax liability. With the Union Budget 2025 introducing changes to the New Tax Regime, understanding the differences is crucial for optimizing your tax planning. This blog compares the two regimes based on tax slabs, deductions, exemptions, and their suitability for different taxpayers, helping you decide which regime saves you more for Financial Year (FY) 2025-26 (Assessment Year 2026-27).
Overview of the Old and New Tax Regimes
Old Tax Regime
The Old Tax Regime is the traditional tax structure in India, allowing taxpayers to claim various deductions and exemptions to reduce taxable income. It features higher tax rates but offers flexibility for those with significant investments or expenses, such as home loans, insurance premiums, or rent payments.
New Tax Regime
Introduced in Budget 2020 under Section 115BAC of the Income Tax Act, the New Tax Regime offers lower tax rates but eliminates most deductions and exemptions. It became the default regime from Assessment Year (AY) 2024-25, as per the Finance Act 2023, but taxpayers can opt for the Old Regime if it suits their financial situation. The New Regime aims to simplify tax calculations and reduce compliance burdens, making it appealing for those with fewer tax-saving investments.
Tax Slabs Comparison for FY 2025-26
Old Tax Regime Slabs
The tax slabs under the Old Regime remain unchanged and vary based on age:
For Individuals Below 60 Years:
- Up to ₹2.5 lakh: Nil
- ₹2.5 lakh – ₹5 lakh: 5%
- ₹5 lakh – ₹10 lakh: 20%
- Above ₹10 lakh: 30%
For Senior Citizens (60 to 79 Years):
- Up to ₹3 lakh: Nil
- ₹3 lakh – ₹5 lakh: 5%
- ₹5 lakh – ₹10 lakh: 20%
- Above ₹10 lakh: 30%
For Super Senior Citizens (80 Years and Above):
- Up to ₹5 lakh: Nil
- ₹5 lakh – ₹10 lakh: 20%
- Above ₹10 lakh: 30%
Rebate: A tax rebate of ₹12,500 is available under Section 87A for taxable income up to ₹5 lakh, resulting in zero tax liability.
Surcharge: Applicable for high-income earners:
- 10% for income between ₹50 lakh and ₹1 crore
- 15% for income between ₹1 crore and ₹2 crore
- 25% for income between ₹2 crore and ₹5 crore
- 37% for income above ₹5 crore
New Tax Regime Slabs
The New Tax Regime, updated in Budget 2025, offers revised slabs applicable to all taxpayers, regardless of age:
- Up to ₹4 lakh: Nil
- ₹4 lakh – ₹8 lakh: 5%
- ₹8 lakh – ₹12 lakh: 10%
- ₹12 lakh – ₹16 lakh: 15%
- ₹16 lakh – ₹20 lakh: 20%
- ₹20 lakh – ₹24 lakh: 25%
- Above ₹24 lakh: 30%
Rebate: A tax rebate of ₹60,000 under Section 87A applies for taxable income up to ₹12 lakh, making income up to ₹12.75 lakh (including standard deduction) tax-free for salaried individuals.
Surcharge: Same as the Old Regime, except the highest surcharge rate is capped at 25% for income above ₹5 crore, reducing the effective tax rate to 39% compared to 42.74% in the Old Regime.
Key Note: The New Regime’s basic exemption limit of ₹4 lakh and rebate up to ₹12 lakh make it more attractive for lower and middle-income earners compared to the Old Regime’s ₹2.5 lakh exemption (or ₹5 lakh with rebate).
Deductions and Exemptions
Old Tax Regime
The Old Regime offers over 70 deductions and exemptions, significantly reducing taxable income. Key examples include:
- Section 80C: Up to ₹1.5 lakh for investments in PPF, ELSS, NSC, life insurance premiums, or home loan principal repayment.
- Section 80D: Up to ₹25,000 (₹50,000 for senior citizens) for health insurance premiums.
- Section 80CCD(1B): Additional ₹50,000 for NPS investments.
- HRA (House Rent Allowance): Exemption for salaried individuals paying rent, calculated based on salary, rent paid, and city of residence.
- Section 24: Up to ₹2 lakh for interest on home loans for self-occupied property.
- Section 80TTA/80TTB: Up to ₹10,000 (₹50,000 for senior citizens) on savings account interest.
- Standard Deduction: ₹50,000 for salaried individuals.
- LTA (Leave Travel Allowance): Exemption for travel expenses within India.
- Other Deductions: Sections 80E (education loan interest), 80G (donations), and 80U (disability).
This regime is ideal for taxpayers with substantial investments or expenses, such as homeowners, those paying high rent, or individuals investing heavily in tax-saving instruments.
New Tax Regime
The New Tax Regime eliminates most deductions and exemptions to simplify tax filing but allows a few:
- Standard Deduction: ₹75,000 for salaried individuals (increased from ₹50,000 in Budget 2024).
- Section 80CCD(2): Employer’s contribution to NPS (up to 14% of basic salary for central government employees, 10% for others).
- Section 80CCH: Deduction for contributions to Agnipath Scheme.
- Section 80JJAA: Deduction for additional employee costs.
- Family Pension: Deduction of ₹15,000 or one-third of the pension, whichever is lower.
- Rental Income: 30% standard deduction on net rental income from let-out property.
Notably, popular deductions like Section 80C, 80D, HRA, and home loan interest (for self-occupied property) are not available, making this regime less beneficial for those with significant tax-saving investments or expenses.
Key Differences
| Feature | Old Tax Regime | New Tax Regime |
|---|---|---|
| Tax Rates | Higher rates, progressive slabs based on age. | Lower rates, uniform slabs for all ages. |
| Basic Exemption Limit | ₹2.5 lakh (below 60), ₹3 lakh (60-79 years), ₹5 lakh (80+ years). | ₹4 lakh for all taxpayers. |
| Rebate (Section 87A) | Up to ₹12,500 for income up to ₹5 lakh. | Up to ₹60,000 for income up to ₹12 lakh. |
| Standard Deduction | ₹50,000 for salaried individuals. | ₹75,000 for salaried individuals. |
| Deductions/Exemptions | Over 70, including 80C, 80D, HRA, LTA, home loan interest, etc. | Limited to 80CCD(2), 80CCH, 80JJAA, family pension, and rental income deduction. |
| Surcharge | Up to 37% for income above ₹5 crore (effective tax rate 42.74%). | Up to 25% for income above ₹5 crore (effective tax rate 39%). |
| Flexibility | Encourages tax-saving investments; complex compliance. | Simplifies tax filing; fewer deductions. |
| Default Option | Must opt-in explicitly when filing ITR. | Default regime since AY 2024-25. |
Which Regime is Better? Scenarios and Examples
The choice between the Old and New Tax Regimes depends on your income level, deductions, and financial goals. Below are two examples to illustrate:
Example 1: Salaried Individual with Moderate Deductions
Profile: Mr. A, aged 45, earns ₹10 lakh annually (gross salary). He claims:
- ₹1.5 lakh under Section 80C (PPF, ELSS).
- ₹30,000 under Section 80D (health insurance).
- ₹50,000 standard deduction.
- No HRA or other exemptions.
Tax Calculation (FY 2025-26):
- Old Regime:
- Gross Income: ₹10,00,000
- Deductions: ₹1,50,000 (80C) + ₹30,000 (80D) + ₹50,000 (standard) = ₹2,30,000
- Taxable Income: ₹10,00,000 – ₹2,30,000 = ₹7,70,000
- Tax:
- ₹0–2.5 lakh: Nil
- ₹2.5–5 lakh: 5% of ₹2.5 lakh = ₹12,500
- ₹5–7.7 lakh: 20% of ₹2.7 lakh = ₹54,000
- Total Tax: ₹12,500 + ₹54,000 = ₹66,500
- Cess (4%): ₹2,660
- Final Tax: ₹69,160
- New Regime:
- Gross Income: ₹10,00,000
- Deduction: ₹75,000 (standard)
- Taxable Income: ₹10,00,000 – ₹75,000 = ₹9,25,000
- Tax:
- ₹0–4 lakh: Nil
- ₹4–8 lakh: 5% of ₹4 lakh = ₹20,000
- ₹8–9.25 lakh: 10% of ₹1.25 lakh = ₹12,500
- Total Tax: ₹20,000 + ₹12,500 = ₹32,500
- Cess (4%): ₹1,300
- Final Tax: ₹33,800
Verdict: The New Tax Regime is better, saving Mr. A ₹35,360 (₹69,160 – ₹33,800) due to lower tax rates and a higher rebate, despite fewer deductions.
Example 2: Salaried Individual with High Deductions
Profile: Mr. B, aged 50, earns ₹25 lakh annually. He claims:
- ₹4 lakh HRA exemption (rent paid in metro city).
- ₹1.5 lakh under Section 80C.
- ₹50,000 under Section 80D.
- ₹50,000 under Section 80CCD(1B).
- ₹2 lakh under Section 24 (home loan interest).
- ₹50,000 standard deduction.
Tax Calculation (FY 2025-26):
- Old Regime:
- Gross Income: ₹25,00,000
- Deductions: ₹4,00,000 (HRA) + ₹1,50,000 (80C) + ₹50,000 (80D) + ₹50,000 (80CCD(1B)) + ₹2,00,000 (24) + ₹50,000 (standard) = ₹8,50,000
- Taxable Income: ₹25,00,000 – ₹8,50,000 = ₹16,50,000
- Tax:
- ₹0–2.5 lakh: Nil
- ₹2.5–5 lakh: 5% of ₹2.5 lakh = ₹12,500
- ₹5–10 lakh: 20% of ₹5 lakh = ₹1,00,000
- ₹10–16.5 lakh: 30% of ₹6.5 lakh = ₹1,95,000
- Total Tax: ₹12,500 + ₹1,00,000 + ₹1,95,000 = ₹3,07,500
- Cess (4%): ₹12,300
- Final Tax: ₹3,19,800
- New Regime:
- Gross Income: ₹25,00,000
- Deduction: ₹75,000 (standard)
- Taxable Income: ₹25,00,000 – ₹75,000 = ₹24,25,000
- Tax:
- ₹0–4 lakh: Nil
- ₹4–8 lakh: 5% of ₹4 lakh = ₹20,000
- ₹8–12 lakh: 10% of ₹4 lakh = ₹40,000
- ₹12–16 lakh: 15% of ₹4 lakh = ₹60,000
- ₹16–20 lakh: 20% of ₹4 lakh = ₹80,000
- ₹20–24 lakh: 25% of ₹4 lakh = ₹1,00,000
- ₹24–24.25 lakh: 30% of ₹0.25 lakh = ₹7,500
- Total Tax: ₹20,000 + ₹40,000 + ₹60,000 + ₹80,000 + ₹1,00,000 + ₹7,500 = ₹3,07,500
- Cess (4%): ₹12,300
- Final Tax: ₹3,19,800
Verdict: The Old Regime is better, saving Mr. B ₹15,600 (₹3,19,800 – ₹3,04,200) due to substantial deductions reducing taxable income significantly.
Break-Even Deduction Analysis
The Old Regime becomes more beneficial when deductions exceed a certain threshold. For FY 2025-26, the approximate break-even deduction levels are:
- Income ₹10 lakh: Deductions above ₹2.5–3 lakh make the Old Regime better.
- Income ₹15 lakh: Deductions above ₹3.75 lakh favor the Old Regime.
- Income ₹25 lakh: Deductions above ₹4.5–5 lakh make the Old Regime more advantageous.
Use an online tax calculator, such as the one provided by ClearTax, to compute exact break-even points based on your income and deductions.
Pros and Cons
Old Tax Regime
Pros:
- Offers multiple deductions (e.g., 80C, 80D, HRA, home loan interest) to lower taxable income.
- Beneficial for high-income earners with significant investments or expenses.
- Higher exemption limits for senior citizens (₹3 lakh) and super senior citizens (₹5 lakh).
- Encourages disciplined savings through tax-saving instruments like PPF, NPS, and ELSS.
Cons:
- Higher tax rates compared to the New Regime.
- Complex compliance due to documentation for deductions.
- Less appealing for those with minimal deductions.
New Tax Regime
Pros:
- Lower tax rates and a higher basic exemption limit (₹4 lakh).
- Tax-free income up to ₹12.75 lakh for salaried individuals due to ₹60,000 rebate and ₹75,000 standard deduction.
- Simplified tax filing with fewer deductions, reducing paperwork.
- Lower surcharge (25% vs. 37%) for income above ₹5 crore.
- Ideal for new taxpayers, NRIs, or those with limited tax-saving investments.
Cons:
- Limited deductions, unsuitable for those with high HRA, home loan interest, or investment-related expenses.
- No special exemption limits for senior citizens.
- No incentive for tax-saving investments, potentially discouraging long-term savings.
Who Should Choose Which Regime?
- Choose Old Tax Regime If:
- You have deductions exceeding ₹2.5–3.75 lakh (e.g., HRA, home loan interest, 80C, 80D).
- You’re a homeowner paying significant interest on a home loan.
- You’re a senior citizen benefiting from higher exemption limits (₹3 lakh or ₹5 lakh).
- You prefer tax-saving investments for long-term financial goals (e.g., PPF, NPS).
- Example: Mr. B with ₹25 lakh income and ₹8.5 lakh deductions benefits more from the Old Regime.
- Choose New Tax Regime If:
- You have minimal deductions (less than ₹2.5 lakh).
- Your income is up to ₹12.75 lakh, qualifying for zero tax liability.
- You prefer simplicity and less documentation.
- You’re an NRI or new taxpayer with limited tax-saving investments.
- Example: Mr. A with ₹10 lakh income and ₹2.3 lakh deductions saves more with the New Regime.
Additional Considerations
- Flexibility for Salaried Individuals: Salaried taxpayers can switch between regimes annually when filing ITR, offering flexibility to adapt to changing financial situations. Business or professional income taxpayers must file Form 10-IEA to opt out of the New Regime and can switch only once unless business income ceases.
- Capital Gains: Tax rates for capital gains (e.g., short-term or long-term) remain the same under both regimes, so the choice of regime doesn’t impact capital gains tax.
- Tax Planning: The Old Regime encourages disciplined savings, while the New Regime suits those prioritizing liquidity over tax-saving investments.
- NRIs: NRIs with minimal deductions may find the New Regime simpler, but those with significant investments or rental income may prefer the Old Regime.
How to Decide?
- Calculate Total Deductions: Sum up eligible deductions (e.g., 80C, 80D, HRA, home loan interest) under the Old Regime.
- Compare Tax Liability: Use an online tax calculator (e.g., ClearTax or 1Finance) to compute tax under both regimes based on your income and deductions.
- Assess Financial Goals: If you prioritize long-term savings, the Old Regime’s deductions align with investment schemes. If simplicity and liquidity are key, choose the New Regime.
- Consult a Tax Advisor: For complex cases, especially for high-income earners or NRIs, professional advice can optimize your choice.
Conclusion
The choice between the Old and New Tax Regimes for FY 2025-26 depends on your income, deductions, and financial priorities. The New Tax Regime is more beneficial for salaried individuals with income up to ₹12.75 lakh or minimal deductions, offering simplicity and lower tax rates. The Old Tax Regime suits those with substantial deductions (e.g., HRA, home loan interest, or 80C investments) or senior citizens leveraging higher exemption limits. Always calculate tax liability under both regimes using a reliable calculator and consult a tax professional for personalized guidance. Make an informed choice to maximize your savings while aligning with your financial goals.
Disclaimer: Tax laws are subject to change, and individual circumstances vary. Consult a chartered accountant or tax advisor before filing your ITR. For more details, visit the Income Tax Department’s official website or trusted platforms like ClearTax or IndiaFilings.