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  7. Old vs New Tax Regime: Best Option for Salaried Individuals

Old vs New Tax Regime: Best Option for Salaried Individuals

Updated on: 17 Feb, 2025 03:44 PM

The Indian tax system offers salaried individuals two options for filing their Income Tax Return (ITR),i.e., the old tax regime and the new tax regime. Each regime has its own set of tax slabs, deductions, and exemptions. Choosing the right regime can significantly impact your final tax liability. This article will guide you through the intricacies of both regimes, helping you determine which one offers the most tax benefit for your specific situation as a salaried individual.

Budget Update 2025

No Income Tax on Annual Salary Income Up to ₹12.75 Lakh!
The government has raised the Section 87A rebate limit from ₹7 lakh to ₹12 lakh, providing major tax relief to the middle class. Salaried individuals can also claim a ₹75,000 standard deduction, making incomes up to ₹12.75 lakh tax-free.

Revised Tax Slab under New Tax Regime:

  • ₹0 – ₹4 lakh → No Tax
  • ₹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%
  • ₹24 lakh & above → 30%

Extended time for filing updated returns (ITR-U):
Taxpayers now get 4 years (instead of 2) to update or file their Income Tax Returns.

These changes will be effective from 1 April 2025 i.e. for FY 2025-26


Contents

New Tax Regime

The new tax regime was introduced in budget 2020 with concessional tax rates. However, the taxpayers who opted for the new tax regime could not claim major deductions like HRA, LTA, 80C, and many others. As a result, a smaller number of taxpayers opted for the new tax regime. Therefore, the government took various measures to make the new regime more attractive. Given below are some important changes introduced to the new regime -

  • Default Regime:- New tax regime is set as a default regime from FY 2023-24 onwards , which means if you haven’t informed your employer about which regime to choose from, the TDS calculation will be done on the basis of the new tax regime.
    Want to calculate your TDS? Use our TDS Calculator.
  • Tax Rate:- The basic exemption limit under the new tax regime was raised to Rs 3 lakh from Rs 2.5 lakh from FY 23-24 to make the new tax regime more attractive. Furtheron, the proposed income tax slabs in the Union Budget 2025 for the New Tax Regime include a rebate of Rs 60,000 for income up to Rs 12 lakh (Rs 12.75 lakh for salaried individuals including standard deduction) under Section 87A. Thus ensuring that income up to Rs 12 lakh remains tax-free.
  • Rebate Limit:- The rebate under section 87A has been hiked to Rs 7 lakh from Rs 5 lakh under the new tax regime. The rebate benefit will be up to Rs 25000, provided income doesn't exceed the limit of 7 lakhs. As per Union budget 2025, from FY 2025-26, for salaried individuals opting for the new tax regime, income up to Rs. 12,75,000 will be tax-free. Additionally, the Section 87A rebate has been increased to Rs. 60,000, up from the previous threshold of Rs. 25,000 under the new tax regime. This provides significant tax relief to individuals with taxable income up to Rs. 12,75,000 under the new regime.
  • Standard Deduction:- As per budget 2024-25, the standard deduction for salaried employees is increased from ₹50,000 to ₹75,000 for those opting for the new tax regime. Similarly, deduction on family pension for pensioners is proposed to be enhanced from Rs 15,000/- to Rs 25,000/-.
  • Slashed the surcharge limit:- Reduction in the surcharge on annual income above 5 crores from 37% to 25% under the new regime. The highest tax rate is 42.74%, which would slash the maximum tax rate to 39% after this reduction.
  • Leave encashment exemption:- The limit of Rs. 3 lakh for tax exemption on leave encashment on non-government salaried employees has been raised to Rs. 25 lakh.
  • Tax Slabs:- The finance minister Nirmala Sitharaman has made changes in the income tax slabs under the new tax regime in Union Budget 2025. These changes will be effective from 1 April 2025, i.e. for FY 2025-26.
Tax Slab Tax Rate
0-4 lakh Nil
4-8 lakh 5%
8-12 lakh 10%
12-16 lakh 15%
16-20 lakh 20%
20- 24 lakh 25%
Above 24 lakh 30%

Income Tax Slab Rate for New Tax Regime FY 2024-25 (AY 2025-26)

Income Slab (Rs) New Tax Regime Rate FY 2025-26 Income Slab (Rs) New Tax Regime Rate FY 2024-25
Up to 4 lacs Nil Up to 3 lacs Nil
4 lacs - 8 lacs 5% 3 lacs - 7 lacs 5%
8 lacs - 12 lacs 10% 7 lacs - 10 lacs 10%
12 lacs - 16 lacs 15% 10 lacs - 12 lacs 15%
16 lacs - 20 lacs 20% 12 lacs - 15 lacs 20%
20 lacs - 24 lacs 25% Above 15 lacs 30%
Above 24 lacs 30%

Old Tax Regime FY 2024-25 (AY 2025-26)

No changes has been introduced under old tax regime. Finance Minister Nirmala Sitharaman instead made adjustments to the slabs, rates, and rebates within the new regime. The Centre has once again aimed to enhance the appeal of the New Tax Regime by introducing lower tax rates and reducing deductions. This restructuring aims to simplify taxation, while the Old Regime continues to provide tax benefits through various exemptions and deductions. The old Tax regime offers more than 70 deductions and exemptions to claims like Section 80C, HRA, LTA, and more.

You can read more about income tax slabs here.

Old vs New Tax Regime: Key Differences After Budget 2025

  • Higher Taxes Beyond ₹12 Lakh: The new tax regime leads to higher taxes for incomes above ₹12 lakh unless deductions under the old regime are maximized.
  • When the Old Regime Wins:
    • If you earn ₹13.75 lakh (without HRA), the old regime results in a lower tax of ₹57,500 compared to ₹75,000 under the new regime—provided you invest ₹5.25 lakh in tax-saving schemes.
    • This advantage extends up to ₹15.75 lakh, but again, requires ₹5.25 lakh in savings investments.
    • Even with HRA, the old regime remains the better option in this range.
  • When the New Regime Wins:
    • At ₹20 lakh (₹20.75 lakh for salaried individuals), the new tax regime becomes more beneficial. Even after investing ₹5.25 lakh, the old regime would result in a tax of ₹2.4 lakh, while the new regime requires only ₹2 lakh—with no deductions needed.
    • For incomes above ₹24.75 lakh, the new regime is better only if total deductions (excluding the standard deduction) are under ₹8 lakh.
  • Example: ₹24 Lakh Income
    • Old Regime (with ₹5.25 lakh savings) → Tax: ₹3.60 lakh
    • New Regime (no deductions) → Tax: ₹3 lakh
      ???? Savings in New Regime: ₹60,000

Which Tax Regime is Better? New Regime vs Old Regime

With the 2025 Budget announcing zero income tax for individuals earning up to ₹12 lakh under the new tax regime, the choice has become straightforward for them. However, for those with higher incomes, the decision between the old and new tax regimes isn’t as simple—especially if they qualify for substantial deductions under the old regime. The key lies in determining the minimum deductions required to make the old regime more tax-efficient. By understanding this, you can assess whether maximizing deductions makes the old regime worthwhile or if switching to the new regime is the smarter choice.

To decide between the two tax regimes, it's crucial to assess the tax exemptions and deductions available under the old tax regime. After determining the net taxable income under the old regime by accounting for all eligible deductions and exemptions, one can calculate the resulting tax liability.

Next, this tax liability under the old tax regime should be compared with the tax liability under the new tax regime. Opting for the regime with the lower tax liability is typically the preferred choice. It's important to inform the employer of this decision so that they can adjust the TDS (Tax Deducted at Source) from the salary accordingly. This ensures that the correct amount of tax is deducted each month, aligning with the chosen tax regime and minimizing the chances of any tax dues or refunds at the end of the financial year.

Are you facing any challenges or have confusion about which tax regime to select from? Tax2win tax expert helps you calculate the tax liability, suggests the best option as per your income and deductions, and file your ITR. Hire a tax expert.

Breakeven Threshold to Decide Which Regime to Choose: New vs Old Tax Regime

The table below highlights the equalisation point—the minimum tax deductions required under the old tax regime to match the tax liability under the new tax regime. If your total deductions exceed the amounts mentioned in the table, you will pay less tax in the old regime than in the new regime.

Understanding this equalisation point is crucial for making an informed decision on whether to opt for the old or new tax regime, especially if your salary income exceeds a certain threshold.

Equilisation table

Gross taxable income Income tax payable under old tax regime Proposed income tax under new tax regime Deductions to pay same tax in both tax regimes
Rs 12,75,000 Nil Nil Rs 7,75,000
Rs 15,00,000 Rs 97,500 Rs 97,500 Rs 5,93,750
Rs 16,00,000 Rs 1,13,100 Rs 1,13,100 Rs 6,18,750
Rs 20,00,000 Rs 1,92,400 Rs 1,92,400 Rs 7,58,333
Rs 24,75,000 Rs 3,12,000 Rs 3,12,000 Rs 8,50,000
Rs 25,00,000 Rs 3,19,800 Rs 3,19,800 Rs 8,50,000

The equalisation point between the old and new tax regimes helps determine which option is more tax-efficient for salaried individuals earning above ₹12.75 lakh. This is the level of tax deductions required under the old tax regime to ensure the tax payable remains the same as in the new regime. If deductions exceed this threshold, the old regime becomes more beneficial. For example, if your annual salary is ₹15 lakh, you would need to claim at least ₹5,93,750 in deductions to equalize tax liability at ₹97,500 under both regimes. Even a slight increase in deductions beyond this point, say ₹5,93,751, would make the old regime more tax-efficient. The higher your deductions, the greater your tax savings under the old regime. This makes understanding the equalisation point crucial in making an informed choice between the two tax structures.

Deductions which can be claimed under the old tax regime and new tax regime

Deductions under Old Tax Regime (Section/Type) Amount Deductions under New Tax Regime (Section/Type) Amount
Section 80C (Investment in PPF, NSC, Life Insurance Premium, ELSS, etc.) Up to Rs. 1.5 lakh Not available -
Section 80D (Health insurance premium) Varies based on premium,age Not available -
Standard Deduction (for salaried individuals) Rs. 50,000 Available Rs. 75,000 (FY 2024-25, 2025-26) and Rs. 50,000 (FY 2023-24)
House Rent Allowance (HRA) Available (based on actuals) Not available -
Leave Travel Allowance (LTA) Available (based on actuals) Not available -
Interest on Housing Loan (Section 24) (for self-occupied property) Deduction up to Rs. 2 lakh Not available -
Interest on Housing Loan (Section 24) (for let out property) Available (based on actuals) Available (based on actuals)
Section 80E (Interest on education loan) Available Not available -
Section 80G (Donations to charitable institutions) Available (based on donation amount) Not available -
Section 80TTA/80TTB (Interest on savings bank account/interest for senior citizens) Up to Rs. 10,000 u/s 80TTA
(Rs. 50,000 for senior citizens u/s 80TTB)		 Not available -
Entertainment Allowance Available for government employees Not available -
Professional Tax (for salaried individuals) Actual amount paid, up to Rs. 2,500 annually Not available -
Additional Depreciation (Section 32(1)(iia)) Available for businesses Not available -
Income from House Property Loss Set-off Allowed (set off with other income) Not available -
Children’s Education Allowance Rs. 100 per month per child (up to two children) Not available -
Transport Allowance (for specially abled) Rs. 1,600 per month Not available -
Section 80CCD(1B) Up to Rs. 50,000 made to NPS Not available
Section 80EEA Up to ₹1.5 lakh deduction for interest payments on loan for first-time residential house property acquisition (loan sanctioned between 1st April 2019 to 31st March 2022) Not available
Section 80EEB Up to ₹1.5 lakh deduction for interest payments on loan for purchase of Electric Vehicle (loan sanctioned between 1st April 2019 to 31st March 2023) Not available
Section 80CCD(2) - Employer's Contribution to NPS Available -
Govt - 14% of their salary (basic + DA)
Others - 10% of salary (basic + DA)		 Available Govt - 14% of their salary (basic + DA)
Others - 14% of salary (basic + DA)

Have you also been stuck between the choice of a more beneficial tax regime?? Relax!! We have made it easier for you. Use our Old vs New Tax Regime Calculator.

Now that you have made your choice and selected the regime, the next step is calculating the tax liability as per the chosen regime and filing the ITR. Tax2win’s tax experts help you with ITR e-filing while ensuring maximum savings and tax deductions. Hire an Online CA Now!

Frequently Asked Questions

Q- What is new tax regime exemption?

The new tax regime offers a simplified tax structure with fewer deductions and exemptions compared to the old regime. While this makes calculations easier, it also means you might end up paying more tax if you were availing significant deductions in the old regime.

Q- What are the deductions available in new tax regime?

The new tax regime offers a simplified tax structure with limited deductions compared to the old regime. While you can't claim popular deductions like those under Section 80C, you can still avail a standard deduction of ₹75,000 for the financial year 2024-25. Additionally, family pensioners can claim a deduction of ₹25,000. Employer contributions to the National Pension System (NPS) under Section 80CCD(2) are also deductible. While not deductions, certain exemptions like those for perquisites for official purposes and under Sections 10(10), 10(10A), and 10(10AA) apply.

Q- What is the old tax regime?

The old tax regime is the existing tax structure under which taxpayers can claim various deductions and exemptions under different sections of the Income Tax Act. It has a higher tax rate but allows taxpayers to claim tax benefits on various investments and expenses.

Q- What is the new tax regime?

The new tax regime is a simplified tax structure introduced in Budget 2020, under which taxpayers can pay lower taxes but have to forego maximum deductions and exemptions. The new tax regime has lower tax rates than the old regime but eliminates the tax benefits of various investments and expenses.

Q- Is new tax regime better for salaried employees?

The choice between the old and new tax regime depends on individual preferences and financial goals. The new regime offers lower tax rates but fewer deductions and exemptions compared to the old regime. Salaried employees should evaluate their specific circumstances and consult with a tax expert to determine which regime is more beneficial for them.

Q- Can I switch between the old and new tax regime?

Yes, taxpayers can switch between the old and new tax regimes every year at the time of filing their tax returns. However, once you opt for the new tax regime for a year, you cannot claim any tax benefits available in the old tax regime. Also, for individuals with income from business and profession, the tax regime opted for in the previous tax returns also applies to the subsequent years.

Q- Are there any limitations to the new tax regime?

Yes, the new tax regime does not allow taxpayers to claim deductions under sections 80C, 80D, 80E, 80G, and others. It also eliminates the tax benefits of maximum exempt allowances like House Rent Allowance (HRA) and leave travel allowance (LTA), etc.

Q- Can I claim deductions under both the old and new tax regimes?

No, you cannot claim deductions under both the old and new tax regimes for the same financial year.

Q- Which tax regime is more advantageous for me if my income is 15 lakhs?

The choice between the two regimes depends on your tax-saving investments and expenses. If you have made tax-saving investments of more than Rs. 5,37,500, you may be better off with the old regime. You may benefit from the new regime if you have made tax-saving investments of less than Rs. 5,37,500.

Q- Which tax regime is more favorable for me if my income is 20 lakhs?

Generally, if your deductible investments and expenses exceed Rs. 7,08,333 per year, the old regime could be more beneficial.

If your deductions are limited or negligible, the new regime might be simpler and more efficient.

Q- Which tax regime is more optimal for me if my income is 25 lakhs?

Generally, the new regime is more beneficial unless you utilize deductions exceeding Rs 7.75 lakhs.

Utilizing maximum deductions under 80C, 80D, etc., can bring your taxable income under the lower slabs in the old regime, leading to a lower tax burden.

Q- Which tax regime is more profitable for me if my income is 50 lakhs?

The New tax regime is better for a salary of Rs 50 lakhs, saving you Rs 240000.

Here's a comparison of the tax liabilities under both regimes:

Tax Regime Tax Payable
New Regime Rs 10,57,500
Old Regime Rs 1297500

The new regime offers a significant tax saving of Rs 2,40,000 even without claiming any deductions. This is because the highest tax rate in the new regime (30%) is lower than the highest tax rate in the old regime (30%).

Therefore, if you have a salary of Rs 50 lakhs, the new tax regime is better for you.

Here are some additional factors to consider:

  • If you have investments or expenses that are eligible for deductions under the old regime, you may be able to save even more tax by opting for the old regime.
  • The old regime may also be beneficial if you are planning to retire soon, as you may be in a lower tax bracket in your retirement years.
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CA Abhishek Soni

CA Abhishek Soni
Founder & CEO at Tax2win

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Abhishek Soni is a Chartered Accountant by profession and an entrepreneur by passion. He has wide industry experience in telecom, retail, manufacturing, and entertainment and has handled various national and international assignments. He is the co-founder and CEO of Tax2win.in. Tax2win, an online tax filing platform, provides the easiest way to e-file your Income Tax Return in India. Through Tax2win.in, Abhishek endeavors to revolutionize how individuals file their income tax returns, offering a seamless and user-friendly experience.