Understanding India’s New vs. Old Tax Regime for FY 2025-2026: Which One Should You Choose?
The Indian tax system has undergone significant changes over the years, with the introduction of the new tax regime in Budget 2020. Now, with the Union Budget 2025, the government has revised the new tax regime with varied tax slabs and a modified rebate rate, effective from April 1, 2025.
For salaried employees, choosing between the old and new tax regimes can impact their take-home salary and savings. In this blog, we will break down the key differences, benefits, and tax calculations with examples to help you make an informed decision.
Overview of the Old and New Tax Regimes
Old Tax Regime
The old tax regime allows taxpayers to claim deductions and exemptions under sections like 80C, 80D, HRA, LTA, and more. It benefits individuals who have significant investments in tax-saving instruments or expenses that qualify for deductions.
New Tax Regime
The new tax regime, introduced to simplify taxation, offers lower tax rates but eliminates most deductions and exemptions. It is ideal for individuals who prefer a straightforward tax calculation process without investing in tax-saving instruments.
Key Differences Between the Old and New Tax Regimes
| Feature | Old Tax Regime | New Tax Regime |
|---|---|---|
| Tax Slabs | Higher tax rates with more slabs | Lower tax rates with fewer slabs |
| Deductions/Exemptions | Available (e.g., 80C, 80D, HRA, LTA) | Not available (except standard deduction) |
| Standard Deduction | ₹25,000 | ₹75,000 |
| Flexibility | Can switch between regimes annually | Can switch between regimes annually |
| Ideal For | Individuals with high investments/expenses | Individuals with minimal investments |
Tax Slabs for FY 2025-2026 (Old vs. New Regime)
Old Tax Regime Slabs (With Deductions)
| Income Range (₹) | Tax Rate | Tax Amount |
|---|---|---|
| Up to ₹2.5 lakh | 0% | 0 |
| ₹2.5 lakh – ₹5 lakh | 5% | ₹12,500 |
| ₹5 lakh – ₹10 lakh | 20% | ₹1,00,000 |
| Above ₹10 lakh | 30% | As applicable |
Income Tax Slabs for FY 2025-26 (New Tax Regime)
| Annual Income Range (₹) | Tax Rate (%) |
|---|---|
| Up to 4,00,000 | Nil |
| 4,00,001 to 8,00,000 | 5% |
| 8,00,001 to 12,00,000 | 10% |
| 12,00,001 to 16,00,000 | 15% |
| 16,00,001 to 20,00,000 | 20% |
| 20,00,001 to 24,00,000 | 25% |
| Above 24,00,000 | 30% |
Additionally, a standard deduction of ₹75,000 is available under the new tax regime.
Benefits of the Old Tax Regime
Higher Tax Savings Through Deductions
The old tax regime allows various deductions and exemptions that can significantly reduce taxable income, leading to lower tax liability.
Section 80C (₹1,50,000 deduction)
- Investments like PPF, EPF, ELSS, NSC, Life Insurance, Tuition Fees
✔ Section 80D (₹25,000 – ₹50,000 deduction for health insurance) - Medical insurance premium for self, family, and parents
✔ Home Loan Interest (Section 24b – ₹2,00,000 deduction) - Interest paid on a home loan reduces taxable income
✔ HRA (House Rent Allowance) - Tax-free component for those paying rent
✔ LTA (Leave Travel Allowance) - Helps save tax on travel expenses
Best for taxpayers who maximize deductions.
Suitable for Salaried Individuals with Fixed Expenses
- Employees with high HRA, medical expenses, or home loans benefit more under the old regime.
- Tax-free components like food coupons, transport allowance, and professional tax still exist.
Best for salaried individuals with planned deductions.
Encourages Long-Term Savings & Investments
- Old tax regime promotes disciplined savings in long-term investment tools like PPF, NPS, and LIC.
- Helps in retirement planning and financial security.
Ideal for risk-averse investors looking for stable returns.
Tax-Free Gratuity & Leave Encashment
- Gratuity up to ₹20 lakh is tax-free for private employees under the old regime.
- Leave encashment benefits help in reducing tax burden at retirement.
Beneficial for individuals planning long-term employment.
Better for Individuals with Lower Gross Income
- Those earning up to ₹7 lakh can fully utilize deductions and pay little to no tax.
- The rebate under Section 87A ensures tax-free income up to ₹5 lakh (after deductions).
Best for middle-class taxpayers with moderate salaries.
Who Should Choose the Old Regime?
- Individuals who invest in PPF, NPS, Life Insurance, ELSS, etc.
- Salaried employees with HRA, home loans, and medical expenses
- Those who prefer structured financial planning & long-term savings
- Retirees or professionals with gratuity and leave encashment benefits
If you claim high deductions (₹3-4 lakh), the old tax regime is better.
Benefits of the New Tax Regime
Higher Basic Exemption Limit
- The basic exemption limit is increased to ₹4,00,000 (compared to ₹2,50,000 in the old regime).
- This benefits low-income earners by reducing taxable income.
Lower Tax Rates & Simplified Slabs
- The tax rates are lower compared to the old regime.
- Example: Income between ₹8-12 lakh is taxed at 10% instead of 20% in the old regime.
Standard Deduction of ₹75,000
- A standard deduction of ₹75,000 is available for salaried individuals and pensioners, reducing taxable income without requiring additional investments.
No Need for Investment Proofs
- Unlike the old regime, taxpayers do not need to invest in specific schemes (like PPF, ELSS, LIC, etc.) to claim deductions.
- This provides more flexibility in financial planning.
Higher Take-Home Salary
- Since less tax is deducted at source (TDS), salaried individuals get higher in-hand income throughout the year.
No Compliance Hassles
- Fewer documentation requirements, as exemptions and deductions are limited, making tax filing easier and quicker.
Suitable for Middle-Income Earners
- The new regime benefits taxpayers who do not have major investments in tax-saving instruments but still want a lower tax burden.
No Surcharge for Income up to ₹5 Crore
- The highest surcharge rate is reduced, benefiting high-income earners.
Who Should Choose the New Tax Regime?
- Individuals with fewer investments in tax-saving schemes.
- Salaried employees who want a higher take-home salary.
- Self-employed professionals who prefer a simpler tax structur.
Which Regime Should You Choose?
Choose the Old Regime if:
- You have significant investments in tax-saving instruments.
- You claim deductions like HRA, LTA, or home loan interest.
- Your total deductions exceed ₹3.75 lakh (including standard deduction).
Choose the New Regime if:
- You have minimal investments or expenses eligible for deductions.
- You prefer a simpler tax calculation process.
- Your income is moderate, and you don’t invest in tax-saving instruments.
Assumptions
- Old Regime includes deductions:
- Standard Deduction: ₹50,000
- Section 80C (Investments like PPF, ELSS, LIC): ₹1,50,000
- Section 80D (Health Insurance): ₹25,000
- HRA and Other Deductions: ₹75,000 (where applicable)
- New Regime includes only the ₹75,000 standard deduction and has lower tax rates.
Example 1: ₹8 LPA (₹8,00,000 per annum)
| Details | Old Regime (₹) | New Regime (₹) |
|---|---|---|
| Gross Salary | 8,00,000.00 | 8,00,000.00 |
| Standard Deduction | -50,000.00 | -75,000.00 |
| Other Deductions (80C, 80D, HRA) | -2,50,000.00 | – |
| Taxable Income | 5,00,000.00 | 7,25,000.00 |
| Tax Payable | 0 (Rebate under 87A) | 16,250.00 |
| Final Tax Liability | – | 16,250.00 |
Old Regime is better for ₹8 LPA due to 87A rebate (tax becomes zero).
Example 2: ₹12 LPA (₹12,00,000 per annum)
| Details | Old Regime (₹) | New Regime (₹) |
|---|---|---|
| Gross Salary | 18,00,000 | 18,00,000 |
| Standard Deduction | -50,000 | -75,000 |
| Other Deductions (80C, 80D, HRA) | -2,50,000 | – |
| Taxable Income | 15,00,000 | 17,25,000 |
| Tax Payable | 1,87,500 | 1,45,000 |
| Final Tax Liability | 1,87,500 | 1,45,000 |
The Old Regime is better due to deductions reducing taxable income.
Example 3: ₹18 LPA (₹18,00,000 per annum)
| Details | Old Regime (₹) | New Regime (₹) |
|---|---|---|
| Gross Salary | 12,00,000 | 12,00,000 |
| Standard Deduction | -50,000 | -75,000 |
| Other Deductions (80C, 80D, HRA) | -2,50,000 | – |
| Taxable Income | 9,00,000 | 11,25,000 |
| Tax Payable | 62,500 | 87,500 |
| Final Tax Liability | 62,500 | 87,500 |
The New Regime is better for ₹18 LPA due to lower tax rates.
How OfficePortal Helps in Choosing the Right Tax Regime
At OfficePortal, our Payroll Management System provides employees with the flexibility to choose between the old and new tax regimes. Our system ensures
- Accurate Payslip Generation with a detailed salary breakdown.
- Clear Salary Component Split to understand deductions and taxable income.
- Easy Switching between tax regimes based on financial needs.
Conclusion
The decision to opt for the old or new tax regime depends on your financial goals, investments, and expenses. Evaluate your deductions and compare your tax liability under both regimes to make an informed choice.
Remember, the new regime offers simplicity, while the old regime provides higher savings for disciplined investors. Choose wisely to maximize your take-home salary!
💡 Stay tax-smart with OfficePortal’s payroll solutions!
For more details about the new tax regime, visit the official Income Tax website.