In February 2025, the Government of India announced major changes in its personal income tax system. Two regimes are available: the Old Tax Regime, which allows many deductions and exemptions, and the New Tax Regime, which offers lower tax rates but fewer exemptions.
What is the Old Tax Regime?
The Old Tax Regime follows the traditional structure. Tax slabs are straightforward:
- For individuals (below 60), no tax is payable up to ₹ 2.5 lakh of income. Anything above that is taxed at 5%, 20%, and 30% as income increases.
- More importantly, this regime allows many exemptions and deductions. These include House Rent Allowance (HRA), Leave Travel Allowance (LTA), Section 80C investments (up to ₹1.5 lakh in PPF, life insurance, EPF etc.), 80D medical insurance, home loan interest under Section 24, and others.
This makes it attractive for taxpayers who invest in tax‑saving instruments or incur taxable expenses like rent or medical insurance.
What is the New Tax Regime?
Introduced in 2020, the New Tax Regime offers simpler structure and lower rates but removes most exemptions.
Key features after the Budget 2025 changes:
- The basic exemption limit is raised to ₹ 4 lakh, so income up to that is tax‑free.
- Income between ₹ 4–8 lakh is taxed at 5%, ₹ 8–12 lakh at 10%, ₹ 12–16 lakh at 15%, ₹ 16–20 lakh at 20%, ₹ 20–24 lakh at 25%, and above ₹ 24 lakh at 30%.
- A standard deduction of ₹ 75,000 is available for salaried individuals.
- The Section 87A tax rebate is increased to ₹ 60,000, which effectively makes income up to ₹ 12 lakh tax‑free. Combined with the standard deduction, salaried taxpayers owe zero tax up to ₹ 12.75 lakh.
- Most other deductions like HRA, LTA, 80C, 80D are not allowed. Only employer contribution to NPS/EPF (as applicable) remains deductible under certain limits.
Major Tax Changes in Budget 2025
A special feature of Budget 2025 (presented on 1 February 2025) was a substantial increase in relief to the middle class. The non‑taxable limit under the new regime was raised from ₹ 7 lakh to ₹ 12 lakh. After standard deduction, income up to ₹ 12.75 lakh becomes tax‑free for salaried people.
This bold change was intended to put more money back into household pockets, boost consumption, savings and investments—and simplify tax planning.
How Do the Two Regimes Compare?
Tax Slabs and Break‑Even
Under the Old Regime, slabs are: 0% up to ₹ 2.5 lakh, 5% up to ₹ 5 lakh, 20% to ₹ 10 lakh, and 30% beyond ₹ 10 lakh.
Under the New Regime, slabs start at 0% up to ₹ 4 lakh, with progressive rates up to ₹ 24 lakh and 30% beyond.
Because the new regime removed exemptions and raised the rebate threshold, taxpayers now pay less tax early on in new regime even without deductions.
Deductions and Exemptions
In the Old Regime, taxpayers can reduce their taxable income significantly via HRA, LTA, 80C, 80D, home loan interest, etc.—often saving much tax if their investments or rent payments are high.
In the New Regime, nearly all of these are disallowed. Only the standard deduction of ₹ 75,000 and limited employer NPS/EPF contributions are allowed. LTA is fully taxable.
Who Pays Less Tax?
Experts with EY India estimate that for those earning above ₹ 24.75 lakh (gross), the new regime is beneficial if total deductions (excluding standard deduction) in the old regime are below ₹ 8 lakh. Above that, old regime might be better.
Examples:
- At a gross salary of ₹ 14 lakh or ₹ 18 lakh, taxpayers who claim meaningful deductions under 80C, HRA, etc. often save more under the old regime.
- If deductions are small or you don’t claim exemptions, even higher incomes may benefit from the new regime due to its simpler, lower rate structure. Pros and Cons in Simple Words
The Old Tax Regime
Advantages
It allows many tax‑saving tools. If you invest in a range of schemes (PPF, insurance, medical cover), and have rent or home loan interest, you can reduce taxable income significantly. This may result in large actual savings.
Drawbacks
Higher slabs once exemptions are exhausted (20% and 30%) can mean more tax if you don’t claim enough deductions. Calculations become more complex—tracking receipts, proofs, timelines etc.
The New Tax Regime
Advantages
Very simple. Lower rates and clear thresholds. With ₹ 12.75 lakh tax‑free for salaried persons, most middle‑class workers pay no tax if income is within that. No need to invest purely for tax relief.
Drawbacks
You cannot claim HRA, LTA, 80C investments, 80D medical premium, and so on. So if you do invest and qualify, you might lose that benefit by choosing the new regime.
How to Choose: Step by Step
Every taxpayer should calculate both ways:
- Total your eligible deductions and exemptions in the old regime.
- Compute tax under old regime using those.
- Compute tax under new regime: flat slabs, ₹ 75,000 standard deduction, ₹ 60,000 rebate.
- Compare tax liability. Use whichever gives lower tax.
This is especially important at the time of Online ITR filing, because you must make a final choice between the two.
Who Typically Benefits from Which Regime?
- If you don’t invest much in tax-saving instruments, and your income is below ₹ 12.75 lakh, the New Regime is almost always better.
- If you have high investments in 80C, pay rent (HRA), or pay medical insurance premiums, home loan interest, and your gross income is ₹ 14 lakh or ₹ 18 lakh or more, the Old Regime might save you more in tax.
- For incomes above ₹ 24 lakh, if you cannot claim at least ₹ 8 lakh in deductions, the New Regime often results in lower tax.
Illustrative Examples
Let’s take a few fictional cases to illustrate:
Example A: Income ₹ 11 lakh, minimal deductions
- Under New Regime: ₹ 11 lakh minus ₹ 75,000 standard deduction = ₹ 10.25 lakh. Rebate covers ₹ 60,000 so tax effectively zero.
- Under Old Regime: Taxable income perhaps ₹ 9 lakh (if you claim ₹ 50k standard + some 80C). You may still pay some tax at 10‑20% slabs. So New Regime is clearly better.
Example B: Income ₹ 18 lakh, ₹ 2.5 lakh deductions (80C etc.)
- Old Regime: ₹ 18 lakh – ₹ 2.5 lakh – ₹ 50k standard = ₹ 15 lakh taxable. Tax at 20–30% plus cess → maybe ₹ 2.1 lakh.
- New Regime: ₹ 18 lakh – ₹ 75k → ₹ 17.25 lakh taxable, tax at 15–20% etc → maybe ₹ 2 lakh. Slightly better, unless your deductions are more.
Example C: Income ₹ 22 lakh, ₹ 5 lakh deductions including HRA and home loan
- Old Regime: ₹ 22 – ₹ 5 lakh – ₹ 50k = ₹ 16.5 lakh taxable → taxed in higher bracket but less overall.
- New Regime: ₹ 22 lakh – ₹ 75k = ₹ 21.25 lakh → higher tax. Old Regime wins.
Such illustrations mirror the findings in EY’s analysis.
Some Key Notes to Remember
- LTA in new regime is fully taxable, i.e. no exemption.
- HRA, Section 80C, 80D, home loan interestare not allowed under new regime.
- Standard deduction of ₹ 75,000 is allowed under new regime (compared to ₹ 50k earlier).
- The rebate threshold under Section 87A is ₹ 60,000 rebate for incomes up to ₹ 12 lakh.
- Many experts now say home loan interest alone shouldn’t be the deciding factor—you need to look at your full deduction basket.
Final Tips for the Taxpayer
To make a wise choice, follow these steps:
- Gather details of your salary structure, HRA, LTA, deductions under Section 80C, 80D, home loan interest, etc. for the year.
- Compute tax under Old Regime using the applicable slabs plus standard deduction (₹ 50k) and all exemptions/deductions you qualify for.
- Compute tax under New Regime using the updated slabs (0 up to ₹ 4 lakh, etc.), after subtracting ₹ 75k standard deduction plus applying the ₹ 60k rebate (up to ₹ 12 lakh), and no other deductions.
- Compare the two. Choose the regime with lower total tax. That will maximize take‑home pay.
- While filing ITR for FY 2024–25 (Assessment Year 2025–26), you have to opt‑in for the old regime explicitly; otherwise the new regime is default.
Conclusion
The Budget 2025 has made the New Tax Regime significantly more attractive by raising tax‑free income to ₹ 12.75 lakh for salaried individuals and simplifying tax planning. For taxpayers who don’t claim many deductions, or whose income is within that range, the New Regime is usually better.
However, if you have legitimate high deductions under 80C, HRA, home loan interest or medical insurance, and your income is higher, the Old Regime may still offer more savings despite higher tax slabs.
The best and safest approach is to compute your tax liability under both regimes before making the choice during ITR filing. That decision ensures you pay the least tax and keep more money in your pock
FAQs:
1. What is the main difference between the two regimes?
The Old Regime offers multiple exemptions/deductions like HRA, 80C, 80D, home loan interest, etc. The New Regime has simpler, lower tax slabs but allows only a standard deduction and a few limited deductions
2. What are the revised tax slabs under the New Regime for FY 2025–26?
Under the New Regime from FY 2025–26:
- ₹0–4 L → 0%
- ₹4–8 L → 5%
- ₹8–12 L → 10%
- ₹12–16 L → 15%
- ₹16–20 L → 20%
- ₹20–24 L → 25%
- Above ₹24 L → 30%
3. What is the tax‑free income limit under the New Regime?
With a ₹75,000 standard deduction, salaried individuals can enjoy up to ₹12.75 lakh tax‑free under the New Regime.
4. Can I claim popular deductions like HRA or 80C under New Regime?
No. Under the New Regime, exemptions like HRA, LTA, 80C, 80D, and home loan interest are not allowed, except limited deductions under 80CCD(2), 80CCH, and 80JJAA.
5. Which regime gives zero tax up to ₹12 lakh?
Yes. For incomes up to ₹12 lakh, taxpayers pay zero tax under the New Regime, and up to ₹12.75 lakh if salaried due to the standard deduction
6. Who benefits more from the Old Regime?
Taxpayers with higher deductions—like full 80C, HRA, home loan interest, medical insurance—typically benefit from the Old Regime even with higher tax slabs.
7. Can the tax regime be switched? If so, how often?
Yes. You can switch annually when filing ITR—opt for Old or New. But once you opt for New and have business income, switching back is allowed only once.
8. Do I need to inform my employer about my chosen regime?
Yes. You should specify your regime (Old/New) to your employer for TDS purposes. But formally opting out of the default New Regime must be done via Form 10‑IEA before ITR filing
9. Has the Section 87A rebate changed under the New Regime?
Yes. The rebate has been increased, making incomes up to ₹7 lakh eligible under old rules and enhancing benefits under the New Regime with the standard deduction, contributing to zero tax for incomes up to ₹12 lakh
10. Should home loan interest be the key factor in choosing?
Not anymore. While home loan interest helps old-regime taxpayers, experts now recommend comparing total deductions and tax liability across both regimes, not just one.
benefits under the New Regime with the standard deduction, contributing to zero tax for incomes up to ₹12 lakh
10. Should home loan interest be the key factor in choosing?
Not anymore. While home loan interest helps old-regime taxpayers, experts now recommend comparing total deductions
ALSO READ
Major changes in ITR forms for AY 2025-26