"The key to financial success lies in making informed decisions; understanding your options is the first step."
As we approach the new financial year, taxpayers face an important decision: whether to stick with the old tax regime or opt for the newly updated tax regime, effective from April 1, 2025. The Union Budget 2025 has made substantial changes, particularly benefiting salaried individuals and employers. This blog aims to provide a detailed, analytical comparison of the old and new tax regimes, explore the deductions available, and offer key insights on salary restructuring to help employees maximize their tax benefits.
Understanding the Tax Regimes
Under India's current tax system, taxpayers are presented with two options:
Old Tax Regime: Allows a wide range of deductions and exemptions, which help reduce taxable income, such as Section 80C, HRA, LTA, and others.
New Tax Regime: Provides lower tax rates but eliminates most deductions and exemptions. It aims for simplicity and ease of filing.
For the financial year 2025-26, taxpayers will need to choose their preferred tax regime before April 30, 2025. This decision is crucial for optimizing tax liabilities.
Key Features of the New Tax Regime (2025-26)
The new tax regime was designed to provide a simpler tax structure with lower tax rates. The main features for FY 2025-26 include:
No Tax up to ₹12 Lakh: A significant shift in the new regime allows taxpayers earning up to ₹12 lakh to pay no tax, offering substantial relief to middle-income earners.
Lower Tax Rates: The tax slabs have been reduced, making it an attractive option for those with lower to mid-level income.
Standard Deduction: Salaried individuals can claim a ₹75,000 standard deduction in the new regime. This simplifies tax filing for those without substantial deductions to claim.
Employer Contributions to NPS: Contributions made by the employer to the National Pension Scheme (NPS) are eligible for deduction, further enhancing the attractiveness of the new regime.
No Deductions on HRA, LTA, 80C, etc.: The new regime eliminates a variety of deductions available under the old regime, making it suitable for those who do not have substantial eligible expenses to claim.
Deductions in the New Tax Regime (2025-26)
The new tax regime offers a simpler, more straightforward tax filing process. Here are the deductions you can claim under the new regime:
Standard Deduction:
Salaried individuals can claim a ₹75,000 standard deduction under the new regime for FY 2025-26.
This is applicable only for salary income and simplifies the tax computation process for individuals.
Employer Contributions to NPS:
Employer contributions to the NPS are deductible under Section 80CCD(2), even in the new regime.
This can significantly benefit employees looking to save for retirement, as these contributions reduce taxable income.
Family Pension:
For those receiving family pension, a ₹25,000 standard deduction is available under the new tax regime (higher than the old regime).
Gifts:
Gifts up to ₹50,000 received from non-relatives are exempt from tax, aligning with both regimes.
Employer Reimbursements:
Transport Allowance, Conveyance Allowance, and other similar reimbursements remain exempt under the new regime.
Deductions Not Available under the New Tax Regime
While the new tax regime offers simplicity and lower rates, it eliminates several deductions available under the old regime, such as:
Section 80C: No deductions for investments in PPF, EPF, life insurance premiums, etc.
House Rent Allowance (HRA): Not allowed under the new regime.
Leave Travel Allowance (LTA): No deductions for travel expenses under the new tax regime.
Health Insurance Premiums (Section 80D): The new regime does not allow for deductions for health insurance premiums.
Interest on Home Loan for Self-Occupied Property: Section 24 deductions are not available under the new regime for self-occupied properties.
Additional Depreciation: Section 32(1)(iia) is not applicable in the new tax regime.
Key Decision-Making Factors: Which Regime to Choose?
Choosing the right tax regime for FY 2025-26 depends on your income profile, available deductions, and preferences. Here are some key factors to consider:
1. Deductions and Exemptions
If you regularly claim HRA, LTA, 80C, or 80D, the old tax regime might be a better choice as it allows these deductions.
If you don't have significant expenses to claim and prefer simpler tax filing, the new regime could be more beneficial.
2. Tax Simplicity
For those who prefer a hassle-free filing experience and have minimal tax-saving investments, the new regime offers a straightforward approach with lower tax rates.
3. Salary Structure Considerations
Employers can assist employees by restructuring salary components to maximize tax savings, especially when opting for the old regime. Here’s how:
Opting for HRA: Employees residing in rented accommodations can structure their salary to include House Rent Allowance (HRA), thereby reducing their taxable income.
NPS Contributions: Employers can structure salary packages to include higher NPS contributions, which are deductible under both tax regimes. These contributions are particularly valuable as they offer long-term retirement benefits and reduce taxable income.
4. Income Levels
If you are earning up to ₹12 lakh annually, the new regime offers a tax exemption, making it an attractive option. For those with higher incomes, the old regime may still offer better tax savings through deductions.
Salary Structuring Tips for Employers to Maximize Tax Savings
Employers can play a key role in helping employees optimize their tax liabilities by structuring salary components strategically. Here’s how:
House Rent Allowance (HRA):
For employees residing in rented homes, HRA can be a significant tax-saving component, especially in the old tax regime.
For the new tax regime, HRA cannot be claimed, but it can still be factored into salary planning for employees opting for the old regime.
National Pension Scheme (NPS):
Employers can contribute to an NPS account for employees under Section 80CCD(2), which will be deductible under both tax regimes.
Salary restructuring can include higher NPS contributions to maximize deductions under the old regime.
Special Allowances and Reimbursements:
Employers can provide tax-exempt allowances such as Conveyance Allowance, Special Allowance for Children’s Education, and Medical Reimbursement to employees opting for the old tax regime.
Standard Deduction:
Employees can avail of the ₹75,000 standard deduction in the new regime for salary income, but they will need to ensure their salary structure is aligned to maximize this benefit.
Conclusion: Make an Informed Choice
Choosing between the old and new tax regimes depends on multiple factors, including available deductions, your income level, and whether you prefer a simpler tax structure or are willing to engage in strategic planning for tax savings.
Tip: To make an informed decision, calculate your potential tax liability under both regimes using online tax calculators and factor in your salary structure, available deductions, and long-term financial goals. This will help you make the best choice for FY 2025-26, ensuring both tax efficiency and financial growth.
"The best time to start planning your tax strategy is today—your future self will thank you for it."
