With the revised income tax slabs set to take effect from April 1, 2025, taxpayers are now presented with a critical choice: stick with the old tax regime or switch to the new tax regime. The Union Budget 2025 introduced significant changes, especially aimed at middle-income earners, including tax exemptions and reduced tax rates for income up to ₹24 lakh. However, choosing the right regime depends on a variety of factors, including deductions, exemptions, and individual financial circumstances. In this blog, we’ll break down both regimes and help you make an informed decision.
Key Features of the New Tax Regime (2025-26)
The new tax regime offers simplified taxation by reducing the number of tax slabs and removing deductions, allowing taxpayers to benefit from lower tax rates. The notable highlights of the new tax regime include:
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No Tax Up to ₹12 Lakh: The most striking change is that individuals earning up to ₹12 lakh are not required to pay any tax, which offers substantial relief to those in the middle-income group.
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Lower Slab Rates: The tax rates have been significantly reduced for income up to ₹24 lakh, making the new regime potentially more attractive for individuals with lower to middle incomes.
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Standard Deduction: A ₹75,000 standard deduction is applicable to salary income, making the new regime more straightforward.
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Simplified Filing: The new regime eliminates the need for tracking various deductions and exemptions, providing a hassle-free filing experience for taxpayers.
Deductions and Exemptions Under the Old Tax Regime
In contrast to the new regime, the old tax regime allows taxpayers to claim various deductions and exemptions, which can significantly lower their taxable income. Some of the most important deductions include:
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Section 80C: Taxpayers can claim up to ₹1.5 lakh in deductions for EPF, PPF, life insurance premiums, and other approved investments.
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House Rent Allowance (HRA): Individuals living in rented accommodations can claim HRA exemptions, which can reduce taxable income, especially for those in high-rent cities.
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Leave Travel Allowance (LTA): Taxpayers can claim LTA exemptions for travel expenses, which can further reduce tax liability.
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National Pension Scheme (NPS): Contributions to NPS are eligible for deductions, with an additional ₹50,000 under Section 80CCD(1b), apart from the 10% of salary available under Section 80CCD(2) for employer contributions.
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Health Insurance Premiums (Section 80D): Premiums paid for health insurance can be deducted under Section 80D for the taxpayer, family, and parents.
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Interest from Savings Accounts (Section 80TTA): Taxpayers can claim up to ₹10,000 in deductions on interest earned from savings accounts.
These deductions make the old tax regime more attractive for individuals who have substantial investments or eligible expenses to claim.
Deductions in the New Tax Regime
The new tax regime, while offering lower tax rates, significantly limits the ability to claim deductions. Key available deductions include:
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Standard Deduction: A ₹75,000 standard deduction for salary income.
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NPS Contributions: Employer contributions to the National Pension Scheme (NPS) are deductible under Section 80CCD(2), but there is no provision for individual contributions under the new regime.
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Telephone and Conveyance Reimbursements: These remain exempt from tax under both regimes.
Beyond these, the new regime does not allow for most other deductions such as HRA, LTA, or investments under Section 80C. This makes it a simpler but less flexible option.
Choosing the Best Tax Regime: Factors to Consider
The decision between the old and new tax regime depends on multiple factors. Here’s a breakdown of what to consider:
1. Deductions and Exemptions
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If you are someone who regularly claims deductions for NPS, HRA, LTA, or health insurance premiums, the old tax regime may be better suited for you as it offers a range of deductions that can significantly reduce your taxable income.
2. Tax Simplicity
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If you prefer a hassle-free filing experience and don’t have substantial deductions to claim, the new tax regime might be more beneficial. It simplifies the filing process, making it ideal for individuals who don’t want to keep track of receipts and documents.
3. Taxable Income and Tax Savings
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For individuals earning up to ₹12 lakh, the new tax regime offers a tax exemption, which makes it a clear choice.
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For those earning higher incomes or those with significant deductions, the old tax regime could still be more beneficial.
4. NPS Contributions
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The old tax regime allows for greater flexibility in NPS deductions (up to 10% of basic salary for employee contributions), compared to the 14% allowed under the new tax regime. This is important for employees contributing significantly to NPS.
Consider Switching to the New Tax Regime
The new tax regime should be considered if you:
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Have minimal deductions and prefer a simplified filing process.
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Have income up to ₹12 lakh, as it offers tax exemption.
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Want to avoid the hassle of maintaining proofs for claiming deductions.
Stick with the Old Tax Regime
The old tax regime remains a better choice if you:
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Have substantial deductions available (e.g., HRA, NPS, health insurance premiums).
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Prefer a customized tax-saving strategy to maximize savings.
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Have a higher income and want to reduce your taxable income significantly using deductions and exemptions.
Make the Right Tax Choice for 2025-26
Choosing between the old and new tax regimes requires a careful evaluation of your income and the deductions you can claim. If your goal is simplicity and you do not have significant deductions, the new tax regime will likely offer better tax savings with less paperwork. However, if you have substantial deductions (such as for NPS or HRA), the old tax regime could result in greater tax relief.
Actionable Tip: Utilize online tax calculators to compare both regimes and see how they affect your overall tax liability. This will help you make an informed decision based on your financial situation and tax-saving needs for FY 2025-26.