With the Union Budget 2025 bringing a sweeping change to India's income tax structure, millions of taxpayers are left with a daunting choice: hold onto the old tax regime or embrace the new one? The reworked tax slabs, effective April 1, 2025, promise lower tax rates and higher exemptions, potentially lightening the load for middle-class earners. But the previous regime still provides a huge number of deductions and exemptions, making it a strong option for people who value saving on taxes. So, what's the better offer? Let's dissect.
One of the largest points of emphasis of the new tax structure is that those with a net taxable income of up to Rs 12 lakh will now be exempted entirely from paying tax. This is a large improvement upon exemptions in the past and should prove beneficial to a large majority of taxpayers. Additionally, for those with an income level up to Rs 24 lakh per annum, the new tax rates have been significantly decreased, providing it with an attractive option for salaried employees.
| Annual Income | Tax Rate | ||
| Up to Rs 4,00,000 | Nil | ||
| Rs 4,00,001 to Rs 8,00,000 | 5 percent | ||
| 10 percent | ||
| Rs 12,00,001 to Rs 16,00,000 | 15 percent | ||
| Rs 16,00,001 to Rs 20,00,000 | 20 percent | ||
| 25 percent | ||
| Above 24,00,000 | 30 percent |
Apart from these new slabs, the threshold for salaried individuals for the standard deduction has been increased to Rs 75,000 from Rs 50,000, further lowering taxable income. The government expects that this new simplified tax regime will persuade more individuals to switch to the new regime, lowering the reliance on deductions and exemptions.
Even with the advantage of the new regime, the majority of the taxpayers still remain fond of the old one, and that is because of the numerous deductions which the old regime provides. Through the old regime, the investor can claim the tax-saving allowance on investments and expenses, as well as the insurance premium. This can remarkably reduce their taxable amount.
EPF contribution: Tax deduction through Section 80C.
House Rent Allowance (HRA): Tax exemption for employee drawing salary who reside in rented house.
National Pension System (NPS): Employer contribution under Section 8-CCD(2) is tax-exempt up to 10 percent of the basic pay.
Health Insurance Premiums: Deductions under Section 80D for premium paid for self, family, and parents.
Education loan interest: Deductions under Section 80E for interest on loans availed for higher studies.
Home loan interest: Deduction under Section 24(b) of Rs 2 lakh per annum.
Savings account interest: Exempt income from interest earned on savings accounts up to Rs 10,000 under Section 80TTA.
For others with large holdings in these vehicles, the older regime offers higher tax-saving advantages. But the additional inconvenience lies in keeping the records and presenting proofs.
The selection between the two regimes heavily depends on the structure of income and spending of a person. Let us look at two scenarios of cases:
Case 1: High-investment taxpayer
Person X, who gets Rs 15 lakh per annum, invests substantially in tax-saving options. His deductions under 80C, 80D, and 24(b) total Rs 3.5 lakh, reducing his taxable income to Rs 11.5 lakh. In the old regime, he would pay Rs 95,000 as tax. But in the new regime, he would have to pay Rs 1.25 lakh as tax because of the elimination of deductions. The old regime works in his favour.
Case 2: Minimal-investment taxpayer
Individual Y, with a salary of Rs 12 lakh, does not make any investment in tax-saving avenues. His taxable income under the new regime goes down to zero due to the new exemption threshold. He would still be liable to pay under the old regime. It is obviously the better option for him under the new tax regime.
The government's objective with the new tax regime is to simplify and increase disposable income. By lowering tax rates and removing the necessity for investments to save tax, individuals have more flexibility in financial planning. However, those who have traditionally relied on deductions might find the new regime less beneficial.
If you are unsure which tax regime to opt for, consider the following:
Calculate your tax liability: Compare your payable tax under both regimes using online tax calculators.
Assess your investment need: If you consistently make investments in tax-reducing schemes, the old regime would be preferable.
Seek professional guidance: Take the advice of a financial advisor to know how each regime will impact your finances.
The new tax regime of 2025-26 is a mixed bag of challenges and opportunities. While it has lower rates and increased exemption limits, it removes the tax-saving advantage of the old regime. The best option ultimately depends on one's financial objectives and tax planning strategy. With the deadline for opting drawing near, taxpayers need to make careful assessments of their choices to ensure that they maximise their savings without making tax compliance cumbersome.