Rajesh Mehta, a 35-year-old marketing manager in the busy city of Mumbai, had to make a financial decision that many people on salaries have to make: between India’s old and new tax regimes. Given the substantial changes brought about by the Union Budget 2025, Rajesh had to assess which regime would be the best for his financial needs.
Understanding the Old and New Tax Regimes
The old tax regime in India offers taxpayers various deductions and exemptions which can be claimed by individuals and HUFs, such deductions are:
Hence, the old tax regime allows individuals to reduce their taxable income by claiming these benefits.
In contrast, the new tax regime, introduced in 2020 and further revamped in the 2025 budget, offers lower tax rates but eliminates most deductions and exemptions. The intent is to simplify the tax filing process and provide relief to taxpayers who do not invest in traditional tax-saving options.
Key Highlights from the 2025 Union Budget
The Union Budget 2025 brought notable changes to the new tax regime:
1. Increased Tax Exemption Limit
Individuals with an annual income up to ₹12 lakh are exempt from paying income tax under the new regime. (pib.gov.in)
2. Revised Tax Slabs
For incomes above ₹12 lakh, the following tax rates apply:
- ₹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%
3. Standard Deduction
A standard deduction of ₹75,000 is available under the new regime.
Rajesh’s Financial Profile
Rajesh, earning ₹20 lakh annually, has financial commitments including ₹3 lakh HRA, ₹1.5 lakh EPF, ₹50,000 PPF, ₹25,000 health insurance, and a ₹50,000 standard deduction (Old Regime). These deductions reduce his taxable income under the Old Tax Regime, making it beneficial if he prioritises tax savings.
Evaluating the Old Tax Regime
Under the old tax regime, Rajesh can claim various deductions:
- Standard Deduction: ₹50,000
- HRA Exemption: Assuming he pays ₹25,000 per month as rent and meets other conditions, he can claim an HRA exemption of approximately ₹1,50,000.
- Section 80C Deductions: EPF (₹1,50,000) and PPF (₹50,000) contributions total ₹2,00,000. However, the maximum allowable deduction under Section 80C is ₹1,50,000.
- Section 80D Deduction: Health insurance premium of ₹25,000.
| Particulars | Old Tax Regime (₹) | New Tax Regime (₹) |
|---|---|---|
| Gross Annual Income | 20,00,000 | 20,00,000 |
| Standard Deduction | 50,000 | 75,000 |
| HRA Exemption | 1,50,000 | Not Applicable |
| Section 80C Deductions | 1,50,000 | Not Applicable |
| Section 80D Deduction | 25,000 | Not Applicable |
| Total Deductions | 3,75,000 | 75,000 |
| Taxable Income | 16,25,000 | 19,25,000 |
| Total Tax Payable | 3,00,000 | 1,85,000 |
| Tax Savings | - | 1,15,000 |
For Rajesh, the New Tax Regime results in a tax saving of ₹1,15,000 compared to the Old Tax Regime. However, he loses out on benefits like HRA exemption and 80C deductions, which are useful for long-term financial planning. The choice depends on his investment habits—if he prefers simplicity and immediate savings, the New Regime is better. If he values long-term wealth building, the Old Regime may still be preferable.
Let’s explore additional scenarios to see how different salary levels and deductions impact the choice between the Old Tax Regime and New Tax Regime.
Scenario 1: Lower Income Bracket (₹8 lakh per annum)
Let’s consider Anita Sharma, a 28-year-old software developer in Mumbai, earning ₹8,00,000 per annum.
Assumptions:
- HRA Exemption: ₹1,00,000
- Section 80C (EPF + ELSS): ₹1,50,000
- Health Insurance (80D): ₹25,000
- Standard Deduction: ₹50,000
| Particulars | Old Tax Regime (₹) | New Tax Regime (₹) |
|---|---|---|
| Gross Annual Income | 8,00,000 | 8,00,000 |
| Standard Deduction | 50,000 | 75,000 |
| HRA Exemption | 1,00,000 | Not Applicable |
| Section 80C Deductions | 1,50,000 | Not Applicable |
| Section 80D (Health Insurance) | 25,000 | Not Applicable |
| Total Deductions | 3,25,000 | 75,000 |
| Taxable Income | 4,75,000 | 7,25,000 |
Tax Calculation:
| Up to ₹2,50,000 (Old) / ₹4,00,000 (New) | Nil | Nil |
| ₹2,50,001 – ₹5,00,000 (5%) | 11,250 | 16,250 |
| ₹5,00,001 – ₹7,25,000 (10%) | 22,500 | 22,500 |
| Total Tax Payable | ₹33,750 | ₹38,750 |
|---|
Since Anita benefits from multiple deductions, the Old Tax Regime is better in her case, as she saves ₹5,000 more than under the New Tax Regime.
Scenario 2: Higher Income Bracket (₹25 lakh per annum)
Vikram Nair, a 42-year-old senior consultant in Mumbai, earns ₹25 lakh per annum. His tax-saving investments include ₹3 lakh HRA exemption, ₹1.5 lakh under Section 80C (EPF + PPF), ₹50,000 for health insurance (80D), and a ₹50,000 standard deduction. These deductions significantly reduce his taxable income under the Old Tax Regime. Let us see his tax calculation:
| Particulars | Old Tax Regime (₹) | New Tax Regime (₹) |
|---|---|---|
| Gross Annual Income | 25,00,000 | 25,00,000 |
| Standard Deduction | 50,000 | 75,000 |
| HRA Exemption | 3,00,000 | Not Applicable |
| Section 80C Deductions | 1,50,000 | Not Applicable |
| Section 80D (Health Insurance) | 50,000 | Not Applicable |
| Total Deductions | 5,50,000 | 75,000 |
| Taxable Income | 19,50,000 | 24,25,000 |
Tax Calculation:
| Up to ₹2,50,000 (Old) / ₹4,00,000 (New) | Nil | Nil |
| ₹2,50,001 – ₹5,00,000 (5%) | 12,500 | 20,000 |
| ₹5,00,001 – ₹10,00,000 (20%) | 1,00,000 | 1,00,000 |
| ₹10,00,001 – ₹19,50,000 (30%) | 2,85,000 | 1,42,500 |
| ₹19,50,001 – ₹24,25,000 (25%) | Not Applicable | 1,18,750 |
| Total Tax Payable | ₹3,97,500 | ₹3,81,250 |
|---|
For Vikram, the New Tax Regime saves ₹16,250 in taxes, making it a better option despite losing out on exemptions.
Key Takeaways
- For lower-income earners (₹8 lakh), the Old Regime is better if tax-saving investments are used, while the New Regime offers simplicity but may lead to higher tax.
- For middle-income earners (₹15-20 lakh), the New Regime is usually more beneficial due to lower tax rates, though the Old Regime can still work if deductions are maximised.
- For high-income earners (₹25 lakh+), the New Regime generally results in savings unless significant deductions make the Old Regime preferable.
Wrapping Up
To wrap up, the Old Tax Regime offers deductions (HRA, 80C, 80D) for tax savings, while the New Tax Regime provides lower tax rates but eliminates most exemptions. The 2025 Budget increased the tax exemption limit to ₹12 lakh and introduced revised slabs, making the New Regime more attractive for middle- and high-income earners. Those who invest in tax-saving schemes may benefit from the Old Regime, but for simplicity and higher take-home pay, the New Regime is preferable. For more clarity, you may read this.
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