Decoded: With Budget 2025 tax sops does old tax regime still make sense?

Since 2020, the government has been trying to encourage individual taxpayers to move to the new income tax regime. The old regime, however, allows deductions on investments made under sections 80C, 80CC, and health insurance under 80D. This has led some taxpayers to stick with it.

 

The government on Saturday said the old tax regime will continue. But with the changes announced in Budget 2025, does it still make sense to use it?

 

Higher exemption limit and new tax slabs

 

Finance Minister Nirmala Sitharaman announced on February 1 that individuals earning up to Rs 12 lakh per year will not have to pay any taxes, raising the exemption threshold from Rs 7 lakh. The tax slabs have also been restructured.

 

Rajarshi Dasgupta, executive director-tax at AQUILAW, explains what this means by looking at an example of a 45-year-old Noida resident earning Rs 14 lakh per annum.

 

For the financial year 2024-25, assuming the following details:

 

Total salary: Rs 14 lakh

Basic: Rs 6,00,000

HRA: Rs 3,00,000

Employee contribution to NPS: Rs 1,08,000

Employer contribution to NPS: Rs 1,08,000

Other allowances: Rs 2,84,000

 

Other components:

 

Interest on fixed deposits (FDs): Rs 15,000

Interest on savings bank account, NSC, etc.: Rs 12,000

 

Additional expenses:

Home loan EMI: Rs 60,000 per month, with an annual interest outlay of Rs 2,40,000

Health insurance premium for self: Rs 20,000

Health insurance premium for parents (not senior citizens): Rs 21,000

 

Dasgupta says that before comparing, it is important to note:

 

< The old regime allows deductions under sections such as 80C (life insurance premiums, etc.), 80D (health insurance), 80TTA (interest on savings accounts), and home loan interest.

< The new regime offers a standard deduction of Rs 75,000 for salaried individuals and allows employer contributions to NPS under section 80CCD(2) up to 14% (compared to 10% in the old regime).

 

Tax comparison in detail

 

Old regime:

 

Total income: Rs 14,27,000

 

Deductions:

Home loan interest deduction (24): Rs 2,00,000

Health insurance deduction (80D): Rs 41,000

Savings interest deduction (80TTA): Rs 10,000

NPS deduction (Employer 80CCD(2)): Rs 60,000

NPS deduction (Employee 80CCD(1)): Rs 90,000

Standard deduction: Rs 50,000

 

Total deductions: Rs 4,01,000

 

Taxable income: Rs 9,76,000

 

Tax liability: Rs 1,05,200

 

Cess (4%): Rs 4,208

 

Total tax liability: Rs 1,09,408

 

Effective rate of tax: 7.67%

 

New regime (existing slabs):

 

Total income: Rs 14,27,000

 

Deductions:

NPS deduction (Employer 80CCD(2)): Rs 84,000

Standard deduction: Rs 75,000

 

Total deductions: Rs 84,000

 

Taxable income: Rs 12,68,000

 

Tax liability: Rs 93,600

 

Cess (4%): Rs 3,744

 

Total tax liability: Rs 97,344

 

Effective rate of tax: 6.82%

 

New regime (proposed slabs):

 

Total income: Rs 14,27,000

 

Deductions:

NPS deduction (Employer 80CCD(2)): Rs 84,000

Standard deduction: Rs 75,000

Total deductions: Rs 84,000

 

Taxable income: Rs 12,68,000

 

Tax liability: Rs 70,200

 

Cess (4%): Rs 2,808

 

Total tax liability: Rs 73,008

 

Effective rate of tax: 5.12% 

 

After the Budget, Central Board of Direct Taxes (CBDT) chairman Ravi Agrawal told Business Standard: "We would be interested to know who would want to remain in the old regime and why? About 74% people have already opted for the new regime and with these tax slabs, why would a taxpayer want to be in the old engine?"

 

The numbers suggest the old tax regime may be on its last legs. Under the old regime, even with all available deductions, a taxpayer would owe Rs 1,09,408. After the Budget 2025 changes take effect, the tax liability under the new regime would drop to Rs 73,008. This means, tax liability decreases by approximately 33.27% under the new regime.