Old vs new tax regime: Consider income and deductions before you pick

If you declared one regime to your employer for TDS but later find the other more beneficial, you can still switch when filing your income-tax return

A study by 1 Finance of 1,865 information technology (IT) professionals found that 68 per cent could have saved an average of ₹49,094 in taxes in the financial year (FY) 2024–25. Of those surveyed, 33 per cent selected the wrong tax regime. Among them, 86 per cent should have switched from the old to the new regime, while the rest would have benefited by shifting in the opposite direction.

 

Understand the differences

 

The old regime provides an exemption limit of ₹2.5 lakh, with a maximum slab rate of 30 per cent on income above ₹10 lakh. It features four tax slabs.

 

“The new tax regime has seven tax slabs, with rates ranging from 5 to 30 per cent. The exemption limit is ₹4 lakh. The highest tax rate of 30 per cent is applicable on income above ₹24 lakh,” says Suresh Surana, a Mumbai-based chartered accountant.

 

Under the old regime, residents earning up to ₹5 lakh can claim a full rebate under Section 87A of the Income-Tax (I-T) Act. “With effect from financial year (FY) 2025–26, individuals opting for the new tax regime can claim a tax rebate of up to ₹60,000 under Section 87A of the I-T Act,” says Surana. This results in nil effective tax for income up to ₹12 lakh.

 

The old regime allows several deductions, including Section 80C (up to ₹1.5 lakh on investments in Public Provident Fund, equity-linked savings schemes, life insurance, etc.), Section 80D (health insurance), Section 24(b) (housing loan interest), Section 80E (education loan), House Rent Allowance (HRA), and Leave Travel Allowance (LTA). Deductions under Sections 80TTA, 80TTB and for professional tax are also available.

 

“This regime benefits individuals who actively invest in tax-saving avenues and are willing to maintain documentation to support their claims,” says Shefali Mundra, tax expert, ClearTax. 

 

In contrast, the new regime removes most exemptions but simplifies tax filing. It offers lower tax rates and a standard deduction of ₹75,000 from salary income, compared to ₹50,000 under the old regime.

 

“In addition to the standard deduction on salary, the new tax regime allows only a few limited deductions, such as on family pension (lower of ₹15,000 or one-third of the pension) and deduction on the employer’s contribution to the National Pension System (NPS) under Section 80CCD(2),” says Surana. A deduction is also allowed on interest paid on loans for let-out property.

 

Changes in Budget 2025

 

Budget 2025 introduced significant changes. “The income between ₹4–8 lakh is taxable at 5 per cent. This rate increases by 5 percentage points for each ₹4 lakh increment. The rebate under Section 87A was increased to ₹12 lakh. Including the standard deduction of ₹75,000, there is zero tax if salary income is up to ₹12.75 lakh,” says Preeti Sharma, partner, global employer services, BDO India.

 

She adds that these changes have exempted many individuals from tax, making the new regime attractive. Mundra notes that the old regime may still suit those with substantial deductions.

 

“The changes reduce the need for complex documentation and for investing in traditional tax-saving investments,” says Niyati Shah, vertical head – personal tax, 1 Finance.

 

Choosing the right regime

 

Income level is the primary consideration. “The new regime has become attractive for those with taxable income up to ₹12.75 lakh due to enhanced rebates and standard deductions,” says Mundra.

 

Another key criterion should be the level of deductions that taxpayers can avail. “If you have substantial eligible deductions, the old regime might reduce your tax liability more effectively,” adds Mundra.

 

Taxpayers opting for the old regime must maintain documents to support their deductions. “Those who make such claims are more prone to scrutiny compared to those who opt for the new regime. Hence, if the amount of tax saving by opting for the old regime is not substantial, many taxpayers still opt for the new regime to avoid the administrative hassle attached to the old regime,” says Sharma. 

 

Mistakes to avoid

 

Taxpayers often overestimate their deductions. “They neglect to reassess their choice of tax regime after significant life events, such as job changes, rental adjustments or changes in insurance premiums. This lack of periodic review frequently leads to suboptimal tax planning and higher tax liabilities due to the selection of the inappropriate tax regime,” says Shah.

 

Some opt for the new regime without a comparative analysis of the tax liability under the two regimes. “They choose the new tax regime for its simplicity, assuming it will automatically result in lower taxes. However, without evaluating the total value of the deductions and exemptions they are eligible for, they may overlook the possible tax savings under the old regime,” says Surana.

 

Many taxpayers fail to align their investments with their chosen regime. “If you have declared that you will opt for the old regime, then you must invest in Section 80C and other eligible instruments. If you do not, there may be a shortfall in the eligible deductions, leading to higher tax liability at the end of the year,” says Surana.

 

Many also overlook mid-year changes in salary or financial obligations. “Employees can declare their preferred regime with the employer for tax deduction at source (TDS) purposes. But they have the option to switch regimes at the time of filing their return. Not exercising this flexibility due to a lack of awareness is a lost opportunity for tax optimisation,” says Surana.

 

Taxpayers must not overlook the need to maintain documentation, especially when choosing the old regime.