The Income Tax Act 2025 has come into effect from April onwards. The Act replaces the 1961 law to simplify tax compliance. Under the new rules, the old tax regime has been made more attractive by increasing exemptions on some expenses.
At the same time, this has also created confusion among taxpayers about whether to stay in the new regime, which is simpler and offers a higher rebate, or switch to the old one.
But taxpayers must note that these new rules will not affect their tax returns this year. Taxpayers will continue to file their ITR for FY26 under the current rules. The new act applies to income earned in FY26-27. This means the impact of the new rules will be reflected when income tax returns are filed in 2027.
New vs Old Tax Regime Under Old IT Act
As announced last year by Finance Minister Nirmala Sitharaman in Budget 2025, the new tax regime has been made more attractive by offering tax-free income up to Rs 12 lakh.
For salaried taxpayers, this can go up to Rs 12.75 lakh after the standard deduction. However, this regime does not allow common deductions like HRA, Section 80C, etc. These benefits are available only under the old tax regime, making it suitable for those with higher investments and eligible deductions.
Choosing between the old and new tax regime depends on your financial situation. Taxpayers should check if they have enough deductions like insurance premiums, HRA, 80C investments, and other allowances to reduce taxable income. If this is the case, the old regime may help them save more tax by lowering the taxable income.
However, if deductions and allowances are limited and your net salary is close to Rs 12.75 lakh, the new tax regime may be better. It is simpler and does not require tracking multiple exemptions. Financial experts are of the view that taxpayers should consider the old tax regime only if their total deductions exceed Rs 4 lakh.
What About the New Income Tax Act?
From 1 April, several changes under the new IT Act will apply for FY27. This means the new act will apply for expenses between April 1, 2026 and March 31, 2027 with filing applicable in June 2027.
Under this, while the tax slabs remain the same for old and new regimes, some changes have been made in case of exemption limits. Mostly applicable for the old regime, the new rules allow for higher exemptions on certain expenses such as children's education allowance and higher HRA for some metro cities, etc.
These provisions have made the old tax regime more attractive. For instance, the old regime under the new IT Act allows for increased children's education allowance from Rs 100 to Rs 3,000 per month per child. Similarly, hostel allowance has been increased from Rs 300 to Rs 9,000.
HRA exemptions now cover four more cities, Ahmedabad, Bengaluru, Hyderabad, and Pune, at 50%, up from earlier 40%. This brings these cities on par with Delhi and Mumbai. Some other benefits include corporate meal cards like Sodexo, now tax free up to Rs 200 per meal, up from Rs 50. Corporate gift cards, certificates, or coupons are exempt up to Rs 15,000 per year. These changes make the old tax regime more attractive for taxpayers who can claim allowances and exemptions.
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