The new income tax regime was introduced by the Centre in Budget 2020 to simplify the tax structure. However, taxpayers can still choose between the old income tax regime and the new one if they so please, under the current tax system.
In budget 2026, Finance Minister Nirmala Sitharaman announced certain exemptions pertaining only to the new income tax regime.
The Minimum Alternate Tax or MAT rate for companies was reduced to 14% from the earlier 15% under the new regime, furthwer no additional credit accumulation would be done beyond MAT.
Notably, the FM also allowed inter-cooperative society dividend income as deduction under New Tax Regime.
Here are the key differences between New income tax regime and old income tax regime
Under the old income tax regime, there are various deductions and exemptions that tax payers can take benefit of including — investments in tax-saving schemes like the Public Provident Fund (PPF), National Pension Scheme (NPS), insurance premiums, and house rent allowances, among others.
The income tax rate goes up with the income levels. For instance, so far, Income of up to Rs 2.5 lakh per annum attracted no income tax for all ages.
Incomes between Rs 2.5 lakh and Rs 3 lakh had 5% income tax levied on them, applicable to only under 60 years of age.
An income of 5 lakh per annum attracts 5% tax for taxpayers under 60 years of age and also for those between 60 and 80 years. Accordingly, all tax payers with salaries between Rs 5 to Rs 10 lakh have to 20% as income tax, and lastly income tax above Rs 10 lakh attracts an income tax of 30% for all taxpayers, under the old regime.
Whereas in the new tax regime, which is also the default regime currently, several changes were announced in 2024 and 2025 to make it more lucrative.
Over 70% of taxpayers had subscribed to the new regime by 2024.
Last year, in a bid to provide massive relief to the middle class the Finance Minister had announced that under the new regime, a taxpayer with an income of Rs 12 lakh will get a benefit of Rs 80,000 in tax for assessment year 2025-26. This made up of 100% of tax payable as per existing rates, Sitharaman said.
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The deduction limit on an employer's contribution to the National Pension System, also known as the NPS, was also increased in July 2024. The limit was earlier set at 10% and this was raised to 14%.
One other significant change in Budget 2024 was around the capital gains tax. The tax rate for short-term capital gains or STCG was increased from the earlier 15%. The short term taxation rate was raised to 20%. The tax rate for long-term capital gains or LTCG was set at 10% earlier, but this was increased to 12.5% by Budget 2024.
The LTCG exemption limit on equity investments had also been increased from Rs 1 lakh to Rs 1.25 lakh. These changes in the taxation of capital gains were taken up to encourage long-term holding by investors.
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