With Budget 2025 ushering in major tax reforms, individual taxpayers now face a crucial decision — should they adopt the simplified new tax regime or continue with the older, deduction-heavy system?
While the new regime provides lower rates and greater ease of filing, the old tax regime may still be the better option for many, especially those who actively make use of tax-saving investments and allowances.
Understanding The Two Regimes
The new tax regime, introduced to simplify the taxation process, offers lower slab rates but does so at the cost of most exemptions and deductions.
Under the latest changes, income up to Rs 12 lakh is now effectively tax-free. For salaried individuals, the benefit goes slightly higher, to Rs 12.75 lakh, due to the inclusion of the standard deduction of Rs 75,000.
Tax slabs under the new regime:
Up to Rs 4 lakh – No tax
Rs 4 lakh to Rs 8 lakh – 5%
Rs 8 lakh to Rs 12 lakh – 10%
Rs 12 lakh to Rs 16 lakh – 15%
Rs 16 lakh to Rs 20 lakh – 20%
Rs 20 lakh to Rs 24 lakh – 25%
Above Rs 24 lakh – 30%
Tax slabs under the old regime:
Up to Rs 2.5 lakh – No tax
Rs 2.5 lakh to Rs 5 lakh – 5%
Rs 5 lakh to Rs 10 lakh – 20%
Above Rs 10 lakh – 30%
What sets the old regime apart is not the rates, but the deductions and exemptions that can bring down your taxable income significantly —provided you take full advantage of them.
Why Old Regime Still Works For Many
If you're someone who regularly invests in tax-saving financial instruments, the older system might offer better overall savings despite its higher tax rates. Here's why:
Tax-Saving Investments: Contributions to Public Provident Fund, National Pension System, Sukanya Samriddhi Yojana and tax-saving fixed deposits can be claimed under Section 80C, allowing deductions up to Rs 1.5 lakh. You also get deductions for premiums paid towards life and health insurance policies, as well as on interest paid on education and home loans.
House Rent Allowance: If you live in rented accommodation and receive HRA as part of your salary, the exemption you can claim under the old regime can be substantial, especially if your HRA is on the higher side.
Higher Income Brackets: For people with annual incomes above Rs 24 lakh, both regimes apply the same top tax rate of 30%. But the old regime allows this group to reduce their taxable income significantly through various exemptions. This can translate into considerable tax savings in comparison to the new system.
Making Right Choice
At first glance, the new regime may appear more attractive, particularly for those with minimal investments or exemptions to declare. The moment you factor in deductions, especially those that salaried individuals typically claim, the equation changes.
The ideal approach is to calculate your tax liability under both regimes before making a decision.
Simply put, the new tax regime is easier to follow, but the old one can still help you save more if you use the available deductions wisely. It's a good idea to check your investments and compare both options before deciding.
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