This tax season, many individuals may consider switching their tax regime while filing their income tax returns. Starting FY25, the government has made the new tax regime more attractive. It has increased the rebate limit and allowed income up to Rs 12.75 lakh to be tax-free.
With this move, many taxpayers are considering shifting to the new tax regime from the old one. Both regimes are designed differently to suit varying income levels, investment patterns and financial planning needs.
Who Should Opt New Regime?
Under the new regime, income up to Rs 4 lakh is not taxable. For higher incomes, tax is applicable as per slab rates, which are lower compared to the old regime. It comes with a standard deduction of Rs 75,000 and rebates under Section 87A that make income up to Rs 12.75 lakh effectively tax-free for eligible resident individuals.
Under this regime, tax rates are lower but most deductions and exemptions are not allowed. People with income between Rs 12.75 lakh and Rs 20 lakh may consider this option if they don't claim significant deductions such as house rent allowance (HRA) or make investments under 80C.
No investment proofs are required to claim this deduction and the compliance process is more simplified.
Who Should Continue With Old Regime:
The old tax regime continues to exist, offering higher tax rates but allowing most deductions like HRA. According to experts, the old tax regime is generally more beneficial for individuals with total deductions between Rs 3 to 4 lakh per financial year. These can include high HRA, home loan interest, or significant investments like Section 80C and 80D and help people lower their taxable income.
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Under this regime, a standard deduction of Rs 50,000 is also applicable. As a result, those with high income (around Rs 20 lakh or more) and significant deductions may continue with the old regime.
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