With the introduction of the New Tax Regime under Section 115BAC of the Income Tax Act, taxpayers now face a critical choice: stick with the traditional (old) tax system with its deductions and exemptions, or move to the simplified new system with lower rates but no deductions.
This decision impacts not just your current year’s tax liability but also long-term financial planning. In this guide, we’ll compare the two regimes in depth and help you assess which one may suit your profile better.
What is the New Tax Regime?
The new regime was introduced in Budget 2020 to simplify tax calculations and increase take-home pay for taxpayers who do not claim many deductions.
Key Features:
- Lower slab rates
- No deductions allowed (like 80C, 80D, HRA, LTA, etc.)
- Available to individuals, HUFs, and certain associations
- Made default regime from FY 2023–24 onwards, though taxpayers can still opt for the old regime
New vs. Old Tax Slabs (AY 2024–25)
| Income Slab | Old Regime (with deductions) | New Regime (without deductions) |
|---|---|---|
| 0 – ₹2.5 lakh | Nil | Nil |
| ₹2.5 – ₹5 lakh | 5% | 5% |
| ₹5 – ₹7.5 lakh | 20% | 10% |
| ₹7.5 – ₹10 lakh | 20% | 15% |
| ₹10 – ₹12.5 lakh | 30% | 20% |
| ₹12.5 – ₹15 lakh | 30% | 25% |
| ₹15 lakh+ | 30% | 30% |
Rebate under Section 87A is available under both regimes up to income of ₹7 lakh (new) and ₹5 lakh (old).
Deductions and Exemptions: What You Lose in the New Regime
Under the new regime, the following popular exemptions and deductions are not available:
- Section 80C (LIC, PPF, ELSS, home loan principal, tuition fees)
- Section 80D (medical insurance)
- HRA (House Rent Allowance)
- LTA (Leave Travel Allowance)
- Standard deduction (only partially available from FY 2023–24)
Whereas under the old regime, you can claim these and more if you invest or spend accordingly.
Who Should Choose the New Regime?
You may benefit more under the new regime if:
- You don’t claim major deductions like 80C, 80D, HRA, etc.
- Your salary structure is straightforward and lacks allowances
- You prefer simplicity over tax-saving investments
- You’re in the early stages of your career or running a startup with variable income
Who Should Stick With the Old Regime?
The old regime may be better if:
- You make full use of deductions (investments, housing loan, insurance, etc.)
- You receive HRA or other tax-exempt allowances
- You have a high income and optimize tax planning effectively
- You’re disciplined about long-term saving through tax-saving instruments
How to Choose the Best Option
1. Compare Net Tax Liability:
Calculate your total income, apply applicable deductions under the old regime, and compare the final tax outgo under both regimes.
2. Consider Long-Term Planning:
Some deductions under the old regime (like PPF or ELSS) build long-term wealth. If these align with your goals, they add value beyond immediate tax benefits.
3. Reassess Annually:
The regime selection can be made each year (for salaried individuals). It’s wise to re-evaluate your situation annually based on any changes in income or deductions.
Practical Example
Mr. A earns ₹10 lakh/year and claims deductions of:
- ₹1.5 lakh (80C)
- ₹25,000 (80D)
- ₹50,000 (standard deduction)
Old Regime Taxable Income: ₹7.75 lakh
Tax Payable: Around ₹62,500 (after rebate)
New Regime Taxable Income: ₹10 lakh
Tax Payable: ₹60,000
In this case, the new regime saves slightly more, but the difference is minimal. For higher deductions, the old regime might be more beneficial.
Conclusion
There is no one-size-fits-all approach when it comes to choosing between the old and new tax regimes. Taxpayers must analyze their income profile, deductions, financial goals, and compliance preferences. Using tax calculators or seeking guidance from a Chartered Accountant can make this decision easier and more strategic.
