The Union Budget 2025 introduced various changes to the tax slabs, which were in favour of the New Tax Regime. Through these changes, the government has encouraged taxpayers to switch to the New Tax Regime as it provides them with added benefits while removing income tax completely for salaried employees with annual salaries up to ₹ 12.75 lakhs.
The government has made its intentions clear by making the New Tax Regime the default for Indian taxpayers, while still leaving the flexibility to choose the Old Tax Regime if they wish to stay with it. However, this flexibility has also raised confusion as to which regime is better for employees.
So, let us answer this question for you!
Budget 2025 Updates
The most important updates from the Union Budget 2025 are:
- Revised Income Tax Slabs:
| Income Tax Slab | Income Tax Rate |
| ₹0 – ₹4,00,000 | 0% |
| ₹4,00,001 – ₹8,00,000 | 5% |
| ₹8,00,001 – ₹12,00,000 | 10% |
| ₹12,00,001 – ₹16,00,000 | 15% |
| ₹16,00,001 – ₹20,00,000 | 20% |
| ₹20,00,001 – ₹24,00,000 | 25% |
| Above ₹24,00,000 | 30% |
- The rebate under Section 87A has been increased to ₹60,000 from ₹25,000, for New Regime taxpayers.
- The Income Tax Rebate Limit has been raised from ₹5 lakhs to ₹12 lakhs, resulting in employees with annual income up to ₹12,00,000 not having to pay income tax, under the New Regime.
- While the Marginal Relief on the rebate is applicable under the New Regime, the standard deduction for salaried individuals has been raised from ₹50,000 to ₹75,000, raising the tax-free income up to ₹12.75 lakhs effectively.
- Additionally, taxpayers now have 4 years to file or update their Income Tax returns.
- The changes in tax slabs and the new rules will be effective for the income earned between 1st April 2025 and 31st March 2026 or the Financial Year 2025-26.
- The new Income Tax Bill 2025 was also tabled by our Honourable Finance Minister in the Lok Sabha in the Union Budget 2025.
Tax Rates under New Tax Regime
While the New Tax Regime was introduced in the Budget of 2020, many did not opt for it simply because it did not have several tax exemptions and deductions, such as HRA, LTA, 80C, 80D, etc. Due to the mediocre response of the taxpayers towards the New Regime, the Government announced added benefits in the Budget of 2023 for the New Regime taxpayers, such as:
- Higher Tax Rebate: Taxable income up to ₹7 lakhs was allowed for complete rebate, while it remained at ₹5 lakhs for Old Regime taxpayers.
- Standard Deduction Changes: The Standard Deduction of ₹50,000 was extended to the New Regime taxpayers. Additionally, Budget 2024 increased the Standard Deduction to ₹75,000.
- Family Pension: The family pension deduction has been increased to ₹25,000 for the New Regime taxpayers.
- Default Regime: From the Financial Year 2023-24, the New Income Tax Regime will be set as the default regime with the option to stay in the Old Regime by submitting Form 10-IEA. Additionally, you also have the option to change Tax Regimes annually.
- Streamlined Tax Slabs: Here is a breakdown of the tax rates:
|
Old Tax Regime |
New Tax Regime |
|||
|
Tax Slabs |
Age<60 yrs & NRIs | Age 60 yrs to 80 yrs |
Age>80 yrs |
|
|
₹0 – ₹2,50,000 |
0% | 0% | 0% | 0% |
|
₹2,50,001 – ₹3,00,000 |
5% | 0% | 0% | 0% |
|
₹3,00,001 – ₹5,00,000 |
5% | 5% | 0% | 5% |
| ₹5,00,001 – ₹6,00,000 | 20% | 20% | 20% |
5% |
| ₹6,00,001 – ₹7,00,000 | 20% | 20% | 20% |
5% |
|
₹7,00,001 – ₹7,50,000 |
20% | 20% | 20% | 10% |
|
₹7,50,001 – ₹9,00,000 |
20% | 20% | 20% |
10% |
| ₹9,00,001 – ₹10,00,000 | 20% | 20% | 20% |
10% |
|
₹10,00,001 – ₹12,00,000 |
30% | 30% | 30% | 15% |
| ₹12,00,001 – ₹12,50,000 | 30% | 30% | 30% |
20% |
|
₹12,50,001 – ₹15,00,000 |
30% | 30% | 30% | 20% |
| ₹15,00,001 and above | 30% | 30% | 30% |
30% |
Tax Rates under Old Tax Regime
The Old Tax Regime had multiple exemptions and deductions, which helped reduce the overall taxes of employees. For example, Section 80C provides the employee with a reduction of taxable income up to ₹1.5 lakhs. Hence, despite the introduction of the New Tax Regime, employees were provided the option to remain in the Old Regime if they wished to do so. However, this option has also led to confusion among the taxpayers as they try to understand which regime is ideal for their use case.
The income tax slabs under the Old Tax Regime are:
| Tax Slabs | Income Tax Rates |
| ₹0 – ₹2.5 lakh | 0% |
| ₹2.5 lakh – ₹5 lakh | 5% |
| ₹5 lakh – ₹10 lakh | 20% |
| More than ₹10 lakh | 30% |
Additionally, there are multiple exemptions and deductions under the Old Tax Regime, which are not available under the New Tax Regime, such as:
➔ Salary-related:
- Professional Tax
- Entertainment Allowance
- Leave Travel Allowance
- House Rent Allowance
- Helper Allowance
- Education Allowance
- Allowances to MLAs and MPs
- Other special Allowances mentioned under Section 10 (14)
➔ Interest on Housing Loan under Section 24
➔ Employee’s contribution to the National Pension Scheme
➔ Exceptions under Section 80C, 80D, 80E.
➔ Donations
Which Tax Regime is Better for Salaried Employees?
The New Tax Regime favours middle-class taxpayers, especially the ones earning annual salaries under ₹15 lakhs. Conversely, high-income taxpayers should ideally opt for the Old Tax Regime.
Additionally, the New Tax Regime favours individuals who are making lower investments. Since the New Tax Regime offers more income tax slabs, individuals paying taxes without any deductions can also benefit by paying a reduced amount in income tax. Hence, the New Tax Regime is geared towards individuals who are investing less.
On the other hand, if you have meticulously planned your tax filings and are heavily investing, the numerous deductions and exemptions of the Old Tax Regime will help you save taxes. Hence, it favours taxpayers with higher incomes who can invest in various government schemes and enjoy the exemptions provided by the Old Tax Regime.
We would advise you to calculate your exact taxes considering the exemptions and deductions you enjoy under the Old Tax Regime, as well as the tax savings under the New Tax Regime to arrive at the ideal regime for you, as the exact tax benefits will vary from person to person.
Here is a simplified table to guide you choose your Tax Regime based on your income and deductions:
| Income/
Deductions |
₹0 | ₹1,25,000 | ₹2,50,000 | ₹5,00,000 | ₹6,50,000 | ₹7,15,000 | ₹7,75,000 | ₹7,75,001 | ₹8,75,001+ |
| ₹10,00,000 | New | New | New | Both
|
Both
|
Both
|
Both
|
Both
|
Both
|
| ₹13,50,000 | New | New | New | Both
|
Old
|
Old
|
Old
|
Old
|
Old
|
| ₹17,00,000 | New | New | New | New | Old
|
Old
|
Old
|
Old
|
Old
|
| ₹20,50,000 | New | New | New | New | New | New | Old
|
Old
|
Old
|
| ₹24,00,000 | New | New | New | New | New | New | Both
|
Old
|
Old
|
| ₹27,50,000 | New | New | New | New | New | New | Both
|
Old
|
Old
|
| ₹31,00,000 | New | New | New | New | New | New | Both
|
Old
|
Old
|
| ₹34,50,000 | New | New | New | New | New | New | Both
|
Old
|
Old
|
| ₹35,00,000+ | New | New | New | New | New | New | Both
|
Old
|
Old
|
Deductions and Exemptions under New Tax Regime
Following are the deductions and exemptions under the New Tax Regime:
- Conveyance allowance received for meeting expenses in an employment.
- Transport allowances for disabled individuals.
- Any amount received as compensation for travelling on tour or a transfer.
- Daily allowances to meet regular charges or expenses incurred due to absence from a regular place of duty.
- Prerequisites for official purposes.
- Voluntary retirement under Section 10 (10C).
- Gratuity under Section 10 (10).
- Leave Encashment under Section 10 (10AA).
- Interest on a home loan on let-out property under Section 24.
- Gifts up to ₹50,000.
- Deduction for employer’s contribution to NPS account under Section 80 CCD (2).
- Deduction for additional employee cost under Section 80 JJA.
- Deduction of the amount paid or deposited into the Agniveer Corpus Fund under Section 80 CCH (2).
Now that we have a robust idea of the deductions and exemptions under the New Tax Regime, let us share a quick comparison chart:
| Deduction | Old Regime | New Regime |
| House Rent Allowance | Exemption up to a certain limit. | Not Available |
| Relocation Allowance | Available | Not Available |
| Leave Travel Allowance | Actual travel ticket expenses are exempt for two trips in 4 years under Section 10 (5). | Not Available |
| Transport allowances in case of a specially-abled person | Available | Available |
| Conveyance allowance received to meet the conveyance expenditure incurred as part of the employment. | Available | Available |
| Any compensation received to meet the cost of travel on tour or transfer | Available | Available |
| Daily allowance received to meet the ordinary charges or expenditure you incur on account of absence from his regular place of duty | Available | Available |
| Perquisites for official purposes | Available | Available |
| Mobile Reimbursement | Exempt if:
|
Not Available |
| Food Expenses | ₹50/meal with a maximum of 2 meals in a day, amounting to ₹26,400 annually. | Not Available |
| Children’s Education & Hostel Allowance | ₹4800 per child applicable for a maximum of 2 children | Not Available |
Exemption on:
|
Available | Available |
| Professional Tax deduction under Section 16 | Available | Not Available |
| Interest on Home Loan on let-out property under Section 24 | Available | Available |
| Interest on Home Loan on Self-occupied property (Section 24). | Allowed up to ₹2,00,000 | Not Available |
| Gifts up to ₹50,000 | Available | Available |
| Deduction for additional employee cost under Section 80 JJA | Available | Available |
| Deduction of the amount paid or deposited in the Agniveer Corpus Fund under Section 80 CCH (2) | Available for the entire contribution made by applicants and the Central Government. | Available for the entire contribution made by applicants and the Central Government. |
| Deduction for employer’s contribution to NPS account under Section 80 CCD (2) | Actual contribution subject to a maximum limit of 10% of the salary. | Actual contribution subject to a maximum limit of 14% of the salary. |
Investments made in the following under Section 80 C:
|
₹1,50,000 | Not Available |
| Additional exemption for investment in the National Pension Scheme | ₹50,000 | Not Available |
| Tax deduction on health insurance premium payments made towards self or parents under Section 80 D | Self, spouse, and dependent children: ₹25,000 (₹50,000 if aged 60 and above)Parents: ₹25,000 (₹50,000 if aged 60 and above) | Not Available |
| Deduction on Savings account interest under Section 80 TTA | ₹10,000 | Not Available |
| Deduction on interest on Deposits under Section 80 TTB | ₹50,000 (Only for Senior Citizens) | Not Available |
| Donations to charitable organizations under Section 80 G | Available | Not Available |
| Maturity amount of a Life Insurance Policy | Maturity proceeds are tax-exempt if the sum assured is ≤:
|
Maturity proceeds are tax-exempt if the sum assured is ≤:
|
Conclusion
The Old Tax Regime as well as the New Tax Regime has its pros and cons depending on which tax slab you are part of, and which exemptions and deductions apply to you. Hence, you should weigh the tax amount and calculate your income taxes in both the Old and New Tax Regimes to understand which is ideal for you, providing you with maximum tax savings.
We hope this blog has cleared your confusion as to which Tax Regime to choose. We have provided you with in-depth information about both Tax Regimes, which will enable you to understand the relevance of choosing the right Tax Regime.
FAQs
1. Can I switch between Old and New Tax Regimes?
Yes, you can switch between the Old and New Tax Regimes every year at the time of filing your Income Tax Returns. However, it applies only to salaried employees. Individuals who have additional income from their business and profession, and who have opted for the New Tax Regime in any of the previous financial years, while choosing the Old Tax Regime in the current financial year, will not be allowed to switch back to the New Tax Regime in the upcoming years.
2. Which Tax Regime is Better for 7 Lakhs Salary?
If your annual taxable income is ₹7 lakhs, then you should definitely choose the New Tax Regime as it is beneficial for maximum savings. Due to the rebates allowed and the way tax slabs are structured, you will not be required to pay any income tax.
3. Which Tax Regime is Better for 10 Lakhs Salary?
If your annual taxable income is ₹10 lakhs, then you should choose the New Tax Regime. The Old Tax Regime will benefit you only if you have made tax-saving investments over ₹2,62,500. However, if your investments are below ₹2,62,500, then you should opt for the New Tax Regime only.
4. Which Tax Regime is Better for 12 Lakhs Salary?
If your annual taxable income is ₹12 lakhs, then you should choose the New Tax Regime. The Old Tax Regime will benefit you only if you have made tax-saving investments over ₹3,12,500. However, if your investments are below ₹3,12,500, then you should opt for the New Tax Regime only.
5. Which Tax Regime is Better for 15 Lakhs Salary?
If your annual taxable income is ₹15 lakhs, then you should choose the New Tax Regime. The Old Tax Regime will benefit you only if you have made tax-saving investments over ₹3,75,000. However, if your investments are below ₹3,75,000, then you should opt for the New Tax Regime only.
6. Which Tax Regime is Better for 20 Lakhs Salary?
If your annual taxable income is ₹20 lakhs, then you should choose the New Tax Regime. The Old Tax Regime will benefit you only if you have made tax-saving investments over ₹3,75,000. However, if your investments are below ₹3,75,000, then you should opt for the New Tax Regime only.
7. Which Tax Regime is Better for 25 Lakhs Salary?
If your annual taxable income is ₹25 lakhs, then you should choose the New Tax Regime. The Old Tax Regime will benefit you only if you have made tax-saving investments over ₹3,75,000. However, if your investments are below ₹3,75,000, then you should opt for the New Tax Regime only.
