Navigating India’s Tax Choices: Old vs. New Tax Regime Post-Budget 2025-26

The Union Budget announced on February 1, 2025, introduced significant changes to India’s income tax structure, aiming to boost middle-class spending and stimulate economic growth. Finance Minister Nirmala Sitharaman introduced significant changes to the New Tax Regime. With lower tax rates and minimal deductions, the new regime has been structured to simplify taxation, while the old regime continues to offer tax benefits through multiple exemptions and deductions. The FM did not make any changes to the Old Tax Regime this year.

As taxpayers prepare for the financial year 2025-26, a critical decision looms: should one transition to the revamped New Tax Regime or remain with the traditional Old Tax Regime? We shall delve into the updated tax rules, delineate the provisions specific to each regime, provides a comparative analysis of tax liabilities across income slabs for FY 25-26, and offer guidance on selecting the most advantageous option.

Overview of Income Tax Slabs for FY 2025-26

The Budget 2025 has ushered in notable amendments to the income tax slabs, particularly under the New Tax Regime, to enhance disposable incomes and foster consumption. The revised tax slabs for the financial year 2025-26 (assessment year 2026-27) are as follows:

New Tax Regime Slabs:

Notably, the tax exemption threshold has been raised, allowing individuals earning up to ₹12,00,000 to be exempt from taxes under the New Tax Regime, up from the previous cap of ₹7,00,000, due to the enhanced rebate under Section 87A.

Old Tax Regime Slabs:

The Old Tax Regime continues with its existing structure, offering various deductions and exemptions. The tax slabs remain unchanged:

Additionally, individuals with taxable income up to ₹5,00,000 can avail a rebate under Section 87A, effectively reducing their tax liability to zero.

Applicability of Provisions Across Tax Regimes

Understanding which provisions apply to each tax regime is crucial for making an informed decision.

Common Provisions Applicable to Both Regimes:

• Income Tax Slabs: Both regimes categorize income into slabs with corresponding tax rates.
• Surcharge and Cess: Applicable as per prevailing rates in both regimes.
• Standard Deduction: Increased to ₹75,000 for New regime. It continues at ₹50,000 for Old regime.

Provisions Exclusive to the Old Tax Regime:

• Standard Deduction: It continues at ₹50,000 for Old regime.
• Deductions Under Chapter VI-A: Includes deductions such as Section 80C (investments in PPF, NSC, life insurance premiums), Section 80D (health insurance premiums), and others.
• House Rent Allowance (HRA) or Home Loan Interest (Sec 24B): One of these may be applicable depending on individual circumstances. The maximum rebate for home loan interest under Section 24B is ₹2,00,000.
• Section 80TTA or 80TTB: Deduction on interest income from savings accounts (80TTA: ₹10,000) or senior citizens’ bank deposits (80TTB: ₹50,000).
• Leave Travel Allowance (LTA): Exemption for travel expenses incurred during leave.
• Rebate Under Section 87A: Now applicable up to ₹5,00,000 taxable income, reducing tax liability to zero. It means the maximum rebate u/s 87A is ₹2,50,000, provided the total income is up to ₹ 5,00,000 only.

Provisions Exclusive to the New Tax Regime:

• Simplified Tax Slabs: Lower tax rates with no exemptions or deductions.
• Standard Deduction: Increased to ₹75,000 for New regime.
• Rebate Under Section 87A: Now applicable up to ₹12,00,000 taxable income, reducing tax liability to zero. It means the maximum rebate u/s 87A is ₹7,00,000, provided the total income is up to ₹ 12,00,000 only.

Clarification on Doubts or Misconceptions and Some Additional Information

With so many provisions and information circulating, there are bound to be some doubts or misconceptions about them. Let’s try and clear some important ones.

• A common perception is that income up to ₹12,00,000 is totally tax free under the new regime. Actually, it is not. Income up to ₹4,00,00 is free from income tax under the new regime. Individuals earning up to ₹4 lakh do not need to pay any tax or file an Income Tax Return (ITR). Beyond ₹4 lakh, tax liability applies, but the rebate under section 87A can reduce the final tax outgo.
• Another common perception is that the rebate under section 87A is available even if the income is above ₹12,00,000 under the new regime. This again is not correct. If the income is above ₹12,00,000, the rebate under section 87A is not available, and tax is calculated on the income above ₹4,00,000. Similar is the case under the old regime, where, if the income crosses ₹5,00,000, tax is calculated on income above ₹2,50,000.
• A relatively unknown information is about Marginal Tax Relief. Marginal tax relief is the relief provided by the income tax department when a person’s income is marginally above the tax-free limit. For FY 2025-26, the tax-free income limit is ₹12 lakh. With marginal relief, a taxpayer will not have to pay full tax when his/her income is just a little over ₹12 lakh. For determining the marginal relief, tax liability without marginal relief will be compared with the amount exceeding the total income up to which rebate is available. Thus this relief is available up to an income of ₹12,75,000 under the new tax regime, because, it is this stage where the marginal tax relief becomes equal to the tax chargeable.

• Another question is whether the tax payer can switch between old and new regimes. An individual taxpayer not having business income is required to choose between the two regimes every financial year. Currently, a taxpayer having business income wanting to continue with the old tax regime in a financial year, will specifically have to opt for it. Once opted, they would have once in a lifetime option to switch to new tax regime. Once new tax regime is opted, they cannot opt for old tax regime again.

Comparative Analysis: Tax Payable Under Both Regimes

To illustrate the tax implications under both regimes, let’s compare the tax payable across various income levels, assuming the taxpayer fully utilizes all available deductions and exemptions under the Old Tax Regime.

Assumptions:

For the purpose of this example, we assume that the tax payer is availing the maximum possible deductions under the old regime, while he gets the benefit of only Standard deduction under the new regime. We are taking a gross income of ₹25,00,000 for this example.

• Deductions Under Old Regime: Standard Deduction: ₹50,000, and maximum of permissible  deductions of ₹4,60,000 (including Section 80C: ₹1,50,000 (Maximum), Section 80D: ₹1,00,000 (Maximum), HRA or Home Loan Interest: ₹2,00,000 (Maximum), and Section 80TTA: ₹10,000. Total Deductions under the old regime are thus ₹5,10,000, and taxable income works out to ₹19,90,000.
• Deductions Under New Regime: Only Standard Deduction of ₹75,000 is considerd. We arrive at a taxable income of ₹24,25,000.

Given below is a table containing the calculations of tax payable at different levels of income. As we are taking an income of ₹25,00,000 as an example, the tax computation for this amount is shown in bold font. We are calculating only the income tax liability and not the cess, which is 4% of the tax liability.

As seen in the table above, for a person having income of ₹25,00,000, with all the deductions to the maximum, his taxable income under the old regime works out to ₹19,90,000 under the old regime, while it is ₹24,25,000 under the new regime. Still, the tax liability under the old regime is ₹4,09,500 which is higher by ₹1,02,000 compared to the liability of ₹3,07,500 under the new regime.

We may go on calculating the difference in the tax liability under both the regimes. But, quite clearly, for a person with ₹12,75,000 gross income, and not having any substantial portion of income which is to be taxed at special rates, new regime, with zero tax liability, is always going to be better. Even at a level of ₹13,50,000 gross income, where the marginal tax relief under the new regime is zero, the tax liability under the new regime works out to ₹71,250 (on taxable income of ₹12,75,000), which is lower than the tax liability of ₹80,500 under the old regime (on taxable income of ₹8,40,000).

For income beyond ₹13,50,000, the difference between tax liability under old and new regime goes on rising till the gross income crosses ₹24,75,000. After this point, the difference in tax liability becomes constant, as the tax rate is 30% for both the regimes.

Who Should Choose Which Regime?

With the comparative analysis laid out, the decision between the Old and New Tax Regime ultimately depends on an individual’s income level, eligible deductions, and financial goals. Let’s break down which category of taxpayers benefits the most from each regime.

Who Should Opt for the New Tax Regime?

The New Tax Regime is more attractive for taxpayers who do not claim many deductions or have a simple financial profile. This includes:

• Individuals with a gross income of up to ₹12,00,000, as they can fully benefit from the enhanced rebate under Section 87A, provided they don’t have a high proportion of income which is taxed at special rates.
• Individuals with a gross income of above ₹13,50,000, provided they don’t have a high proportion of income which is taxed at special rates, as after this point, the difference between tax liability under old and new regime goes on rising till gross income crosses ₹24,75,000.
• Taxpayers who prefer a hassle-free filing process without the need to track multiple deductions.
• Self-employed individuals and freelancers who do not claim multiple exemptions.

Who Should Opt for the Old Tax Regime?

• People having large income attracting special rates for which tax rebate under Section 87A is not available, such as capital gains, lotteries and horse race winnings etc, and having good tax saving investments, and with total income under ₹12,00,000.
• HUFs, NRIs, companies, and super senior citizens cannot claim rebate under section 87A. Hence if their income is under ₹12,00,000, and they have sufficient tax saving investments, they should opt for the old regime.

Final Thoughts: Making an Informed Decision

The choice between the Old and New Tax Regime is not a one-size-fits-all decision, though based on the current rates, the new regime wins hands down against the old regime. It depends on an individual’s specific financial situation, income level, and ability to claim deductions. Before making a switch, taxpayers should:

• Calculate their total eligible deductions under the Old Regime.
• Compare tax liability under both regimes using the provided tax slabs and calculations.
• Assess their long-term financial planning needs and whether they benefit more from tax-saving investments.
• Use online tax calculators provided by the Income Tax Department or financial advisory platforms to make a precise comparison.

As tax rules evolve, staying informed and evaluating one’s tax strategy annually will ensure the best financial outcomes. Taxpayers should also consult with financial advisors or tax professionals to tailor their decisions based on their unique financial landscape.