Old vs. New Tax Regime: Which One Is Best for Employees?

The Indian tax system allows salaried individuals to file their Income Tax Return (ITR) using either the old tax regime or the new tax regime. Each option has different tax rates, deductions, and exemptions, so picking the right one can significantly affect your tax bill.

This article will explain both systems to help you figure out which one is best for your situation.

New Tax Regime

The new tax regime was introduced in the 2020 budget, offering lower tax rates. However, taxpayers who chose this option could not claim major deductions like House Rent Allowance (HRA) or deductions under Section 80C, which led to fewer people opting for it. 

To make the new regime more appealing, several key changes were introduced:

• Default Option: Starting from FY 2023-24, the new tax regime will be the default option. If you don’t tell your employer which regime to choose, they will calculate your TDS based on the new tax regime.
• Higher Basic Exemption: The basic exemption limit has been raised from ₹2.5 lakh to ₹3 lakh from FY 2023-24 onwards. The highest tax rate of 30% applies to income over ₹15 lakh.
• Increased Rebate Limit: The rebate under Section 87A has increased from ₹5 lakh to ₹7 lakh, allowing a benefit of up to ₹25,000 for those with income up to ₹7 lakh.
• Higher Standard Deduction: For the 2024-25 budget, the standard deduction for salaried employees has been increased from ₹50,000 to ₹75,000. The deduction for family pensioners has also been raised from ₹15,000 to ₹25,000.
• Lower Surcharge: The surcharge on annual income above ₹5 crore has been reduced from 37% to 25%. This change lowers the maximum tax rate from 42.74% to 39%.
• Revised Tax Slabs: The number of income tax slabs has been reduced from 6 to 5. The new tax rates are as follows:

Income Tax Slab Rates for New Tax Regime (FY 2024-25, AY 2025-26)

Here are the income tax slab rates for the new tax regime for the financial year 2024-25:

These rates show how much tax you need to pay based on your income under the new tax regime.

Income Tax Slab Rates for Old Tax Regime (FY 2024-25, AY 2025-26)

The Old Tax Regime has been around for longer and allows taxpayers to claim over 70 deductions and exemptions, such as those under Section 80C, House Rent Allowance (HRA), and Leave Travel Allowance (LTA). Here are the income tax slab rates for the old tax regime applicable to an individual who is below the age of 60:

These rates show how much tax you would pay based on your income if you choose the old tax regime.

Comparing Old and New Tax Regimes: What’s Best for You?

When your employer asks for your investment declaration to calculate taxes on your salary, it’s important to weigh the pros and cons of both tax regimes. Choosing the wrong one could lead to higher tax deductions from your salary.

To decide which tax regime is better for you, consider the deductions and exemptions available under the old tax regime. First, figure out your net taxable income by adding up all the eligible deductions and exemptions.

Once you have your tax amounts for each regime, compare them. Usually, it’s best to choose the one with the lower tax liability. Make sure to inform your employer of your choice so they can adjust the Tax Deducted at Source (TDS) accordingly. This way, the correct amount of tax will be deducted from your salary each month, helping you avoid any surprises at the end of the financial year, whether it’s a tax due or a refund.

Which Tax Regime is Better? New vs. Old Regime

Deciding which tax regime is better for salaried individuals depends on several factors:

• Investment Goals: Consider your investment plans before choosing a tax regime. The new tax regime works well if you prefer flexibility and don’t want to invest in tax-saving options. However, if you’re focused on long-term goals like retirement savings, the old tax regime may be more advantageous since it allows for deductions on various investments.
• Simplicity: The new tax regime is simpler because it doesn’t require you to calculate and claim deductions and exemptions. This makes filing your Income Tax Return (ITR) quicker and easier.
• Income Level: The new tax regime has lower tax rates compared to the old one. For example, under the new regime, someone with an annual income of ₹9 lakh pays ₹45,000 in tax (5% of taxable income), which is ₹47,500 less than the ₹92,500 they would pay under the old regime. Similarly, someone earning ₹15 lakh would pay ₹1.5 lakh under the new rates, down from ₹1.87 lakh prior to the latest budget changes.
• Deductions and Exemptions: The old tax regime allows you to claim deductions like ₹1.5 lakh under Section 80C and ₹2 lakh for home loan interest (Section 24(b)). This means you can deduct a total of ₹3.5 lakh from your income. In contrast, the new regime does not offer these deductions or exemptions.

Factors to Consider When Choosing a Tax Regime

When deciding between the old and new tax regimes, keep these points in mind:

• Total Income: If your income is below ₹7 lakh, the new tax regime is advantageous due to a higher rebate limit.
• Available Deductions: If you have substantial deductions (like HRA or medical expenses, interest from home loan), the old regime might work better for you.
• Investment Plans: If you invest a lot in tax-saving instruments (like PPF or ELSS), you may benefit more from the old regime.
• Break-even Point: This is the income level where your tax liability is the same in both tax regimes. Budget 2023 raised the tax rebate under Section 87A, meaning that taxpayers with income up to ₹7 lakh will now pay no tax. The new tax regime also includes a standard deduction of ₹50,000 for salaried individuals. As a result, individuals can earn up to ₹7.5 lakh annually with zero tax liability, making the new regime attractive.
• Income Levels and Break-even Points: If your deductions and exemptions in the old tax regime exceed the break-even point for your income, stick with the old regime. If your deductions are below the break-even threshold, the new regime might be better for you.

Frequently Asked Questions

What is the new tax regime?

The new tax regime is a simpler tax system that offers lower tax rates but allows fewer deductions and exemptions compared to the old tax regime. This means calculations are easier, but you might pay more tax if you used to claim many deductions in the old regime.

What deductions are available in the new tax regime?

In the new tax regime, you can claim a standard deduction of ₹75,000 for the financial year 2024-25. Family pensioners can get a deduction of ₹25,000. Employer contributions to the National Pension System (NPS) are also deductible. However, you cannot claim popular deductions like those under Section 80C.

What is the old tax regime?

The old tax regime is the traditional tax system where taxpayers can claim various deductions and exemptions. It has higher tax rates but allows you to benefit from tax deductions on many investments and expenses.

What is the new tax regime?

The new tax regime was introduced in Budget 2020 and has lower tax rates but fewer deductions and exemptions. It’s designed to simplify taxes, but you lose the benefits of many investments and expenses.

Is the new tax regime better for salaried employees?

Whether the new or old tax regime is better depends on your individual financial situation and preferences. The new regime has lower rates but fewer deductions, so salaried employees should carefully consider their circumstances and possibly consult a tax expert.

Can I switch between the old and new tax regimes?

Yes, you can switch between the old and new tax regimes each year when you file your income tax return. However, if you choose the new regime, you can’t claim any benefits from the old regime for that year.

Are there any limitations to the new tax regime?

Yes, the new tax regime does not allow many deductions, such as those under sections 80C, 80D, and others. You also can’t claim allowances like House Rent Allowance (HRA) or Leave Travel Allowance (LTA).

Can I claim deductions under both tax regimes?

No, you cannot claim deductions under both regimes for the same financial year. You must choose one.

Which tax regime should I choose if my income is ₹7 lakh?

If your income is ₹7 lakh, the new tax regime is likely better for you. Here’s why:

• No Tax: With a taxable income of up to ₹7 lakh, you can pay no tax thanks to a rebate.
• Standard Deduction: You can still benefit from a standard deduction of ₹50,000.
• Simpler Slabs: The new regime has fewer tax brackets with lower rates for income between ₹6 lakh and ₹9 lakh.