New vs Old Tax Regime: Which One Saves You More?
Compare the new and old tax regimes for FY 2025-26. Slab rates, deductions, and a practical guide to choosing the regime that saves you the most tax.
Since Budget 2020, Indian taxpayers have had the option to choose between two tax regimes: the old regime with higher slab rates but generous deductions, and the new regime with lower slab rates but minimal deductions. Budget 2023 made the new regime the default option, though you can still opt for the old regime every year. Which one saves you more? The answer depends entirely on your income and deduction profile.
Old Tax Regime: Higher Rates, More Deductions
Under the old regime, the tax slabs for FY 2025-26 are:
- Up to ā¹2.5 lakh: Nil
- ā¹2.5 lakh ā ā¹5 lakh: 5%
- ā¹5 lakh ā ā¹10 lakh: 20%
- Above ā¹10 lakh: 30%
The old regime allows you to claim deductions under Section 80C (ā¹1.5 lakh), Section 80D (health insurance up to ā¹25,000āā¹1 lakh), HRA exemption, LTA, Section 24(b) home loan interest (ā¹2 lakh), standard deduction of ā¹50,000, and many others. If you have significant deductions, the old regime often results in lower tax despite higher slab rates.
New Tax Regime: Lower Rates, Fewer Deductions
The new regime offers reduced slab rates:
- Up to ā¹3 lakh: Nil
- ā¹3 lakh ā ā¹7 lakh: 5%
- ā¹7 lakh ā ā¹10 lakh: 10%
- ā¹10 lakh ā ā¹12 lakh: 15%
- ā¹12 lakh ā ā¹15 lakh: 20%
- Above ā¹15 lakh: 30%
Under the new regime, most deductions are disallowed. However, you still get:
- Standard deduction of ā¹75,000 (for salaried individuals and pensioners)
- Employer NPS contribution under Section 80CCD(2) ā up to 10% of basic salary (14% for government employees)
- New tax regime is the default ā you must actively opt out to use the old regime
Budget 2024 also introduced a Section 87A rebate under the new regime, making income up to ā¹7 lakh effectively tax-free (after the rebate).
Who Should Choose the Old Regime?
The old regime typically works better if your total deductions and exemptions exceed ā¹3.5ā4 lakh annually. This includes:
- Full Section 80C utilisation (ā¹1.5 lakh)
- Home loan interest under Section 24(b) (up to ā¹2 lakh)
- HRA exemption (especially for metro city renters)
- Health insurance premiums under Section 80D
- NPS additional deduction under 80CCD(1B) (ā¹50,000)
Example: A salaried employee earning ā¹15 lakh with ā¹1.5 lakh in 80C, ā¹2 lakh home loan interest, ā¹1.5 lakh HRA exemption, and ā¹25,000 health insurance (total deductions ~ā¹5.25 lakh) will likely pay less tax under the old regime.
Who Should Choose the New Regime?
The new regime favours taxpayers with minimal deductions:
- Young professionals living with parents (no HRA, no home loan)
- Those who cannot fully utilise Section 80C
- High earners without significant investments or loans
- Anyone with total deductions below ā¹2ā2.5 lakh
Example: A 25-year-old earning ā¹8 lakh with only ā¹50,000 in EPF contributions and no other deductions will pay significantly less under the new regime thanks to lower slab rates and the ā¹7 lakh rebate.
Quick Comparison Table
| Factor | Old Regime | New Regime |
|---|---|---|
| Highest slab rate | 30% (above ā¹10L) | 30% (above ā¹15L) |
| Standard deduction | ā¹50,000 | ā¹75,000 |
| Section 80C | Yes (ā¹1.5L) | No |
| HRA exemption | Yes | No |
| Home loan interest | Yes (ā¹2L) | No |
| Default regime | No (opt-in) | Yes (opt-out) |
| Rebate (87A) | Up to ā¹12.5L income | Up to ā¹7L income |
How to Switch Between Regimes
For salaried employees, inform your employer at the start of the financial year via a declaration form. You can still switch when filing your ITR ā the final choice at filing time overrides your employer's TDS calculation.
For business income filers (ITR-3/ITR-4), the regime chosen in one year cannot be changed in subsequent years without exiting the presumptive taxation scheme.
Conclusion
There is no one-size-fits-all answer. Calculate your tax liability under both regimes using the e-filing portal's tax calculator or an online comparison tool. As a rule of thumb, if your total deductions exceed ā¹3.5 lakh, the old regime likely saves more; otherwise, the new regime's lower rates usually win. Review your choice every year as your income and financial situation change.