Opting for New Tax Regime or Old Tax Regime for Financial Year 2025-2026

author
CA Poonam Gandhi
May 28, 2025
Opting for New Tax Regime or Old Tax Regime for Financial Year 2025-2026

Post Budget 2025, the taxpayer is in a great dilemma of whether to opt for the New Tax Regime or go for the Old Tax Regime.

Vide the present article, let us try and clear the said dilemma by understanding the basics of the New Tax Regime; evaluating income tax rates as applicable under both New Tax Regime and Old Tax Regime; comparing deductions and exemptions available under New Tax Regime and Old Tax Regime and conclusive guide for selecting best possible regime.

Understanding the basics of the New Tax Regime 

We are all well versed with the Old Tax Regime which we have been practising for past many years. Now, let us understand the basics of the New Tax Regime –

  • ● A New Tax Regime was introduced vide Budget 2020. Thereafter, the taxpayer had the option to either continue under the Old Tax Regime or opt for the New Tax Regime;
  • ● The New Tax Regime was attractive as it offered lower tax rates. However, important deductions and exemptions like House Rent Allowance; 80C deduction; Leave Travel Allowance; and many more are not available under the New Tax Regime;
  • ● Notably, the New Tax Regime was made as the default tax regime for all taxpayers (other than Companies and Firms) vide amendment to section 115BAC of the Income Tax Act effective from FY 2023-2024.

In nut-shell, from FY 2023-2024, the eligible taxpayers will have to opt out of the New Tax Regime so as to continue under the Old Tax Regime;

  • ● Budget 2025, made New Tax Regime more eye-catching by enhancing the zero tax threshold up to the income of INR 12,00,000.

Evaluating Income Tax Rates as applicable under both the New Tax Regime and the Old Tax Regime 

Income Tax Rates under the New Tax Regime for FY 2025-2026 [AY 2026-2027] –

Income Range Income Tax Rates
Up to INR 4,00,000 NIL
INR 4,00,000 to INR 8,00,000 5%
INR 8,00,001 to INR 12,00,000 10%
INR 12,00,001 to INR 16,00,000 15%
INR 16,00,001 to INR 20,00,000 20%
INR 20,00,001 to INR 24,00,000 25%
Above INR 24,00,000 30%

Rebate limit available under the New Tax Regime 

  • ● Vide Budget 2025, the tax rebate limit under the New Tax Regime has been enhanced from INR 7,00,000 to INR 12,00,000. This means that under New Tax Regime there will be zero tax up to the income of INR 12,00,000;
  • Correspondingly, the rebate under section 87A of the Income Tax Act has been enhanced from INR 25,000 to INR 60,000.

Standard deduction available under New Tax Regime 

  • ● A standard deduction of INR 75,000 is available to salaried individuals under New Tax Regime. This means that under New Tax Regime, in the case of salaried individuals, there will be zero tax up to the income of INR 12,75,000 [Rebate limit INR 12,00,000 + Standard deduction INR 75,000]

Income Tax Rates under the Old Tax Regime for FY 2025-2026 [AY 2026-2027] 

Income Range Income Tax Rates
Up to INR 2,50,000 NIL
INR 2,50,000 to INR 5,00,000 5%
INR 5,00,001 to INR 10,00,000 20%
Above INR 10,00,000 30%


There is a tax rebate limit of INR 5,00,000 under the Old Tax Regime. Hence, correspondingly, the rebate available under section 87A of the Income Tax Act is INR 12,500. This means that under the Old Tax Regime there will be zero tax up to the income of INR 5,00,000.

Comparative analysis of deduction and exemption available under New Tax Regime and Old Tax Regime 

The Old Tax Regime covers a huge list of deductions and exemptions. However, around 70 deductions and exemptions that are available under the Old Tax Regime are not allowed under the New Tax Regime. Thus, the availability of deductions and exemptions plays a vital role while selecting a specific tax regime.

The following table covers a comparative analysis of important deductions and exemptions available under the New Tax Regime and the Old Tax Regime –

Deductions and exemptions available under the New Tax Regime Important Deductions and exemptions available under the Old Tax Regime
  • ● Section 80CCD(1) – Employee’s contribution to Provident Fund;
  • ● Section 80CCD(2) – Employer’s contribution to NPS;
  • ● Section 80CCH(2) – Deposit in Agniveer Corpus Fund;
  • ● Section 10(10) – Gratuity;
  • ● Section 10(10AA) – Leave Encashment;
  • ● Section 10(10B) – Retrenchment Compensation;
  • ● Section 10(10D) – Income from Life Insurance;
  • ● Section 10(14) – Transport allowance to differently abled;
  • ● Section 24(b) – Deduction for interest paid on home loans that is borrowed for the let-out property; etc.
  • ● Section 80C – Deduction towards contribution to Provident Fund, life insurance premia, deferred annuity, subscription to certain equity shares/ debentures, etc.
  • ● Section 80CCC – Deduction for contribution to specific pension plans;
  • ● Section 80CCD – Deduction towards contribution to pension scheme of Central Government;
  • ● Section 80D – Health Insurance Premium deduction;
  • ● Section 80DD – Deduction towards expense for disabled dependent;
  • ● Section 80DDB – Deduction for expenditure incurred on treatment of specified diseases;
  • ● Section 80E – Deduction towards interest paid on loan for pursuing higher education;
  • ● Section 80EE – Deduction towards home loan interest for first time home buyer;
  • ● Section 80EEA – Deduction towards home loan interest for first time home buyer on affordable housing;
  • ● Section 80G – Deduction towards donations to specific funds/ charitable institutions etc.;
  • ● Section 80GG – Deduction for rent paid;
  • ● Section 80U – Tax deduction for disabled individuals;
  • ● Section 80TTA – Deduction towards interest earned on the savings bank account;
  • ● Section 80TTB – Deduction for senior citizens on interest earned on deposits;
  • ● Others –
    • ● Professional tax;
    • ● HRA – House Rent Allowance;
    • ● LTA – Leave Travel Allowance;
    • ● Helper Allowance;
    • ● Other Special Allowance u/s. 10(14); etc.

Conclusive guide for selecting the best regime 

Taxpayers who have income up to INR 12 Lakhs [INR 12.75 Lakhs in case of salaried taxpayer] should straight away opt for the New Tax Regime since the said income limit is covered under a zero-tax threshold.

Now, the taxpayers with income above INR 12 Lakhs need to evaluate both options and select the best possible option. The following table narrates circumstances based on which best possible regime can be selected –

Particulars

Circumstances under which the New Tax Regime should be selected Circumstances under which the Old Tax Regime should be selected
Investment preferences Taxpayers who generally do not prefer investing much in instruments options i.e. Public Provident Fund [PPF], ELSS, insurance which are eligible for deduction. Taxpayers who prefer claiming maximum deduction by investing in several instruments which are eligible for deductions.
Taxpayers preferences Taxpayers who don’t want to go into complex tax slabs and give more preference to simple tax slabs Taxpayers who still prefer and want to stick with the old tax regime as they are more used to dealing with it.
Documentation Taxpayers who prefer minimal documentations. Here, taxpayers will have to maintain more documentation as compared to the New Tax Regime.
 
 
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