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Since the new tax regime was introduced in Budget 2020, there has been a lot of discussion among taxpayers about the old versus new tax regime.
There is a clear distinction between the two regimes, and understanding these differences will help you choose the better option.
Here is a quick guide to old tax regime vs new tax regime primarily for individual taxpayers, recent changes made to new tax regime slabs and how to choose the right one for you.
Before we get into the detailed differences between the old and new tax regimes, let’s first look at the fundamental distinctions.
Refers to the tax structure that existed before the announcement of the new tax regime in Budget 2020. It has higher tax rates across the various income tax slabs but allows taxpayers to claim a wide range of deductions and exemptions.
First introduced in Budget 2020, it simplified the approach to income tax computation. The new tax regime offers lower rates but allows only a few deductions and exemptions.
Here is an overview of the fundamental differences between the old and new tax regimes.
Differentiating Factors
Old Tax Regime
New Tax Regime
Purpose
To reduce taxable income by encouraging taxpayers to opt for savings and investment plan options.
For better financial planning and a secure future
To simplify tax structure and provide relief to taxpayers.
To eliminate the need for taxpayers to opt for savings and investment plans that may not align with their individual needs.
To introduce more flexibility in spending
Tax Slabs
The old tax regime slab had multiple slabs with higher rates.
New tax regime slabs have been revised, with comparatively more slabs with lower rates.
Exemptions and Deductions
Allows for a wide range of exemptions, such as HRA and deductions under Section 80C and Section 80D, to reduce taxable income.
Fewer exemptions and deductions are allowed.
Ease of Calculation
Quite complicated when applying for exemptions and deductions
Simple and straightforward calculations with fewer exemptions and deductions
The old tax regime has remained largely unchanged recently, whereas the government has announced several updates to the new regime. These changes aim to make the new tax regime more appealing and encourage taxpayers to transition to it.
Tax Provision
Threshold Limit for Income Eligible for the Tax Rebate
₹7 lakhs
₹5 lakhs
Rebate if the taxable income is within the threshold limit
Actual tax or ₹25,000, whichever is lower
Actual tax or ₹12,500, whichever is lower
Tax Slabs and Tax Exemption Limit on Tax Slabs
The new tax regime slabs have been revised.
The tax exemption limit for the new tax regime has been increased to ₹7 lakhs, regardless of age.
The old tax regime slabs and exemption limits have not changed.
₹2.5 lakhs (taxpayers under 60 years)
₹3 lakhs (taxpayers 60 - 80 years)
₹5 lakhs (taxpayers over 60 years)
Standard Deduction on Salary Income
With effect from FY 2024-25, the standard deduction is ₹75,000. It was increased from ₹50,000 applicable for FY 2023-24.
The standard deduction remains ₹50,000.
Family Pension
With effect from FY 2024-25, individuals receiving a family pension can claim a deduction of up to 1/3rd of their pension or ₹25,000 (increased from 15,000), whichever is lower.
Individuals receiving a family pension can claim a deduction of up to 1/3rd of their pension or ₹15,000, whichever is lower.
Surcharge
(For high net worth individuals, the highest rate of surcharge is for income over ₹5 crores.)
It has been reduced from 37% to 25%.
It remains at 37%.
Exemption on Leave Encashment (For non-government employees)
The exemption limit on leave encashment has been increased from ₹3 lakhs to ₹25 lakhs.
Deduction Limit on Employer’s Contribution for NPS (applicable only to non-governmental employers)
The deduction limit has been changed from 14% to 10%.
The deduction limit remains 10%.
Default Regime
From FY 2023-24, the new tax regime is the default regime.
Was the default tax regime until FY 2022-23
New Tax Regime Slabs - FY 2023-24 (AY 2024-25)
New Tax Regime Slabs - FY 2024-25 (AY 2025-26)
Tax Slab (₹)
Tax Rate
Till 3 lakhs
Not Applicable
Between 3 lakhs and 6 lakhs
5%
Between 3 lakhs and 7 lakhs
Between 6 lakhs and 9 lakhs
10%
Between 7 lakhs and 10 lakhs
Between 9 lakhs and 12 lakhs
15%
Between 10 lakhs and 12 lakhs
Between 12 lakhs and 15 lakhs
20%
Above 15 lakhs
30%
Old Tax Regime Slab - For FY 2023-24 and FY 2024-25
Till 2.5 lakhs
Between 2,50,001 lakhs and 5,00,000 lakhs
Between 5,00,001 lakhs and 10,00,000 lakhs
Above 10,00,000
Between 3,00,001 lakhs and 5,00,000 lakhs
Till 5 lakhs
The old tax regime allows for a wide range of exemptions and deductions as compared to the new tax regime. Here is a list of some of the common old tax regime deductions and exemptions allowed and new tax regime exemptions and deductions allowed and not allowed.
Deductions and Exemptions in Old Tax Regime (FY 2024-25)
New Tax Regime Deductions and Exemptions (FY 2024-25)
Main Deductions
Standard Deduction
₹50,000
₹75,000
Rebate under Section 87A
₹12,500
₹25,000
Interest on Home Loan under Section 24B
For Self-Occupied or Vacant Property
Applicable
For Let-out Property
Deductions Applicable to Savings Schemes, Investment Plans, Insurance Plans and Pension Plans
Deductions under Section 80C for PPF, SCSS, ELSS funds, NSC, NPS, etc.
Deductions under Section 80CCD (1) for Employee’s contribution to NPS
Deductions under Section 80CCD(2) for employer’s contribution to NPS
Deductions under Section 80D for Health Insurance Premium
Other Deductions
Deductions under Section 80E for interest paid towards an education loan
Deductions under Section 80EEB for interest paid towards an electric vehicle loan
Deduction under Section 80G for donations
Deduction under Section 80U for disabled individuals
Deductions under Section 80TTA and 80TTB for savings bank interest
Other deductions applicable under Chapter VI - A
Deductions applicable to Family Pension
Entertainment Allowance
Exemptions
HRA Exemption
Leave Travel Allowance
Professional Tax
Other allowances, such as food allowance of ₹50/meal restricted to two meals a day
Prerequisites for official engagements
Exemption applicable to gifts received up to ₹50,000
Exemption under Section 10 (10AA) applicable to Leave Encashment
Exemptions under Section 10(10C) applicable to Voluntary Retirement
Exemption under Section 10 (10) applicable to Gratuity
Conveyance Allowance
Daily Allowance
Transport Allowance (for specially-abled persons)
The better option between the two depends on your circumstances. It will be based on your income, financial goals and income tax liability.
You can consider the following aspects to determine the most suitable income tax regime.
While the old tax regime can reduce your taxable income based on your savings and investment plans, the new tax regime can lower your income tax liability based on your income.
If you haven’t invested in any savings or investment plans, the new tax regime may be better suited for you. On the other hand, if you’ve invested in tax-saving instruments like insurance plans and investment plans, the old tax regime may be better.
If you prefer a disciplined savings and investment approach, the old regime can be a better fit, provided it reduces your tax liability to the maximum possible extent.
If you prefer flexibility and do not want to get tied to mandatory payments for tax-saving investment benefits, the new tax regime can be a better option.
The Income Tax Calculator available on the e-filing portal can help you determine your income tax liability based on your personal finances for both the old and new tax regimes. Use this online tool to compare and make a wise decision.
Here are a few illustrations to compare the old versus new tax regime. Detailed explanations for calculations are provided for Scenario 1, as the remaining scenarios follow a similar approach.
You can also go through our how to calculate income tax on the salary page for step-by-step calculations.
Let us consider Mr Naveen, a salaried individual earning ₹7 lakhs per annum. The organisation does not offer any further benefits such as HRA, LTA, etc. He is eligible for Section 80C deductions of up to ₹75,000.
Particulars
Old Tax Regime (₹)
New Tax Regime (₹)
Gross annual income
7,00,000
50,000
75,000
Section 80C deductions
NA
Total Taxable Income
5,75,000
6,25,000
Income Tax
27,500 (₹12,500 + ₹15,000)
16,250
Rebate
Not applicable as taxable income exceeds ₹5,00,000
Cess (4% on Tax)
1,100
Income Tax Liability
28,600
Nil
Explanation
Old Tax Regime Slab (₹)
Calculation (₹)
Tax Amount (₹)
Up to 2,50,000
2,50,000 - 5,00,000
5% (5,00,000 - 2,50,000)
12,500
5,00,000 - 10,00,000
20% (5,75,000 - 5,00,000)
15,000
Tax Liability
12,500 + 15,000
27,500
New Tax Regime Slab (₹)
Up to 3,00,000
3,00,000 - 7,00,000
5% (6,25,000 - 3,00,000)
Rebate (Actual amount or 25,000, whichever is lower)
16,250 - 16,250
Let us consider Mr Subesh, a salaried individual earning ₹8 lakhs per annum. He is eligible for Section 80C deductions of up to ₹1,50,000 and Section 80D deductions of up to ₹75,000. Details of his income and income tax computation are as follows.
Basic Salary
8,00,000
20,000
Gross Total Income
8,20,000
Leave Travel Allowance Exemption (To the extent of bills submitted)
1,50,000
Section 80D deductions
5,30,000
7,45,000
18,500
24,500
740
980
19,240
25,480
Scenario 3
Mr Vignesh is an IT professional residing in Chennai and pays a house rent of ₹20,000 per month. The table below details his salary, allowances, income from other sources and deductions applicable.
Value (₹)
Basic Salary (Per Annum)
10,00,000
House Rent Allowance (Per Month)
30,000
Leave Travel Allowance (Per Annum)
Interest Earned from Savings Account Per Annum
9,000
Annual Contribution to PPF (Public Provident Fund)
Annual Investment in ELSS Funds
Annual Contribution to Employees Provident Fund (EPF)
1,20,000
Total Annual Investment in NPS (shared equally by Vignesh and his employer)
90,000
Annual Life Insurance Premium
10,000
Annual Health Insurance Premium
Annual Basic Salary
House Rent Allowance
3,60,000
Gross Total Income from Salary
13,80,000
Income from Other Sources
13,89,000
Income Tax Computation
House Rent Allowance Exemption (Use an HRA calculator to calculate the exemption)
1,40,000
Leave Travel Allowance Exemption (Exemptions allowed based on the extent of bills submitted.)
18,000
Taxable Income after allowing Exemptions
11,81,000
13,14,000
Total Eligible Deductions Under Section 80C (Although total deductions exceeds ₹1,50,000 )
Employee’s Contribution to NPS under Section 80CCD (1B) (As the Section 80C limit gets exhausted, the employee’s contribution can be claimed under Section 80CCD (1B)
45,000
Employer’s Contribution to NPS Under Section 80CCD (2). Section 80CCD (2) does not come under Section 80C.
Deduction applicable to Interest Income
Health Insurance Premium under Section 80D
Taxable Income After Allowing Deductions
9,22,000
12,69,000
96,900
93,800
Cess (4%)
3,876
3,752
Total Income Tax Liability
1,00,776
97,552
Mr Saravanan is a salaried taxpayer. He has availed a home loan and is eligible for,
The table below details his salary, allowances, income from other sources and applicable deductions.
15,00,000
25,000
40,000
15,25,000
15,35,000
Leave Travel Allowance Exemption
(Exemptions allowed based on the extent of bills submitted.)
Taxable Income After Allowing Exemptions
14,65,000
14,60,000
Total Eligible Deductions Under Section 80C
(Although actual deductions, including those applicable to the home loan, exceed ₹1,50,000)
Deduction applicable to interest incurred on home loan under Section 24B
2,00,000
Deduction applicable to interest incurred on home loan under Section 80EEA
9,40,000
1,00,500
1,32,000
4,020
5,280
1,04,520
1,37,280
From scenario 1, we understand that although there were deductions applicable up to ₹75,000 for a salary income of ₹7 lakhs, the recent changes to the rebate in the new tax regime have resulted in zero income tax liability.
Scenario 2 shows that for an income of ₹8 lakhs, with eligible deductionsof ₹2,25,000, the old tax regime proves to be the better option.
Scenario 3 shows that for an income of ₹10 lakhs, although there were eligible deductionsof ₹2,59,000 for the old tax regime, the new proves to be the better option.
Scenario 4 shows that for an income of ₹15 lakhs with eligible deductionsof ₹1,75,000 and an additional deduction of ₹3,50,000, the old tax regime emerges as a better option.
Therefore, it is essential to assess your income tax liability under both tax regimes to determine the most suitable option. Make sure you make financial decisions that align with your future goals.
If you are an Individual with business or professional income, you cannot switch between the new and old tax regimes every year. If you opt out of the new tax regime, you will have one chance to switch back to the new regime. After that, you will not be allowed to switch back to the old regime.
On the other hand, if you are an individual without a business or professional income, you can switch between the old and new tax regimes every year. You need to inform your employer regarding the change at the beginning of the financial year.
When you compare old versus new tax regimes, you need to work out detailed calculations to identify which option provides a lower income tax liability. However, you must keep in mind that it is also important to consider your financial responsibilities just beyond income tax liability.
For example, purchasing a health insurance policy may or may not lead to a significant reduction in your income tax liability. However, you need to view it beyond the tax benefit, as it helps cover unexpected medical expenses.
Health insurance policies can be purchased to cover medical expenses for yourself, your family and your parents. While it provides a tax deduction benefit* under Section 80D for up to ₹1 lakh, it also protects you against a wide range of medical expenses, including critical illnesses, pre- and post-hospitalisation costs, surgical procedures and more.
Reliance General Insurance offers various health insurance policies online, allowing you to customise and choose the best option for your needs. You can compare different coverage benefits and their applicable premiums online before purchasing a health insurance policy.
No, Section 80C tax deductions do not apply to the new tax regime.
Yes, you need to inform your employer regarding the change in your tax regime at the beginning of the financial year. If you fail to inform the employer, they will apply the default new tax regime to determine the applicable income tax liability.
No, the tax exemption applicable to HRA does not apply to the new tax regime.
The standard deduction applicable to salaried individuals has been increased from ₹50,000 to ₹75,000 from the FY 2024-25.
You can choose to opt out of the new tax regime by selecting the appropriate option while filing your Income Tax Return (ITR).
In addition, taxpayers with business or professional income must submit Form 10-IEA when filing their ITR. This requirement does not apply to individuals who do not have business or professional income.
Disclaimers:
*T&C Apply. For more details on risk factors, terms conditions, brochure, and exclusions, please read the policy wording and CIS carefully before concluding a sale.
Tax benefits are subject to conditions under the Income Tax Act and amendments thereof. The tax laws are subject to amendments/changes from time to time. Please consult your tax advisor for details.
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