Since 2020, Indian taxpayers have had the choice of two regimes of income tax: the old regime with a myriad of exemptions and deductions, and a newer simpler one with lower slab rates at the expense of giving up almost all of those benefits. For 2024–25 (accounting year 2025–26), the new regime is the default one, although taxpayers are free to opt for being taxed under the old regime when they submit their tax returns. Understanding the details of both regimes is necessary for you to ensure you do not end up paying a higher tax amount than what is necessary.
How income is taxed under the new and old regimes
The contrast between the two schemes is best seen in the slab structures. The new taxation scheme has more nuanced income slabs with lower rates. Income up to ₹3 lakh is exempt, then 5% on income of ₹3 lakh to ₹6 lakh, 10% from ₹6 lakh to ₹9 lakh, 15% from ₹9 lakh to ₹12 lakh, 20% from ₹12 lakh to ₹15 lakh, and 30% from income above ₹15 lakh. The new taxation system, however, exempts only income of up to ₹2.5 lakh, levies 5% between ₹2.5 lakh and ₹5 lakh, 20% between ₹5 lakh and ₹10 lakh, and 30% on income exceeding ₹10 lakh.
Threshold rebates are of very much concern for low-income earners
Both the regimes offer rebate of tax under Section 87A, but the slabs are varied. Under the old regime, those having income up to ₹5 lakh are eligible for a full rebate. The new regime is more generous on this front with the rebate being available up to ₹7 lakh. That means individuals with an income of ₹7 lakh or less under the new regime do not pay any tax, without needing to claim any deductions.
Exemptions and deductions: the old regime's strength
The biggest advantage of the pre-revised regime of taxes is the long menu of exemptions and deductions it offers. People can claim deductions under Section 80C for investing in PPF, EPF, ELSS, and life insurance premium, health insurance under Section 80D, house loan interest under Section 24(b), and exemptions for HRA and LTA. The pre-revised regime also offers a minimum deduction of ₹50,000 in the case of salaried employees.
On the other hand, the new regime, so far, did not grant any deductions other than employer contributions to NPS as per Section 80CCD(2). From FY 2023–24, it now grants a normal deduction of ₹50,000, which narrows the difference a bit. It still doesn't include most tax-saving allowances, though, so taxpayers who rely heavily on deductions will probably be worse off under the new regime.
Who benefits more from the old regime
Those who have large investments in tax-saving instruments, pay rent and get HRA, or have large home loan interest outgo are likely to benefit from the earlier tax regime. For them, the total deductions can cut down their taxable income significantly so that the higher tax rates under the earlier plan become cheaper than they initially appear.
When the new regime could be the smarter choice
The new regime is, overall, more attractive for individuals with little deductions to claim. This encompasses young professionals who have not started investing for tax deductions, retirees who have no HRA or home loans, or high-income earners who would like to forgo the complexity and uncertainty of compliance. Lower rates and reduced compliance simplify the new regime for individuals with straightforward finances.
Regime change: flexibility with conditions
Salaried individuals can switch between the old and new tax structures on a financial year basis while submitting their income tax returns. This provides them with the option to analyze which structure is most appropriate depending on the quantum of income, investments, and expenditures. Business or professional income earners, however, can switch only once. Once they switch out of the old regime to avail of the new one, they cannot revert to the old system unless business income ceases.
Make an informed choice, not an automatic one
Just because the new tax regime is now the default does not mean it’s the best option for everyone. Depending on your income composition and your ability to invest in eligible instruments, the old regime may offer higher tax savings despite the steeper rates. Before you file your income tax return for FY 2024–25, it's a good idea to calculate your tax liability under both regimes using the services of a good calculator or with the help of a tax professional. A good comparison can save you lots of money and simplify your tax process.