When it comes to paying income tax in India, the most common confusion taxpayers face is choosing between the new tax regime and the old tax regime. Since the introduction of the new system under the Union Budget 2020, and with further updates in subsequent budgets including 2025, individuals have been comparing both options to identify which one suits them better.
This detailed article breaks down the key differences, tax slabs, deductions, exemptions, pros, and cons of both regimes — so you can make an informed decision before filing your Income Tax Return (ITR) for FY 2024-25 / AY 2025-26.
Understanding the Concept of Tax Regimes in India
The Income Tax Act, 1961 allows individuals to calculate and pay tax based on defined slabs and applicable deductions.
Earlier, there was only one system — now referred to as the old tax regime — which offered numerous deductions and exemptions. However, with the aim to simplify taxation and reduce dependency on tax-saving investments, the government introduced a new tax regime that features lower tax rates but fewer deductions.
What Is the Old Tax Regime?
Key Features of the Old Regime
The old tax regime (in force for decades) allows taxpayers to claim various deductions and exemptions to lower their taxable income.
You can reduce your tax liability by claiming benefits under sections such as:
- Section 80C – Investments in PPF, ELSS, LIC, etc. (up to ₹1.5 lakh)
- Section 80D – Health insurance premium
- Section 80TTA / 80TTB – Interest from savings accounts
- House Rent Allowance (HRA)
- Leave Travel Allowance (LTA)
- Home loan interest deduction under Section 24(b)
Old Tax Regime Slab Rates for FY 2024-25
| Income Range (₹) | Tax Rate |
| 0 – 2.5 lakh | Nil |
| 2.5 – 5 lakh | 5% |
| 5 – 10 lakh | 20% |
| Above 10 lakh | 30% |
Note: Senior and super-senior citizens get higher exemption limits (₹3 lakh and ₹5 lakh respectively).
What Is the New Tax Regime?
The new tax regime, introduced under Section 115BAC, aims to simplify taxation by offering reduced tax rates with minimal exemptions.
Taxpayers can opt in or out of this regime each year while filing ITR (subject to conditions for business income).
New Tax Regime Slab Rates for FY 2024-25 (AY 2025-26)
| Income Range (₹) | Tax Rate |
| 0 – 3 lakh | Nil |
| 3 – 6 lakh | 5% |
| 6 – 9 lakh | 10% |
| 9 – 12 lakh | 15% |
| 12 – 15 lakh | 20% |
| Above 15 lakh | 30% |
Standard Deduction (2025 Update)
From Budget 2025, the new tax regime also includes a standard deduction of ₹75,000 for salaried individuals and pensioners, along with higher rebate under Section 87A for income up to ₹12 lakh — effectively making it tax-free for many middle-class taxpayers.
Key Differences Between Old and New Tax Regime
| Parameter | Old Tax Regime | New Tax Regime |
| Tax rates | Higher rates | Lower rates |
| Deductions & Exemptions | 70+ available | Limited (few allowed) |
| Compliance | More documentation | Simplified filing |
| Rebate u/s 87A | Up to ₹5 lakh income | Up to ₹12 lakh income |
| Standard Deduction | ₹50,000 | ₹75,000 (from 2025) |
| Best for | Taxpayers with large investments and deductions | Taxpayers with minimal deductions |
| Flexibility | Can switch every year (non-business income) | Default regime from FY 2023-24 onwards |
Deductions and Exemptions: What You Gain or Lose
Deductions Allowed Only Under the Old Regime
If you choose the old regime, you can claim:
- Section 80C: Investments in PF, PPF, NSC, ELSS, life insurance, etc.
- Section 80D: Health insurance premium (₹25,000–₹50,000).
- Section 24(b): Home loan interest (₹2 lakh for self-occupied property).
- HRA: If living on rent.
- LTA: For travel reimbursement.
- 80E / 80EE / 80G: Education loans, additional home loan interest, and donations.
These deductions can significantly reduce taxable income for individuals with planned investments.
Deductions and Exemptions Under the New Regime
Under the new regime, most exemptions are removed. However, a few are still available:
- Employer’s NPS contribution (Section 80CCD (2))
- Standard deduction of ₹75,000 (2025 onwards)
- Agniveer Corpus Fund contribution (Section 80CCH)
This simplified system eliminates the need for multiple investment proofs and reduces paperwork.
Example: Tax Comparison Between New and Old Regimes
Let’s understand with an example of a salaried employee having an annual income of ₹12 lakh.
Scenario 1: Under Old Tax Regime
Assume the following deductions:
- Section 80C – ₹1.5 lakh
- Section 80D – ₹25,000
- Standard deduction – ₹50,000
Total deductions: ₹2.25 lakh
Taxable income: ₹12 lakh – ₹2.25 lakh = ₹9.75 lakh
Tax Payable:
- ₹2.5 lakh–₹5 lakh @ 5% = ₹12,500
- ₹5 lakh–₹10 lakh @ 20% = ₹95,000
- Total = ₹1,07,500 + cess = ₹1,11,800 (approx.)
Scenario 2: Under New Tax Regime
No deductions (except ₹75,000 standard deduction).
Taxable income: ₹12 lakh – ₹75,000 = ₹11.25 lakh
Tax calculation:
- 0–3 lakh = Nil
- 3–6 lakh @ 5% = ₹15,000
- 6–9 lakh @ 10% = ₹30,000
- 9–12 lakh @ 15% = ₹45,000
Total tax = ₹90,000 + cess = ₹93,600 (approx.)
✅ Result: The new regime saves around ₹18,000 in this case — beneficial if the taxpayer doesn’t invest heavily in deductions.
Advantages of the Old Tax Regime
1. Suitable for Investors and Savers
If you regularly invest in PPF, ELSS, or NPS, the old regime helps reduce taxable income through deductions.
2. Supports Financial Discipline
Since savings lead to tax benefits, it encourages long-term wealth creation.
3. Flexibility in Exemptions
Taxpayers can choose from multiple sections (80C, 80D, 80G, etc.) to optimize taxes.
4. Ideal for Home Loan Borrowers
Interest on housing loans offers substantial relief under Section 24(b).
Advantages of the New Tax Regime
1. Simplified Compliance
No need to maintain proofs for numerous deductions or exemptions — reducing complexity.
2. Lower Tax Rates
Tax slabs are distributed more evenly, offering relief for middle-income earners.
3. Default Option from FY 2023-24
The government made the new regime the default, reflecting its aim for a simplified, transparent system.
4. Better for Non-Investors
If you prefer liquidity and do not invest for tax-saving purposes, this regime is ideal.
Disadvantages of the Old Tax Regime
- Complex filing due to multiple exemptions and proofs.
- Beneficial only if you have significant investments.
- Requires continuous monitoring of eligible deductions.
Disadvantages of the New Tax Regime
- Most traditional exemptions (like HRA, LTA, 80C, 80D) are not available.
- No motivation for disciplined long-term savings.
- Some high earners with multiple deductions may pay more tax.
Who Should Choose the New Tax Regime?
The new regime is ideal for:
- Salaried individuals with no major tax-saving investments.
- Young professionals who want higher take-home income.
- Freelancers and gig workers without structured deductions.
- Senior citizens earning below ₹12 lakh (benefiting from 87A rebate).
Who Should Choose the Old Tax Regime?
The old regime is suitable for:
- Taxpayers with substantial deductions — housing loan, insurance, PPF, etc.
- Salaried individuals claiming HRA, LTA, and 80C benefits.
- Families with long-term investment goals.
- Those with medical or educational loan deductions.
Expert Tip: Compare Both Regimes Before Filing ITR
You can use the tax calculator available on the Income Tax e-filing portal to compare both options. Enter income details, deductions, and applicable exemptions — the system automatically suggests the more beneficial regime.
It’s also recommended to seek professional guidance from a Chartered Accountant or tax consultant if your income includes multiple sources (salary, business, capital gains, etc.).
New Regime Becoming the Default Choice (Budget 2025 Highlights)
- Default regime: From FY 2023-24 onward, the new regime applies automatically unless you opt for the old one.
- Rebate limit: Extended to ₹12 lakh under Section 87A.
- Standard deduction: Increased to ₹75,000.
- Reduced surcharge: Maximum surcharge capped at 25% for high earners.
These changes make the new regime more attractive, especially for salaried and middle-income taxpayers.
How to Opt for the Desired Tax Regime While Filing ITR
For Salaried Individuals
You can inform your employer about your preferred regime at the beginning of the financial year. However, final selection can still be made while filing the ITR.
For Business or Professional Income
Once you choose the new regime, you cannot switch back to the old regime unless you stop the business. Hence, choose carefully.
Tax Planning Strategy for FY 2024-25
If You Prefer Old Regime
- Invest up to ₹1.5 lakh in ELSS, PPF, or tax-saving FDs.
- Buy adequate health insurance for family.
- Consider home loan
- Claim deductions for donations or education loans.
If You Prefer New Regime
- Focus on liquid investments like mutual funds or ETFs.
- Don’t tie up funds unnecessarily for tax-saving motives.
- Use employer’s NPS and standard deduction to your advantage.
Which Regime Is Better in 2025?
The answer depends on your income level and investment pattern.
| Profile | Recommended Regime |
| Salaried with heavy deductions (80C, HRA, 80D) | Old Regime |
| Salaried with few deductions | New Regime |
| Self-employed or freelancer | New Regime |
| High-income investor | Old Regime |
| Young professional, no loans or savings | New Regime |
In short, if your deductions exceed roughly ₹3 lakh per year, the old regime might save more tax; otherwise, the new regime is simpler and often cheaper.
Frequently Asked Questions (FAQs)
1. Can I switch between regimes every year?
Yes, individuals (without business income) can choose annually. Business taxpayers can switch only once.
2. Is the new tax regime mandatory?
No, but it is the default system from FY 2023-24 onward. You must opt out if you prefer the old regime.
3. Does the new regime allow HRA or 80C deduction?
No, these are not available except for NPS and standard deduction.
4. Which regime gives better refund?
It depends on your investments and TDS. The one with lower overall tax will lead to higher refunds.
5. What is the rebate limit under Section 87A in 2025?
For FY 2024-25, full tax rebate is available for income up to ₹12 lakh under the new regime.
Conclusion
Both the new tax regime and old tax regime have their unique advantages. The old system rewards disciplined savers with multiple deductions, while the new system offers simplicity, transparency, and reduced rates.
Before filing your ITR for FY 2024-25 (AY 2025-26), analyze your annual income, investments, and eligible deductions using a tax calculator. The right regime choice can help you save thousands of rupees and ensure better financial planning.
Remember: Tax planning is not just about saving money — it’s about aligning your financial goals with smarter decisions.
