Old Tax Regime vs New Tax Regime: Which one is Better for You?

The Union Budget 2025 has introduced significant changes to India’s personal income tax structure, leading to the crucial question: Should you opt for the old tax regime or the new tax regime? Whether you are a salaried professional or self-employed, choosing the right regime can help optimize your tax liability.

This article explores the key differences between the old and new tax regimes and provides insights to help you make an informed decision.

New Tax Regime vs Old Tax Regime: Which is Better After Budget 2025?

With Finance Minister Nirmala Sitharaman’s Union Budget 2025 providing significant income tax relief—particularly no tax burden up to ₹12.75 lakh for salaried individuals (with a standard deduction of ₹75,000) and ₹12.00 lakh for other individuals under the new regime—a large segment of the middle class has reasons to celebrate.

However, this change has also led to an important question: Should you switch to the new regime, or do the higher deductions and exemptions under the old regime still offer better savings?

Each regime has its advantages and disadvantages:

• The old regime promotes savings and investments through various deductions.

• The new regime simplifies taxation and benefits individuals with lower incomes or fewer investments.

Your decision should be based on the deductions and exemptions available under the old tax regime.

Who Should Choose the New Tax Regime?

✅ Individuals with fewer investments in tax-saving schemes.

✅ Salaried employees who prefer a higher take-home salary.

✅ Self-employed professionals who prefer a simpler tax structure.

Who Should Choose the Old Tax Regime?

✅ Individuals who can claim significant deductions (₹5–8 lakh or more) through HRA, 80C, 80D, and home loan interest.

✅ Those who prefer structured financial planning and long-term savings.

✅ Retirees or professionals with gratuity and leave encashment benefits.

After the above analysis, it is clear that taxpayers earning up to ₹12 lakh (₹12.75 lakh for salaried taxpayers) should choose the new tax regime.Higher-income taxpayers need to evaluate both options and select the one that best suits their financial situation.

Income Tax Calculation: Old vs. New vs. Proposed Regime

To better understand the tax implications, let’s look at an example:

Example:

Miss Aarya receives the following salary components:

• Basic Salary: ₹75,000 per month

• HRA: ₹50,000 per month

• Special Allowance: ₹2,90,000 per annum

• Rent Paid: ₹40,000 per month (Mumbai)

• Interest from Savings Account: ₹10,000 per year

• PPF Investment: ₹1,50,000 per year

Income Tax Calculation (FY 2024-25 & FY 2025-26)

Income Details	Old Regime (FY 2024-25)	New Regime (FY 2024-25)	Proposed Tax Regime (FY 2025-26)
Basic Salary	₹9,00,000	₹9,00,000	₹9,00,000
HRA	₹2,10,000	₹6,00,000	₹6,00,000
Special Allowance	₹2,90,000	₹2,90,000	₹2,90,000
Less: Standard Deduction	₹50,000	₹75,000	₹75,000
Gross Salary Income	₹13,50,000	₹17,15,000	₹17,15,000
Savings Bank Interest	₹10,000	₹10,000	₹10,000
Gross Taxable Income	₹13,60,000	₹17,25,000	₹17,25,000
Less: Deductions	₹1,50,000 (80C)	-	-
	₹10,000 (80TTA)	-	-
Net Taxable Income	₹12,00,000	₹17,25,000	₹17,25,000
Applicable Tax	₹1,79,400	₹2,15,800	₹1,50,800
Tax Rebate (87A)	Not Applicable	Not Applicable	₹0
Net Tax Payable	₹1,79,400	₹2,15,800	₹1,50,800

Hence, the choice between the two regimes largely depends on income and one's ability to claim deductions. Since individual financial situations vary, comparing tax liabilities under both regimes is crucial to making an informed decision.

Tax-Saving Strategies for Individuals Earning Above ₹12 Lpa

For those earning above ₹12 lakh, effective tax planning is crucial. Consider the following strategies before March 31, 2025, to benefit from the old regime:

1. Maximize Deductions under Section 80C

• Invest up to ₹1.5 lakh in PPF, EPF, NSC, ELSS, and LIC premiums.

  
  

2. Contribute to the National Pension System (NPS)

• An additional ₹50,000 deduction under Section 80CCD(1B) is available.

  
  

3. Claim Deductions for Health Insurance (80D)

• Premiums paid for health insurance policies for self, spouse, children, and parents are deductible.

  
  

4. Utilize Home Loan Benefits

• Up to ₹2 lakh per annum on housing loan interest is deductible under Section 24(b).

  
  

5. Optimize Salary Structure

• Opt for HRA, LTA, and food coupons to reduce taxable income.

  
  

6. Invest in Tax-Free Bonds

• Interest earned on government-issued tax-free bonds is exempt from tax.

  
  

7. Donate to Charitable Institutions

• Donations to specified funds qualify for deductions under Section 80G.

  
  

8. Leverage Standard Deduction

• Ensure you claim the ₹75,000 standard deduction (proposed for FY 2025-26).

Final Thoughts

The choice between the old and new tax regime depends on your financial situation and ability to claim deductions.

• If your deductions exceed ₹5–8 lakh, the old regime is beneficial.

• If you prefer higher take-home pay and simplicity, opt for the new regime.

  
  

Before making a decision, evaluate your tax liability under both regimes to maximize your savings and reduce tax burdens effectively.

For a more professional advice, feel free to reach out to us or write to dinesh_ca_jpr@yahoo.com