KKN Gurugram desk | In her Union Budget speech for 2025, Finance Minister Nirmala Sitharaman announced significant income tax relief aimed at providing substantial benefits for middle-class taxpayers in India. A major highlight was the elimination of income tax for individuals earning up to Rs. 12.75 lakh annually, marking a crucial shift in the income tax structure for the financial year 2025-26. As taxpayers prepare for the changes, one of the most pressing questions they face is whether to opt for the new income tax regime or stick to the old one with its higher exemptions and deductions. In this article, we explore both tax regimes, the key changes announced in the 2025 Budget, and help you decide which option is best for you.
New vs Old Tax Regime: What’s Changed in the Income Tax Structure?
In Budget 2025, significant reforms were introduced to provide more relief to salaried taxpayers, especially those in the middle class. The new income tax regime offers reduced tax rates but with fewer exemptions, while the old tax regime continues to offer various exemptions and deductions, albeit at higher tax rates. To make an informed decision, it is crucial to understand the differences between these two regimes and calculate which one will result in lower tax liability based on your income and financial goals.
Income Tax Slabs for FY 2025-26: New vs Old
Income Tax Slabs for the New Regime (FY 2025-26)
- 0 to 4 lakh: Nil
- 4 lakh to 8 lakh: 5%
- 8 lakh to 12 lakh: 10%
- 12 lakh to 16 lakh: 15%
- 16 lakh to 20 lakh: 20%
- 20 lakh to 24 lakh: 25%
- Above 24 lakh: 30%
Income Tax Slabs for the Old Regime (FY 2025-26)
- Up to 2.5 lakh: Nil
- 2.5 lakh to 5 lakh: 5%
- 5 lakh to 10 lakh: 20%
- Above 10 lakh: 30%
The new income tax regime significantly reduces the income tax burden for middle-class taxpayers, especially those earning up to Rs. 12.75 lakh annually. This means that for individuals earning under Rs. 12 lakh, no income tax will be levied, making the new tax regime a favorable choice for a large section of the population.
Key Features of the New Income Tax Regime:
- Lower Tax Rates: The new regime offers lower income tax rates for various income brackets, starting from 5% for income between Rs. 4 lakh and Rs. 8 lakh, up to 30% for income exceeding Rs. 24 lakh.
- No Income Tax for Income Up to Rs. 12.75 Lakh: A major reform announced in the Union Budget 2025 is the elimination of income tax for individuals earning up to Rs. 12.75 lakh annually.
- Limited Deductions and Exemptions: While the new tax regime offers lower tax rates, it eliminates most of the exemptions and deductions available under the old tax regime, such as HRA (House Rent Allowance), LTA (Leave Travel Allowance), and deductions under Sections 80C, 80D, and 24 (home loan interest), among others.
Key Features of the Old Income Tax Regime:
- Higher Exemptions and Deductions: The old tax regime allows taxpayers to claim a variety of exemptions and deductions, including those under HRA, LTA, 80C (for savings), 80D (for medical insurance), and interest on home loans under Section 24.
- Higher Tax Rates: The tax rates under the old regime are higher compared to the new one. For instance, income above Rs. 10 lakh is taxed at 30%.
- More Flexibility for Tax Planning: For individuals who have significant exemptions and deductions, the old regime can be more beneficial, allowing taxpayers to reduce their taxable income through various savings and expenses.
Which Tax Regime Should You Choose in FY 2025-26?
The decision to opt for the new or old tax regime depends on various factors, including your income level, available exemptions, and the amount of deductions you claim annually. Here’s a simple approach to help you make the right choice:
Step 1: Calculate Total Deductions and Exemptions Under the Old Regime
Under the old tax regime, you can claim various deductions, such as:
- House Rent Allowance (HRA)
- Leave Travel Allowance (LTA)
- Deductions under Section 80C (for investments)
- Deductions under Section 80D (for medical insurance)
- Interest on home loan under Section 24
- Additional NPS deduction under Section 80CCD
Step 2: Compare the Tax Liabilities for Both Regimes
Let’s consider a few salary examples to illustrate the comparison between the old and new tax regimes.
Example 1: Salary of Rs. 14 Lakh
- Old Regime: With exemptions and deductions totaling Rs. 5.75 lakh (including HRA, LTA, 80C, and standard deduction), the taxable income is Rs. 8.25 lakh, resulting in a tax liability of Rs. 91,500.
- New Regime: In the new regime, with the lower tax rates, the taxable income of Rs. 14 lakh is taxed at a rate of 10% for the first Rs. 8 lakh, and 15% for the remaining Rs. 6 lakh, resulting in a total tax liability of Rs. 78,750.
Example 2: Salary of Rs. 22 Lakh
- Old Regime: After applying the exemptions and deductions, the taxable income comes down to Rs. 18.25 lakh, with a tax liability of Rs. 295,500.
- New Regime: In the new regime, the taxable income of Rs. 22 lakh is taxed at 15% for income between Rs. 12 lakh and Rs. 16 lakh, 20% for income between Rs. 16 lakh and Rs. 20 lakh, and 25% for the remaining income, resulting in a tax liability of Rs. 231,250.
Example 3: Salary of Rs. 35 Lakh
- Old Regime: The exemptions and deductions significantly reduce the taxable income, but given the high salary, the tax liability under the old regime comes out to Rs. 702,000.
- New Regime: With fewer deductions, the tax liability is Rs. 631,800, benefiting from the lower tax rates but losing out on the exemptions.
Choosing between the new and old income tax regimes comes down to a simple calculation of which regime results in the lower tax liability based on your income and available exemptions. If your income exceeds Rs. 24 lakh and your deductions and exemptions are relatively low, the new income tax regime will likely result in lower taxes. However, if you have substantial deductions or exemptions, such as HRA, 80C, or home loan interest, the old tax regime may be more beneficial.
The middle class and salaried taxpayers have found significant relief under the Union Budget 2025, especially with the removal of income tax up to Rs. 12.75 lakh. However, taxpayers must carefully evaluate their individual circumstances to choose the most tax-efficient option for the financial year 2025-26.
As always, consulting with a tax professional is advisable to make an informed choice that best suits your financial situation.
