Understanding the New Tax Regime: A Complete Guide for FY 2025-26
Since its introduction in Budget 2020, the new tax regime has been a topic of much discussion among taxpayers. With lower tax rates but fewer deductions, it presents a different approach to tax planning. In this comprehensive guide, we'll help you understand both regimes and determine which one works best for your financial situation.
What is the New Tax Regime?
The new tax regime offers reduced tax rates compared to the old regime. However, to avail these lower rates, you must forgo most deductions and exemptions that were previously available under Sections 80C, 80D, HRA, LTA, and others.
The government introduced this regime to simplify taxation by reducing the complexity of claiming multiple deductions while giving taxpayers the option to choose what works best for them.
Tax Slab Comparison: Old vs New Regime
Here's how the tax slabs compare for FY 2025-26:
New Tax Regime Slabs (FY 2025-26)
- Up to ₹4,00,000: Nil
- ₹4,00,001 - ₹8,00,000: 5%
- ₹8,00,001 - ₹12,00,000: 10%
- ₹12,00,001 - ₹16,00,000: 15%
- ₹16,00,001 - ₹20,00,000: 20%
- ₹20,00,001 - ₹24,00,000: 25%
- Above ₹24,00,000: 30%
Old Tax Regime Slabs (FY 2025-26)
- Up to ₹2,50,000: Nil
- ₹2,50,001 - ₹5,00,000: 5%
- ₹5,00,001 - ₹10,00,000: 20%
- Above ₹10,00,000: 30%
Deductions Available in Each Regime
New Tax Regime - Limited Deductions
Under the new regime, you can claim:
- Standard deduction of ₹75,000 (increased from ₹50,000)
- Employer's contribution to NPS (Section 80CCD(2))
- Conveyance allowance for official duties
- Transport allowance for specially-abled employees
- Deduction for employment of new employees (Section 80JJAA)
Old Tax Regime - Full Deductions
The old regime allows all traditional deductions including:
- Section 80C investments (PPF, ELSS, LIC, etc.) - up to ₹1.5 lakhs
- Section 80D health insurance - up to ₹25,000 (₹50,000 for senior citizens)
- HRA exemption
- LTA (Leave Travel Allowance)
- Home loan interest (Section 24) - up to ₹2 lakhs
- NPS additional deduction (Section 80CCD(1B)) - up to ₹50,000
- Standard deduction of ₹50,000
Which Regime Should You Choose?
Choose the New Regime if:
- Your total deductions are less than ₹2-2.5 lakhs
- You prefer simplicity over tax optimization
- You're a new taxpayer without significant investments in 80C instruments
- Your income is primarily from sources without deduction options
Choose the Old Regime if:
- Your total deductions exceed ₹2.5-3 lakhs
- You have a home loan with significant interest payments
- You maximize your 80C and 80D investments
- You claim HRA exemption
Break-Even Analysis
Generally, if your gross income is below ₹7-8 lakhs and you claim standard deductions plus some 80C investments, the old regime might be better. For incomes above ₹15 lakhs, the new regime often becomes more attractive unless you have substantial deductions.
The exact break-even point varies based on your specific deduction profile. We recommend calculating your tax liability under both regimes before making a decision.
How to Opt for a Regime
- Salaried employees: Declare your choice to your employer at the beginning of the financial year. You can switch regimes when filing your ITR.
- Business professionals: Once you opt for the new regime, you can only switch back to the old regime once. After switching back, you cannot opt for the new regime again.
Conclusion
The choice between old and new tax regimes depends entirely on your individual financial situation. Take time to calculate your tax liability under both options, considering all eligible deductions. Remember, you can change your choice every year (except for business income), so review your decision annually based on changes in your income or investments.
"The best tax regime is the one that leaves more money in your pocket after considering both tax liability and investment returns."