High-Income Salaried Individuals: Which Regime Saves More?
- PRITI SIRDESHMUKH
- Sep 19
- 8 min read
Income tax planning is an essential part of financial management, and understanding the differences between the old and new tax regimes can help salaried individuals optimize their tax liability. For the Financial Year 2025–26, taxpayers have the option to choose between the new tax regime with lower slab rates and fewer exemptions, or the old regime with higher slab rates but multiple deductions and exemptions. Making the right choice depends on your income structure, eligible deductions, and financial goals. Careful comparison and calculation are crucial to ensure maximum tax benefits. Using tools like the TaxBuddy mobile app can simplify this decision-making process, offering a clear comparison between regimes and helping taxpayers file their returns seamlessly while ensuring accuracy.
Table of Contents
Updated Tax Slabs for FY 2025-26
The updated tax slabs for FY 2025–26 provide clarity on how income is taxed under both regimes, helping individuals plan their finances better. Understanding these slabs allows taxpayers to estimate their tax liability accurately and evaluate whether the new or old regime is more beneficial.
New Regime Tax Slabs
Under the new tax regime, individuals benefit from lower tax rates but cannot claim most exemptions and deductions. The applicable slabs for FY 2025–26 are:
Income up to ₹12,00,000: Nil tax
₹12,00,001 to ₹15,00,000: 10%
₹15,00,001 to ₹18,00,000: 15%
₹18,00,001 to ₹25,00,000: 20%
₹25,00,001 to ₹50,00,000: 25%
Above ₹50,00,000: 30%
Old Regime Tax Slabs
The old tax regime maintains higher tax rates but allows taxpayers to claim deductions such as HRA, Section 80C, and home loan interest. Slabs for FY 2025–26 are:
Income up to ₹2,50,000: Nil tax
₹2,50,001 to ₹5,00,000: 5%
₹5,00,001 to ₹10,00,000: 20%
Above ₹10,00,000: 30%
Key Deductions and Benefits: Old vs New Regime
The old regime allows deductions under Section 80C, 80D, 80E, and exemptions such as HRA, standard deduction, and home loan interest. The new regime, while offering reduced rates, restricts most of these exemptions. Comparing your eligible deductions against potential tax savings can help identify which regime is financially advantageous.
Is HRA Allowed in New Tax Regime?
HRA (House Rent Allowance) is not allowed under the new tax regime. Taxpayers who previously claimed HRA must calculate their taxable income without this exemption if they opt for the new regime.
How HRA Works in the Old Tax Regime
In the old tax regime, House Rent Allowance (HRA) is one of the most beneficial allowances for salaried individuals living in rented accommodation. HRA is designed to provide relief to employees who pay rent for their residence, reducing their taxable income and, consequently, the overall tax liability. The amount of HRA exemption depends on a combination of factors, including the salary of the individual, the city of residence, and the actual rent paid. The old tax regime allows taxpayers to claim the minimum of the following three components as exempt from tax.
1. Actual HRA Received The first factor considered is the actual HRA amount received from the employer. This is the allowance specifically provided in the salary structure for housing expenses. The exemption cannot exceed the HRA received, so this acts as a natural upper limit.
2. Rent Paid Minus 10% of Salary The second component calculates the excess of rent paid over 10% of the basic salary (and sometimes the dearness allowance if it forms part of salary). This ensures that only the portion of rent exceeding a reasonable proportion of the salary qualifies for tax exemption. For example, if an employee pays ₹20,000 monthly rent and the basic salary is ₹1,00,000 per month, the exempt portion will be computed as ₹20,000 - 10% of ₹1,00,000 = ₹10,000 per month.
3. Percentage of Salary Based on City of Residence The third factor varies depending on whether the employee lives in a metro or non-metro city. For metro cities (Delhi, Mumbai, Chennai, Kolkata), up to 50% of the salary can be considered for exemption. For non-metro cities, the exemption is limited to 40% of the salary. Salary for this purpose typically includes basic pay plus dearness allowance if applicable. This ensures higher exemption for employees residing in high-cost urban areas.
Is Section 80C Allowed in New Tax Regime?
Section 80C deductions, which cover investments like PPF, ELSS, and life insurance, are not allowed under the new tax regime. Taxpayers can claim these only if they choose the old regime.
How Section 80C Works in the Old Tax Regime
Under the old regime, Section 80C allows a maximum deduction of ₹1,50,000 for eligible investments and expenses, reducing taxable income effectively. Common components include:
PPF contributions
Employee Provident Fund (EPF)
Life insurance premiums
Tuition fees for children
Principal repayment of home loan
Is Home Loan Interest Deduction Allowed in New Regime?
Interest paid on home loans under Section 24(b) is not allowed as a deduction in the new regime. Only under the old regime can taxpayers claim this benefit.
How Home Loan Interest Deduction Works in Old Regime
Under the old regime, home loan interest deduction is available up to ₹2,00,000 per financial year for self-occupied property. Interest on let-out property is fully deductible, helping reduce tax liability for property owners.
Example Break-Even Scenarios for High-Income Salaries
For high-income taxpayers, choosing the right regime depends on eligible deductions. For instance, an individual earning ₹25 lakh per year with HRA, Section 80C investments, and home loan interest may benefit more under the old regime. Conversely, a professional with minimal deductions may find the new regime advantageous due to lower slab rates. Tables and calculations can help visualize potential tax savings and guide regime selection.
Practical Tips for Choosing the Right Regime
Choosing between the old and new tax regimes can significantly impact your tax liability. To make an informed decision, consider these practical steps:
Calculate taxable income under both regimes: Start by computing your total taxable income according to the rules of both the old and new tax regimes. The old regime allows various deductions and exemptions, while the new regime offers lower tax rates but fewer exemptions. Comparing your income under both systems helps identify which one results in lower tax liability.
Identify all eligible deductions and exemptions: Review all deductions you qualify for under the old regime, such as Section 80C investments, HRA, LTA, and other allowances. Make a list of exemptions like house rent allowance and leave travel concession. Understanding these can clarify whether the old regime’s benefits outweigh the simplicity of the new regime.
Use tax calculators or apps like TaxBuddy for accurate computation: TaxBuddy and similar platforms can automate calculations for both regimes, factoring in all eligible deductions, exemptions, and tax rates. This ensures accuracy and saves time compared to manual computation.
Factor in lifestyle, investments, and financial goals: Consider your personal and financial situation, including recurring investments, retirement plans, and lifestyle expenses. For example, if you regularly invest in tax-saving instruments, the old regime may provide significant tax savings. Conversely, if you prefer simplicity and minimal compliance, the new regime might be more suitable.
Consider long-term benefits such as investment growth and retirement planning: The old regime often encourages investments that can grow over time, such as PPF, ELSS, and NPS, which can provide wealth accumulation and retirement benefits. Assess whether long-term benefits from these investments outweigh the lower tax rates of the new regime.
By following these steps, taxpayers can make a well-informed choice between the old and new tax regimes, balancing immediate tax savings with long-term financial planning.
How TaxBuddy Can Simplify Regime Selection
TaxBuddy’s mobile app simplifies regime selection by allowing users to input income details, investments, and deductions. The app calculates tax liability under both regimes, compares outcomes, and provides a seamless filing experience. This ensures error-free tax computation while helping users choose the most beneficial regime for their specific financial situation.
Conclusion
Choosing between the old and new tax regimes requires careful evaluation of income, deductions, and exemptions. The old regime offers multiple deductions such as HRA, Section 80C, and home loan interest, while the new regime provides lower tax rates but limited exemptions. For a smooth and accurate filing experience, and to determine the optimal tax regime based on personal finances, platforms like TaxBuddy are highly recommended. For anyone looking for assistance in tax filing, it is highly recommended todownload the TaxBuddy mobile app for a simplified, secure, and hassle-free experience.
FAQs
Q1. Can HRA be claimed under the new tax regime? Yes, under the new tax regime, House Rent Allowance (HRA) is not eligible for exemption. Taxpayers choosing the new regime cannot claim HRA benefits. Only the old tax regime allows HRA exemption based on salary, rent paid, and city of residence. For accurate HRA calculations under the old regime, TaxBuddy’s tools simplify the process by automatically factoring in your salary structure and rent receipts.
Q2. What is the maximum deduction under Section 80C? Under Section 80C, taxpayers can claim a maximum deduction of ₹1,50,000 in a financial year for eligible investments like PPF, EPF, NSC, ELSS, life insurance premiums, and principal repayment on home loans. This deduction is available only under the old tax regime. TaxBuddy ensures all eligible investments are captured to maximize deductions while avoiding errors.
Q3. Are home loan interest deductions allowed in the new tax regime? No, under the new tax regime, deductions for home loan interest under Section 24(b) or principal repayment under Section 80C are not allowed. These deductions are applicable only in the old tax regime. TaxBuddy provides a clear comparison between old and new regimes, helping taxpayers make informed decisions about home loan benefits.
Q4. How do I decide which tax regime is better for me? Choosing between old and new tax regimes depends on factors like HRA, Section 80C investments, home loan interest, and other deductions. TaxBuddy offers AI-driven comparisons, showing potential tax liability under both regimes, so you can select the option that saves the most tax efficiently.
Q5. Can I switch regimes every year? Yes, taxpayers can switch between the old and new tax regimes at the beginning of each financial year. Salaried individuals have this flexibility to choose the regime that suits their investments, deductions, and exemptions for the year. TaxBuddy helps analyze the impact of switching to optimize tax savings.
Q6. Does TaxBuddy calculate tax for both regimes? Absolutely. TaxBuddy calculates tax liability for both old and new regimes based on your income, deductions, and exemptions. This ensures a seamless comparison, allowing users to make informed decisions without manually calculating different scenarios.
Q7. Are medical insurance premiums deductible under the new regime? No, deductions under Section 80D for medical insurance premiums are not available in the new regime. They remain applicable only in the old tax regime. TaxBuddy flags all eligible medical insurance deductions, ensuring accuracy if filing under the old regime.
Q8. How is standard deduction applied under old and new regimes? The standard deduction of ₹75,000 is allowed for salaried and pensioned individuals under both the old and new tax regimes for FY 2024-25. TaxBuddy automatically applies this deduction while computing taxable income, ensuring accurate tax calculations for all salaried users.
Q9. Does choosing the new regime affect NPS contributions? Yes, contributions to the National Pension Scheme (NPS) under Section 80CCD(1B) are not deductible under the new tax regime. They can only be claimed in the old regime. TaxBuddy guides taxpayers on whether NPS contributions are beneficial based on their selected tax regime.
Q10. Can salaried employees with HRA benefit under the old regime? Yes, salaried employees can claim HRA exemptions under the old regime by submitting rent receipts and other proof. TaxBuddy provides a simple interface to enter HRA details, automatically calculating eligible exemptions to reduce taxable income.
Q11. Is it possible to file ITR directly under TaxBuddy for both regimes? Yes. TaxBuddy allows users to file ITR for both old and new tax regimes directly through its platform. It supports self-filing and expert-assisted plans, ensuring seamless, error-free filing and accurate computation of tax liability.
Q12. How can TaxBuddy help in tax planning for FY 2025-26? TaxBuddy assists in proactive tax planning by analyzing income, investments, and deductions, comparing old and new regimes, and suggesting strategies to maximize savings. The platform’s AI-driven tools ensure compliance, timely filing, and optimized tax planning, making it easier for taxpayers to manage their finances efficiently.
Comments