Key Differences Between Old and New Tax Regimes Explained

Q: Can I switch between old and new regimes each year?

Yes. Taxpayers can choose between the old and new tax regimes each financial year at the time of filing the ITR. Salaried individuals may change the choice annually based on income, deductions, and exemptions.

Q: Are HRA and 80C deductions available under the new regime?

No. Under the new tax regime, most exemptions and deductions—including HRA and Section 80C—are not available. Since the new regime uses lower slab rates, compare both regimes to see which benefits you more.

Q: What is the standard deduction under both regimes?

For FY 2024–25, the standard deduction for salaried individuals is ₹75,000 under both regimes. The new regime generally does not allow other deductions like 80C or HRA, while the old regime does.

Q: How does Section 87A rebate apply in the new regime?

Section 87A provides a rebate for eligible individuals. In the old regime it applies up to ₹7 lakh taxable income; it is also available in the new regime for eligible taxpayers, directly reducing the tax payable.

Q: Who benefits more from the old regime?

Taxpayers with significant exemptions and deductions—such as HRA, 80C investments, 80D health insurance, or 80E education loan interest—generally benefit more from the old regime due to lower taxable income.

Q: Is the new regime better for salaried employees with minimal deductions?

Yes. If you have few deductions or exemptions, the new regime’s lower slab rates often result in a simpler process and potentially lower tax.

Q: Can TaxBuddy calculate tax liability under both regimes?

Yes. TaxBuddy computes tax under both regimes using your income, deductions, and exemptions, and recommends the more beneficial option.

Q: How do I choose the best regime for my income?

Assess your total income, exemptions, and eligible deductions, then simulate tax under both regimes (e.g., via TaxBuddy). Pick the option with the lower final liability while ensuring compliance.

Q: Are there penalties for choosing the wrong regime?

No penalty applies solely for choosing a costlier regime—you’ll just pay more tax. However, you must correctly declare your chosen regime in the ITR; misreporting or ineligible claims can attract scrutiny.

Q: Does the standard deduction differ for pensioners?

Generally, the standard deduction applies similarly to salaried individuals for regular pensions. Specific pension schemes may have differing rules, so check the provisions relevant to your pension type.

Asharam Swain
3 days ago
9 min read

Understanding the differences between the Old and New Tax Regimes is crucial for taxpayers in FY 2025-26. The New Tax Regime, now the default option, offers simplified slabs, higher rebates, and fewer deductions, while the Old Regime allows extensive exemptions and deductions for strategic tax planning. Knowing which regime suits individual income, investments, and expenses can optimize tax liability and maximize refunds. TaxBuddy provides intuitive tools and calculators to help taxpayers assess the best option seamlessly.

Table of Contents

Key Differences Between Old and New Tax Regimes
Tax Slabs and Rates: Old vs New Regime
Standard Deduction: How It Works in Both Regimes
Deductions and Exemptions
Rebate Under Section 87A: Old vs New Regime
Default Status and Choosing Your Regime
Who Benefits Under Each Regime?
Recent Updates and Legal Framework
How TaxBuddy Helps Compare Old and New Regimes
Conclusion
FAQs

Key Differences Between Old and New Tax Regimes

The old and new tax regimes in India present two distinct approaches to income taxation, each with its own structure, benefits, and implications for taxpayers. The old tax regime is characterized by higher tax rates but offers a wide range of deductions and exemptions that can significantly reduce taxable income. Under the old regime, taxpayers can claim benefits such as House Rent Allowance (HRA), which provides relief for individuals paying rent, and Section 80C deductions, which cover investments in life insurance, provident fund contributions, and certain savings schemes. Other deductions and exemptions under the old regime include allowances for children’s education, medical insurance premiums, and interest on home loans, among others. These deductions encourage taxpayers to save and invest while providing tax relief, but they also require careful documentation and compliance.

In contrast, the new tax regime aims to simplify the tax filing process by offering lower tax rates across broader income slabs but with limited exemptions and deductions. Most of the deductions available under the old regime, such as HRA, standard deduction, and 80C investments, are not applicable in the new regime. The advantage of this system is its simplicity—taxpayers do not need to maintain extensive records or plan investments primarily for tax benefits. However, the trade-off is that while the rates are lower, taxpayers may end up paying more tax if they previously relied heavily on deductions and exemptions under the old regime. Choosing between the old and new regimes requires an evaluation of one’s financial situation, investment patterns, and reliance on various deductions. Taxpayers must weigh the convenience and simplicity of the new regime against the potential savings offered by the old regime, selecting the option that minimises tax liability while aligning with their financial planning goals.

Tax Slabs and Rates: Old vs New Regime

Under the old regime, income is taxed at progressive slabs with higher rates for higher income brackets. Taxpayers can reduce taxable income using deductions and exemptions. The new regime, introduced to simplify taxation, offers lower rates across slabs but removes most deductions. This makes the new regime easier to calculate but may not always result in lower tax liability for individuals with multiple eligible deductions.

Standard Deduction: How It Works in Both Regimes

The standard deduction is available under both regimes but differs in treatment. In the old regime, salaried employees and pensioners can claim a standard deduction of ₹75,000 for FY 2024–25. The new regime allows the same deduction, but many other exemptions are removed, making the net taxable income calculation straightforward yet potentially higher for taxpayers who rely heavily on other deductions.

Deductions and Exemptions

Deductions and exemptions play a crucial role in determining an individual’s taxable income and, consequently, their overall tax liability. Under the old tax regime, taxpayers can avail themselves of a wide array of deductions, each designed to encourage savings, investments, and responsible financial planning.

One of the most commonly used deductions is under Section 80C, which allows taxpayers to reduce their taxable income through investments in instruments such as the Employee Provident Fund (EPF), Public Provident Fund (PPF), National Savings Certificates (NSC), and life insurance premiums. By strategically utilizing Section 80C, individuals can significantly lower their tax burden while simultaneously promoting long-term savings.

Section 80D provides deductions for premiums paid towards health insurance policies, covering not just the taxpayer but also their spouse, children, and parents. This deduction helps offset the costs of maintaining health coverage and encourages families to prioritize insurance planning.

House Rent Allowance (HRA) is another key exemption available to salaried individuals who live in rented accommodation. Depending on the rent paid, basic salary, and city of residence, HRA can substantially reduce taxable income.

Leave Travel Concession (LTC) is designed to incentivize travel within India and provides exemptions for travel expenses incurred by employees for themselves and their families.

Additionally, education loan interest under Section 80E allows taxpayers to claim a deduction on interest paid for loans taken to fund higher education, reducing financial stress while encouraging educational advancement.

In contrast, the new tax regime has largely removed these deductions and exemptions, opting instead for lower tax rates across income slabs. While this simplifies the filing process by reducing the need for extensive documentation and calculation of various deductions, it may not be advantageous for taxpayers who previously leveraged multiple deductions to reduce their taxable income. Those with substantial investments in eligible schemes, health insurance premiums, rent obligations, or education loans may find the old regime more financially beneficial. Conversely, individuals with minimal deductions or a simpler financial profile might prefer the new regime, as the lower tax rates offer a straightforward and hassle-free approach to filing taxes without having to account for multiple exemptions.

Overall, choosing between the old and new regimes requires careful consideration of an individual’s financial habits, investments, and eligibility for deductions, balancing the benefits of exemptions against the convenience and simplicity of lower tax rates.

Rebate Under Section 87A: Old vs New Regime

Section 87A provides a rebate for individuals with taxable income up to ₹7 lakh in the old regime, effectively reducing tax liability to zero. The same rebate is available under the new regime, ensuring that low-income earners are not disadvantaged. However, the calculation of taxable income differs, especially considering deductions available under the old regime.

Default Status and Choosing Your Regime

By default, taxpayers are considered under the old regime. Taxpayers can opt for the new regime at the time of filing their ITR. The choice is flexible, and taxpayers should evaluate their total deductions, exemptions, and projected tax liability before deciding. Once selected, the chosen regime applies for that financial year.

Who Benefits Under Each Regime?

Understanding who benefits under the old and new tax regimes is crucial for making informed decisions during Income Tax Return (ITR) filing.

Under the old regime, the structure is designed to favor salaried individuals and other taxpayers who make substantial investments in eligible tax-saving instruments. These include contributions to provident funds, life insurance premiums, equity-linked savings schemes (ELSS), and payments under various sections such as 80C, 80D, and 80E. Taxpayers who take advantage of these deductions can significantly reduce their taxable income, making the old regime particularly advantageous for those with multiple avenues for tax-saving investments. Essentially, the old regime rewards disciplined savings and strategic investment planning, allowing taxpayers to leverage exemptions and deductions to lower their overall tax liability.

In contrast, the new regime is more straightforward and better suited for taxpayers who do not claim many deductions or who prefer a simpler structure with lower tax rates. While it removes most deductions and exemptions available under the old regime, it offers reduced tax rates across various income slabs. This regime is attractive for those who have minimal investments in tax-saving instruments or who prefer a less complex filing process without tracking numerous deductions throughout the year.

The optimal choice between the old and new regime depends on several factors, including the taxpayer’s total income, eligibility for deductions, and personal financial goals. Individuals with substantial eligible investments are likely to benefit more from the old regime, whereas those who prioritize simplicity and predictability may find the new regime more suitable.

Recent Updates and Legal Framework

Recent updates for the financial year 2024–25 include an increase in the standard deduction to ₹75,000 for salaried and pensioned individuals, continuation of the Section 87A rebate for eligible taxpayers, and adjustments in the tax slabs under the new regime to provide relief for lower and middle-income earners. Additionally, the legal framework allows taxpayers to switch between the old and new regimes on an annual basis. This flexibility emphasizes the importance of evaluating the benefits each year in light of one’s income, deductions, and changing financial circumstances to optimize tax planning and minimize liabilities.

How TaxBuddy Helps Compare Old and New Regimes

TaxBuddy simplifies the comparison between old and new regimes by providing an intuitive platform to calculate tax liability under both regimes. Users can input their income, deductions, and exemptions, and instantly see which regime results in lower tax. The platform also highlights benefits like Section 87A rebate and standard deduction, enabling informed decisions without manual calculations.

Conclusion

Choosing between the old and new tax regimes requires careful consideration of income, deductions, and exemptions. While the old regime benefits taxpayers with multiple eligible deductions, the new regime provides simplicity and lower tax rates. Tools like TaxBuddy make it easy to compare both regimes, ensuring optimal tax planning. For anyone looking for accurate and hassle-free tax filing, using the TaxBuddy mobile app can simplify the process and help maximize benefits.

FAQs

Q1: Can I switch between old and new regimes each year? Yes, taxpayers have the flexibility to choose between the old and new tax regimes each financial year. The choice must be made at the time of filing your ITR, based on which regime offers the most benefit for that year. Salaried individuals can opt for either regime, and the decision can change annually depending on income, deductions, and exemptions.

Q2: Are HRA and 80C deductions available under the new regime? Under the new tax regime, most exemptions and deductions, including House Rent Allowance (HRA) and Section 80C deductions, are not available. Taxpayers opting for the new regime are subject to lower slab rates but cannot claim most deductions, so careful calculation is necessary to determine the most beneficial option.

Q3: What is the standard deduction under both regimes? The standard deduction for salaried individuals is ₹75,000 under both old and new tax regimes for FY 2024–25. However, in the new regime, no other deductions like 80C or HRA are allowed, while the old regime allows a combination of deductions and exemptions to reduce taxable income.

Q4: How does Section 87A rebate apply in the new regime? Section 87A provides a rebate for individuals whose total taxable income falls below ₹7 lakh in the old regime. In the new regime, this rebate is also available for eligible taxpayers. The rebate directly reduces the tax liability, ensuring lower-income taxpayers benefit from the tax structure.

Q5: Who benefits more from the old regime? Taxpayers with significant exemptions, deductions, and investments, such as HRA, 80C contributions, medical insurance (80D), or education loan interest (80E), generally benefit more from the old regime. High-deduction taxpayers can substantially reduce taxable income, which may outweigh the lower slab rates of the new regime.

Q6: Is the new regime better for salaried employees with minimal deductions? Yes, salaried employees with fewer deductions or exemptions often benefit from the new tax regime. The lower slab rates simplify tax calculation, remove the need to track numerous exemptions, and make compliance easier without requiring extensive documentation for deductions.

Q7: Can TaxBuddy calculate tax liability under both regimes? Absolutely. TaxBuddy provides tools to compute tax liability under both the old and new regimes. By entering income, deductions, and exemptions, the platform automatically calculates which regime is more beneficial, helping taxpayers make informed decisions and maximize tax savings.

Q8: How do I choose the best regime for my income? To choose the best regime, assess your total income, exemptions, and eligible deductions. Use platforms like TaxBuddy to simulate tax calculations under both regimes. Compare the final tax liability under each option and select the one that minimizes taxes while complying with all regulations.

Q9: Are there penalties for choosing the wrong regime? There are no penalties for choosing a regime that results in higher tax liability; the only consequence is paying more tax. However, you must correctly declare your choice in the ITR form, and the chosen regime must align with your eligibility. Errors in reporting or failure to declare deductions can attract scrutiny.

Q10: Does the standard deduction differ for pensioners? Yes, for pensioners, the standard deduction applies similarly to salaried individuals but may vary depending on the type of pension received. Regular government or private pensions generally allow the ₹75,000 standard deduction, but special pension schemes may have different rules, so it is essential to check applicable provisions.

Q11: Can I claim education loan interest under the new regime? No, under the new tax regime, deductions like education loan interest under Section 80E are not available. Taxpayers opting for the new regime can only rely on the reduced slab rates, whereas the old regime allows such deductions, which can significantly lower taxable income for those with outstanding education loans.

Q12: How does TaxBuddy simplify the old vs new regime comparison? TaxBuddy simplifies the comparison by allowing taxpayers to input income, deductions, and exemptions, and instantly calculating tax liabilities under both regimes. It highlights which option offers the maximum tax benefit, ensuring taxpayers make an informed choice without manual calculations or guesswork. The platform also provides guidance for filing accurately under the selected regime.