Old vs New Tax Regime: Which Saves More in 2025?
- Dipali Waghmode
- Oct 15
- 8 min read
The choice between the Old and New Tax Regime in 2025 depends heavily on individual income, deductions, and investment habits. The New Tax Regime offers lower slab rates and a higher standard deduction, making it attractive for middle-income earners with minimal deductions. The Old Tax Regime, with multiple exemptions and tax-saving deductions, can significantly reduce taxable income for individuals with large investments, home loans, or health insurance premiums. Understanding these differences is essential to determine which regime results in greater tax savings for a specific financial profile.
Table of Contents
Overview of Old vs New Tax Regimes in 2025
The choice between the old and new tax regimes plays a significant role in the way Tax Deducted at Source (TDS) is computed by employers, and it also directly affects the information reported in various bank-related forms, such as Form 16 and Form 12BB. Under the old tax regime, taxpayers have the advantage of claiming a wide range of deductions and exemptions. These include, but are not limited to, House Rent Allowance (HRA), standard deductions, contributions to tax-saving instruments under Section 80C, and other eligible deductions declared in Form 12BB. Employees are expected to submit these details to their employers so that the TDS can be adjusted accordingly. By declaring these exemptions and deductions, the overall TDS deducted from the salary is reduced, aligning the deductions with the actual taxable income of the employee. This ensures that employees do not pay more tax than necessary during the financial year and avoids a large tax burden at the time of filing the ITR.
Properly submitting deductions through Form 12BB is critical because it allows the employer to compute TDS based on the real taxable income rather than the gross salary. Without accurate reporting, the employer may end up deducting more TDS than required, resulting in excess tax being withheld. This excess can later be claimed as a refund, but it may involve additional administrative steps and delays in receiving the refund.
On the other hand, the new tax regime simplifies the calculation of TDS by eliminating most exemptions and deductions. In this regime, TDS is calculated solely based on the applicable slab rates corresponding to the declared income. Deductions like HRA, Section 80C investments, or other allowances are not considered in this calculation. While this approach reduces the complexity of tax computation and filing, it also means that the TDS is higher in cases where employees would otherwise have claimed deductions under the old regime. The simplicity comes at the cost of reduced flexibility in optimizing tax liability throughout the year, making regime selection a crucial decision for employees.
Selecting the correct regime and accurately communicating it to the employer ensures that TDS is calculated correctly. If an employee incorrectly indicates the regime, it could result in either an overpayment or underpayment of TDS. Overpayment leads to excess tax being deducted, which the taxpayer would then have to claim as a refund during the income tax filing process, causing a delay in cash flow. Underpayment, on the other hand, can lead to interest and penalties on the shortfall, creating unnecessary financial strain.
Therefore, understanding the impact of regime selection on TDS is essential. Employees must accurately report all relevant information in forms like Form 12BB, including salary structure details, eligible deductions, and investment declarations. This ensures precise computation of TDS, prevents interest or penalties for underpayment, and avoids administrative delays for claiming refunds. Overall, careful consideration of the old versus new tax regime, combined with meticulous reporting, plays a vital role in tax compliance and efficient financial planning.
Key Differences Between Old and New Tax Regimes
The main difference between the old and new tax regimes lies in the approach to deductions and exemptions. The old regime allows taxpayers to claim multiple deductions and exemptions, lowering taxable income, but it involves more complex calculations. The new regime reduces the number of exemptions to simplify filing but offers lower tax rates across slabs. Other differences include the treatment of HRA, LTA, and other allowances, which are fully allowed in the old regime but largely unavailable in the new regime. Understanding these differences is critical for evaluating potential tax savings.
Tax Slab Rates Under Old and New Regimes
In FY 2024-25, the old regime maintains traditional slabs: 0–₹2.5 lakh: nil, ₹2.5–₹5 lakh: 5%, ₹5–₹10 lakh: 20%, and above ₹10 lakh: 30%. The new regime offers modified slabs with lower rates for mid-income levels but higher thresholds for top earners: 0–₹3 lakh: nil, ₹3–₹6 lakh: 5%, ₹6–₹9 lakh: 10%, ₹9–₹12 lakh: 15%, ₹12–₹15 lakh: 20%, and above ₹15 lakh: 30%. Comparing slab rates helps identify which regime reduces overall tax liability for specific income brackets.
Standard Deduction and Section 87A Rebate in New Regime
The new tax regime allows a standard deduction of ₹75,000 for salaried individuals, slightly higher than the old regime, and maintains the Section 87A rebate for taxpayers with income up to ₹12 lakh. These provisions provide additional relief for low- to middle-income earners under the new system, partially compensating for the absence of other deductions.
How Tax-Saving Deductions Work in the Old Regime
The old tax regime allows taxpayers to reduce taxable income using various deductions such as 80C (up to ₹1.5 lakh for investments like PPF, ELSS, and life insurance), 80D (health insurance premiums), 24(b) (home loan interest), and exemptions like HRA and LTA. By leveraging these deductions, taxpayers can significantly reduce tax liability, particularly those with substantial investments or home loans. Proper planning is required to maximize savings under this regime.
Income Scenarios: Who Benefits More
Middle-income earners with minimal investments may benefit more from the new regime due to lower rates and simpler filing. Conversely, taxpayers with significant deductions, investments, and home loans often gain higher savings under the old regime. High-income earners with multiple exemptions and deductions typically prefer the old regime, while salaried professionals with fewer investments may find the new regime advantageous.
Example Calculations: Old vs New Regime Savings
Consider an individual with ₹10 lakh taxable income, paying ₹1.5 lakh in 80C investments, ₹25,000 in 80D health insurance, and ₹2 lakh interest on a home loan. Under the old regime, total deductions reduce taxable income to ₹6.25 lakh, lowering tax liability substantially. Under the new regime, without these deductions, the tax liability is calculated on ₹10 lakh income at lower slab rates, showing a comparison of actual savings to aid decision-making.
Impact of Investment and Home Loan on Tax Savings
Investments under Section 80C and home loan interest under Section 24(b) significantly impact tax liability in the old regime. In contrast, the new regime ignores these deductions. Taxpayers with substantial financial planning, including retirement accounts, insurance, and home loans, will generally benefit from the old regime. Understanding how these factors influence taxes helps determine the most effective filing strategy.
How Choice of Regime Affects TDS and Bank Forms
The choice between the old and new tax regimes has a direct impact on the computation of Tax Deducted at Source (TDS) by employers and the information reported in bank-related forms. Under the old tax regime, taxpayers are eligible to claim a range of deductions and exemptions, such as House Rent Allowance (HRA), standard deductions, investments under Section 80C, and other eligible deductions declared in Form 12BB. When employees submit these details to their employer, the TDS is adjusted to reflect these claims. This reduces the overall TDS deducted from the salary, ensuring that employees do not pay excess tax during the year. Properly declaring deductions under Form 12BB is essential because it allows employers to calculate TDS accurately based on the actual taxable income rather than the gross salary.
In contrast, the new tax regime eliminates most exemptions and deductions. TDS under the new regime is computed simply based on the applicable slab rates for the declared income, without considering deductions like HRA or 80C claims. While this simplifies the tax calculation process, it also means that the employer deducts TDS without factoring in many tax-saving components. Choosing the correct regime and accurately indicating it to the employer ensures that TDS is calculated correctly. If the wrong regime is indicated, there could be either an overpayment or underpayment of TDS, which may lead to the need for adjustments at the time of filing the income tax return. Therefore, understanding the impact of regime selection on TDS and properly reporting all relevant information in forms like 12BB is crucial for accurate tax compliance and avoiding unnecessary interest or penalties.
Using TaxBuddy to Compare Old vs New Tax Regimes
TaxBuddy provides an intuitive platform to compare tax liabilities under both regimes. By entering income, deductions, investments, and exemptions, taxpayers can instantly see potential savings under each system. The platform simplifies complex calculations, highlights optimal regimes, and offers actionable recommendations. Using TaxBuddy helps taxpayers make informed choices, avoid errors, and plan financial strategies effectively.
Conclusion
Choosing between the old and new tax regimes significantly impacts tax liability and savings. While the new regime offers simplicity and lower rates for some, the old regime remains beneficial for those with significant deductions and exemptions. Evaluating your income, investments, and financial goals is critical in selecting the right regime. Platforms like TaxBuddy streamline this comparison, providing accurate calculations and guidance for optimal tax planning. For anyone looking to make an informed choice and simplify filing, consider using theTaxBuddy mobile app for a seamless, secure, and hassle-free experience.
FAQs
Q1: Can I switch between old and new tax regimes every year? Yes, taxpayers have the flexibility to choose either the old or new tax regime for each financial year. This choice must be made at the time of filing your ITR. However, once selected and the return is filed, it cannot be changed for that financial year.
Q2: Do deductions like Section 80C and 24(b) work in the new regime? No, most popular deductions such as Section 80C (investments in PF, PPF, life insurance, etc.) and 24(b) (home loan interest) are not available under the new tax regime. These deductions are only applicable under the old tax regime.
Q3: How does HRA affect old vs new regime calculations? House Rent Allowance (HRA) exemptions are only allowed under the old regime. The new regime does not provide any HRA exemption, so salaried individuals must consider this when choosing a regime for tax savings.
Q4: Who benefits more from the new tax regime? Salaried individuals with minimal investments or few exemptions usually benefit from the new regime due to its lower tax slab rates. Conversely, those with substantial deductions and exemptions often find the old regime more advantageous.
Q5: Are standard deduction and Section 87A rebate applicable in the new regime? Yes, the new regime allows a standard deduction of ₹75,000 for salaried taxpayers and continues to provide the Section 87A rebate for eligible taxpayers whose income falls within the threshold.
Q6: How do investments affect tax savings in old vs new regimes? Investments reduce taxable income under the old regime through eligible deductions, lowering overall tax liability. Under the new regime, most deductions and exemptions are ignored, so investments do not impact taxable income.
Q7: Does TaxBuddy calculate both regimes automatically? Yes, TaxBuddy allows taxpayers to enter their income, deductions, and investments, and then calculates and compares the tax liability under both old and new regimes. This helps you make an informed choice.
Q8: Can I change my choice of regime after filing? No, once you file your ITR for a financial year, the selected tax regime cannot be altered. Taxpayers must carefully evaluate their options before submission.
Q9: Does the choice of regime affect TDS? Yes, TDS is computed based on the declared tax regime. Under the old regime, eligible deductions reduce TDS liability. In the new regime, lower slab rates apply but deductions do not affect TDS.
Q10: Is it better to switch to the new regime if I have minimal deductions? Typically, yes. Taxpayers with few exemptions or deductions may benefit more from the lower slab rates of the new regime, resulting in a lower overall tax liability.
Q11: How do home loans impact tax planning? Interest paid on home loans is deductible under Section 24(b) in the old regime, reducing taxable income. This deduction is not available in the new regime, which can significantly affect overall tax liability for homeowners.
Q12: Can TaxBuddy help optimize tax savings between regimes? Yes, TaxBuddy analyzes your income, deductions, and investments to recommend the most tax-efficient regime. The platform also provides step-by-step guidance to maximize savings while ensuring compliance with Income Tax regulations.
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