What’s the Tax Impact of Switching from Old to New Regime?
- Dipali Waghmode
- Mar 11
- 9 min read
The Indian tax system provides taxpayers with two distinct tax regimes—the old tax regime and the new tax regime. Each has its own advantages and trade-offs, making the decision to switch a crucial financial consideration. While the old tax regime allows taxpayers to reduce taxable income through various deductions and exemptions, the new tax regime offers lower tax rates but eliminates most of these benefits.
Understanding the implications of switching from the old to the new tax regime is essential for effective tax planning. Since the decision impacts net taxable income, investments, and savings strategies, choosing the right regime can optimize tax liability and maximize financial benefits.
Table of Content
Why Choosing the Right Tax Regime Matters
Selecting the appropriate tax regime depends on multiple factors such as:
Income level: The effectiveness of deductions depends on income slabs.
Tax-saving investments: If you heavily invest in tax-saving instruments, the old regime might be more beneficial.
Simplicity vs. tax savings: The new tax regime simplifies tax filing but removes exemptions.
Annual vs. long-term tax planning: Salaried individuals can switch yearly, but business owners face a permanent decision.
This blog explores the key differences between the two regimes, explains the financial impact of switching, and provides a comparative analysis to help taxpayers make an informed choice.
Key Differences Between the Old and New Tax Regimes
1. Tax Rates
One of the most significant differences between the two tax regimes is the tax slab structure. The new tax regime offers lower tax rates compared to the old tax regime, but removes several deductions and exemptions.
Comparison of Tax Slabs (FY 2024-25 / AY 2025-26)
Income Slab (₹) | Old Tax Regime (with deductions) | New Tax Regime (without deductions) |
Up to ₹ 2,50,000 | Nil | Nil |
₹ 2,50,001 - ₹ 3,00,000 | 5% | Nil |
₹ 3,00,001 - ₹ 5,00,000 | 5% | 5% |
₹ 5,00,001 - ₹ 6,00,000 | 20% | 5% |
₹ 6,00,001 - ₹ 7,00,000 | 20% | 5% |
₹ 7,00,001 - ₹ 9,00,000 | 20% | 10% |
₹ 9,00,001 - ₹ 10,00,000 | 20% | 10% |
₹ 10,00,001 - ₹ 12,00,000 | 30% | 15% |
₹ 12,00,001 - ₹ 15,00,000 | 30% | 20% |
Above ₹ 15,00,000 | 30% | 30% |
Standard Deduction in the New Regime (Updated for FY 2024-25)
The standard deduction available for salaried individuals and pensioners has been increased to ₹75,000 (previously ₹50,000).
This increase effectively reduces taxable income, making the new regime more attractive for salaried individuals.
Impact of Lower Tax Rates in the New Regime
The new tax regime reduces tax rates across different income levels, making it beneficial for those who do not claim significant deductions.
However, taxpayers who rely on deductions (such as HRA, Section 80C, home loan interest, etc.) may pay more tax under the new regime.
While the new regime appears attractive due to lower tax rates, the overall tax liability must be evaluated based on the deductions a taxpayer is eligible for.
2. Deductions and Exemptions
The old tax regime provides various deductions and exemptions that help reduce taxable income. In contrast, the new tax regime eliminates most of these benefits, making it a simpler but less flexible option for tax planning.
Key Deductions Available in the Old Regime (But Not in the New Regime)
Section 80C (Investments in PPF, ELSS, LIC, EPF, etc.) – Up to ₹1.5 lakh deduction
Section 80D (Health insurance premium) – Up to ₹25,000 (₹50,000 for senior citizens)
House Rent Allowance (HRA) – Based on rent paid and salary structure
Leave Travel Allowance (LTA) – Tax-free travel reimbursement for eligible employees
Home Loan Interest Deduction (Section 24b) – Up to ₹2 lakh for self-occupied property
Standard Deduction – ₹50,000 for salaried individuals (available in the new regime from FY 2023-24). However, from FY 2024-2025, the standard deduction is increased to ₹75,000 under the new tax regime.
Impact of Losing These Deductions
Taxpayers who claim high deductions under the old regime may end up paying higher taxes under the new regime.
If a taxpayer does not invest in tax-saving instruments or has minimal deductions, the new regime could be a better choice due to lower tax rates.
The decision to switch should depend on a taxpayer’s total deductions and actual tax savings rather than just looking at lower tax rates.
3. Flexibility in Switching
Rules for Salaried Individuals
Salaried taxpayers can switch between the old and new regimes every financial year while filing their Income Tax Return (ITR).
This means a salaried individual can evaluate both regimes annually and choose the one that minimizes their tax liability.
Rules for Business Owners and Professionals
If an individual earns income from business or profession, they can switch to the new tax regime only once in their lifetime.
Once they opt for the new regime, they cannot revert back to the old regime unless they stop their business/profession income.
Implications of Switching Regimes
Salaried employees enjoy greater flexibility as they can review their tax situation each year and decide accordingly.
Self-employed professionals and business owners must be cautious while switching because their decision is mostly irreversible.
A taxpayer must carefully analyze their deductions, income structure, and long-term financial goals before making a decision.
Tax Impact of Switching
1. Lower Tax Rates and Tax Liability
The new tax regime has undergone significant changes in Budget 2024, making it the default regime for taxpayers unless they opt for the old one via Form 10-IEA. With increased standard deduction and family pension benefits, it now provides a more competitive alternative.
Scenarios Where the New Regime Results in Lower Taxes
Lower tax rates: The revised income tax slabs in the new regime are:
Annual Income | Tax Rate (New Regime FY 2024-25) |
Up to ₹3,00,000 | NIL |
₹3,00,001 - ₹7,00,000 | 5% |
₹7,00,001 - ₹10,00,000 | 10% |
₹10,00,001 - ₹12,00,000 | 15% |
₹12,00,001 - ₹15,00,000 | 20% |
Above ₹15,00,000 | 30% |
Tax rebate under Section 87A: If income ≤ ₹7 lakh, no tax is payable due to a rebate of ₹25,000 in the new regime. This is a significant advantage for low-income earners.
Higher standard deduction: Salaried individuals can claim a ₹75,000 standard deduction in the new regime, up from ₹50,000.
Simpler compliance: No need to track investments or maintain tax-saving proofs, making tax filing easier.
When Lower Tax Rates Do Not Necessarily Mean Lower Tax Liability
If deductions and exemptions under the old regime exceed ₹4.5 lakh, the higher tax rates in the old regime may still be more beneficial than the new regime’s lower rates.
Higher-income taxpayers: While the highest surcharge in the new regime is 25% (compared to 37% in the old regime), those maximizing exemptions (80C, 80D, home loan interest, NPS) may still benefit from the old regime.
2. Loss of Deductions and Exemptions
While the new regime offers lower tax rates, it does so at the cost of most deductions and exemptions, including:
How Switching Affects Individuals Who Claim Significant Deductions
If you have tax-saving investments like PPF, EPF, ELSS, and LIC policies, these lose their tax advantage in the new regime.
Housing benefits lost: No HRA, home loan interest, or principal repayment deductions.
Medical & insurance benefits lost: No Section 80D deduction for health insurance premiums.
Examples of Tax-Saving Investments That Lose Relevance Under the New Regime
Deduction/Exemption | Old Regime | New Regime |
HRA (House Rent Allowance) | Yes | No |
LTA (Leave Travel Allowance) | Yes | No |
80C (EPF, PPF, LIC, ELSS) | Yes (Up to ₹1.5L) | No |
NPS (80CCD(1B)) | ₹50,000 | No |
Home Loan Interest (Section 24b) | ₹2L | No |
80D (Health Insurance Premium) | Yes | No |
Family Pension Deduction | ₹15,000 | ₹25,000 (Revised) |
Key takeaway:The only major deductions in the new regime are:
Standard deduction of ₹75,000
Family pension deduction of ₹25,000
Employer’s NPS contribution (up to 14%)
3. Impact on Financial Planning and Investments
Switching to the new regime alters long-term financial strategies:
How Switching Can Affect Long-Term Savings Strategies
PPF, EPF, and NPS Contributions:
Though these remain tax-free at maturity, no upfront tax deduction makes them less attractive for tax planning.
ELSS (Equity-Linked Savings Scheme):
The lock-in period remains, but no tax advantage under the new regime makes these funds less appealing.
Home loan repayments:
Loss of ₹2L deduction on home loan interest under Section 24b may impact borrowers’ tax planning.
Considerations for Employees with Salary Structures Optimized for Deductions
If your salary includes HRA, LTA, professional tax, switching means losing these exemptions, increasing taxable income.
However, standard deduction of ₹75,000 is now available, partially offsetting some losses.
Income and Deduction-Based Tax Benefit Analysis
How to Compare the Old and New Tax Regimes?
The old tax regime allows deductions like HRA, 80C (EPF, PPF, ELSS, etc.), 80D (Health Insurance), NPS, and home loan interest.
The new tax regime offers lower tax rates but removes most deductions, except:
Standard Deduction (₹75,000)
Family Pension Deduction (₹25,000)
Employer's NPS Contribution (Up to 14%)
So, when comparing the two regimes, we must analyze:
How much tax would you pay under the new regime (without most deductions)?
How much tax would you pay under the old regime (after deductions)?
Which results in a lower tax liability?
Thresholds for Choosing the Better Tax Regime
Deductions Claimed (₹) | Better Regime |
₹1.75L or less | New Regime (Lower Tax) |
₹4.5L or more | Old Regime (More Savings) |
₹1.75L - ₹4.5L | Case-by-case evaluation |
Revised Table: Comparing Tax Benefits Based on Deductions Claimed
Annual Income (₹) | Deductions Claimed (Old Regime) (₹) | Better Tax Regime | Why? |
7,00,000 | 1,50,000 | New Regime | Tax rebate up to ₹7L means zero tax in new regime |
8,50,000 | 2,00,000 | Old Regime | ₹2L deductions lower taxable income below ₹7L |
10,00,000 | 2,50,000 | Depends | If deductions exceed ₹3L, old regime may be better |
12,50,000 | 4,50,000 | Old Regime | ₹4.5L deductions significantly lower tax burden |
15,00,000 | 1,50,000 | New Regime | Lower tax rate outweighs deductions benefit |
20,00,000 | 5,00,000 | Old Regime | High deductions make old regime more tax-efficient |
Why is the New Regime Chosen for ₹7L and ₹15L?
For ₹7L Income:
The new regime offers a rebate (₹25,000), making tax zero.
In the old regime, even with ₹1.5L deductions, taxable income would be ₹5.5L, and some tax may still be payable.
For ₹15L Income with ₹1.5L Deductions:
The new regime’s lower tax rates are beneficial even without deductions.
In the old regime, ₹1.5L deductions only reduced taxable income to ₹13.5L, where tax rates are higher.
Key Takeaways:
If deductions are below ₹1.75L → The new regime is better because of lower tax rates.
If deductions are above ₹4.5L → Old regime saves more tax because it significantly reduces taxable income.
Between ₹1.75L - ₹4.5L → Calculation needed to compare tax liability in both regimes.
FAQs
1. Can I switch back to the old tax regime after opting for the new one?
Salaried individuals can switch between the old and new tax regimes every year while filing their Income Tax Return (ITR). However, business owners and professionals can switch only once in a lifetime. Once they opt out of the new regime and revert to the old one, they cannot switch back to the new regime.
2. Does the new tax regime completely remove all deductions?
Most deductions have been removed under the new tax regime. However, a few key deductions remain:
Standard Deduction: ₹75,000 for salaried individuals (increased from ₹50,000 in FY 2024-25).
Family Pension Deduction: Increased from ₹15,000 to ₹25,000.
Employer’s NPS Contribution Deduction: Up to 14% for government employees and 10% for private sector employees.
3. Who benefits more from the new tax regime?
The new tax regime is beneficial for:
Individuals with lower deductions (less than ₹1.75L per year).
Those who prefer lower tax rates and a simplified tax filing process.
Salaried employees benefiting from the increased standard deduction of ₹75,000 and the rebate up to ₹7 lakh.
4. How does switching impact tax-saving investments?
Traditional tax-saving investments like PPF, ELSS, and LIC policies are still available, but they lose their tax-saving advantage under the new regime, as deductions under Section 80C are not applicable.
5. Can I still claim HRA in the new tax regime?
No, House Rent Allowance (HRA) is not available under the new tax regime. If you are a salaried employee with high rent expenses, the old regime might be a better option.
6. Which tax regime is better for a self-employed professional?
For self-employed professionals, the choice depends on deductions:
If they claim significant business expenses and tax-saving deductions, the old regime may be more beneficial.
If they don’t have many deductions, they may benefit from the lower tax rates of the new regime.
7. Is the new tax regime applicable to senior citizens?
Yes, senior citizens can opt for the new tax regime. However, they should evaluate whether their deductions (such as 80D for medical insurance or 80TTB for interest income exemption) make the old regime a better choice.
8. What happens if I don’t choose a regime while filing ITR?
From FY 2023-24 onwards, the new tax regime is the default regime. If you prefer the old regime, you must explicitly opt for it by filing Form 10-IEA while submitting your Income Tax Return (ITR).
9. Can I claim home loan interest deduction in the new tax regime?
No, Section 24(b) deduction (₹2 lakh interest on home loan) is not available in the new tax regime.
10. Will the tax regime affect my EPF and PPF contributions?
You can still contribute to the Employee Provident Fund (EPF) and Public Provident Fund (PPF), but these contributions will not qualify for tax deductions under the new tax regime.
11. How do I decide if I should switch tax regimes?
To decide which tax regime suits you best:
Compare your tax liability under both regimes.
Evaluate your total deductions and tax-saving investments.
Use an online tax calculator for a clear comparison.
12. What should high-income earners consider before switching?
If deductions exceed ₹4.5L per year, the old regime may offer more tax savings.
The highest surcharge rate under the new regime is 25%, compared to 37% in the old regime.
Evaluate total taxable income and deductions before making a decision.
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