Why the Default New Tax Regime Doesn’t Work for Many Salaried Employees
- Rashmita Choudhary
- 15h
- 9 min read
The default new tax regime under Section 115BAC promises simplicity through lower tax slabs, but it removes most exemptions and deductions that salaried employees commonly use. From HRA and LTA to Section 80C and home loan interest, these exclusions significantly alter tax outcomes. Since FY 2024–25, this regime applies automatically unless actively changed, impacting take-home pay for many professionals. Despite revised slabs and enhanced rebates announced in Budget 2025, salaried individuals with rent payments, insurance, and long-term investments often find the new regime financially restrictive compared to the old structure.
Table of Contents
What Changed When the New Tax Regime Became Default
From FY 2024–25, the new tax regime under Section 115BAC became the default option for salaried employees. This means employers now calculate TDS assuming the new regime unless an employee explicitly opts for the old regime. While the intent was to simplify taxation through lower slab rates, the shift reduced the visibility of exemptions and deductions during salary structuring. Many employees continued contributing to rent, insurance, and long-term investments but saw no immediate tax benefit reflected in monthly TDS, leading to higher cash outflow during the year.
How Section 115BAC Alters Salaried Tax Planning
Section 115BAC fundamentally changes how salaried tax planning works by discouraging deduction-led planning. Earlier, tax efficiency was built around salary components like HRA, LTA, and investments under Section 80C. Under the new regime, tax planning becomes slab-driven rather than structure-driven. This suits individuals with simple salary structures but weakens the relevance of long-term financial habits such as provident fund contributions, insurance cover, and housing-related planning.
Is HRA Allowed in the New Tax Regime?
House Rent Allowance is not allowed as an exemption under the new tax regime. Even if HRA is part of the salary structure and rent is paid regularly, no exemption can be claimed while computing taxable income under Section 115BAC. This single restriction significantly impacts salaried individuals living in rented accommodation, especially in metro cities where rent forms a large portion of monthly expenses.
How HRA Works in the Old Tax Regime
Under the old tax regime, HRA exemption is available based on the least of three values: actual HRA received, rent paid minus 10 per cent of salary, or 40 per cent (50 per cent for metro cities) of salary. This structure allows salaried employees to reduce taxable income substantially if rent payments are high. For urban professionals, HRA alone can lower taxable income by several lakhs annually, making the old regime more efficient in real terms.
Is Section 80C Allowed in the New Tax Regime?
Section 80C deductions are not allowed under the new tax regime. Contributions to EPF, PPF, ELSS, life insurance premiums, and tuition fees do not provide any tax benefit when opting for Section 115BAC. This removes incentives for disciplined long-term savings and discourages salaried individuals from using tax-saving instruments as part of financial planning.
How Section 80C Works in the Old Tax Regime
The old tax regime allows a deduction of up to ₹1.5 lakh under Section 80C. For most salaried employees, EPF contributions alone consume a large portion of this limit, with additional scope for ELSS, PPF, or insurance premiums. This deduction directly reduces taxable income and remains one of the most widely used and effective tax-saving provisions for salaried taxpayers.
Standard Deduction Under Old vs New Tax Regime
The standard deduction differs across regimes. Under the old tax regime, salaried employees can claim a standard deduction of ₹50,000. Under the new tax regime, this has been increased to ₹75,000. While the higher deduction offers some relief, it often fails to compensate for the loss of HRA, 80C, 80D, and housing loan interest benefits available under the old regime.
New Tax Regime Slab Structure After Budget 2025
Post Budget 2025, the new tax regime offers revised slabs with zero tax up to ₹4 lakh and a higher rebate under Section 87A covering income up to ₹12 lakh. These changes benefit individuals with limited deductions and moderate income. However, slab benefits alone do not address the structural disadvantage faced by employees who incur unavoidable expenses such as rent and insurance.
Old Tax Regime Slabs and Deduction Advantage
The old tax regime follows higher slab rates but allows a wide range of deductions and exemptions. When deductions such as HRA, 80C, 80D, and housing loan interest are combined, the effective tax rate often falls below that of the new regime for salaried employees with structured finances. This regime continues to reward planned savings and long-term financial commitments.
Break-Even Analysis for Salaried Employees
A practical break-even point emerges when total deductions exceed approximately ₹3.75 lakh. Beyond this level, the old tax regime generally results in lower tax liability despite higher slab rates. Salaried individuals paying rent, investing regularly, and servicing home loans often cross this threshold comfortably, making the default new regime financially inefficient for them.
Salary Profiles Where the New Regime Fails
The new tax regime tends to underperform for salaried employees living in rented accommodation, those contributing heavily to provident funds or ELSS, individuals with housing loans on self-occupied property, and professionals with family health insurance premiums. In these cases, the loss of deductions outweighs the benefit of lower slab rates, leading to higher net tax outgo.
When the New Tax Regime Actually Works
The new tax regime works well for salaried individuals with minimal deductions, such as those living with family, having no rent obligations, limited investments, and income largely below ₹12 lakh. It also suits early-career professionals who prefer higher take-home pay over long-term tax-saving instruments. For such profiles, simplicity and lower slabs provide genuine benefit.
Choosing the Right Regime at the Time of ITR Filing
Choosing the right tax regime at the time of filing the income tax return is a decision that should be based on actual numbers rather than default settings or assumptions. Since the new tax regime applies automatically for TDS purposes, many salaried employees assume it is compulsory or already finalised. In reality, the final choice is made only at the time of return filing, and this choice determines the actual tax liability for the year.
A proper comparison begins with listing all eligible deductions and exemptions available under the old tax regime. This includes rent paid during the year, contributions to the provident fund, investments under Section 80C, health insurance premiums, interest on home loans, and any other applicable deductions. These figures need to be considered in total, not in isolation, because the combined impact of deductions often outweighs the benefit of lower slab rates under the new regime.
The next step is to compare the taxable income under both regimes using the same gross salary. Under the new tax regime, taxable income is calculated with limited deductions, primarily the standard deduction and a few specified allowances. Under the old regime, the taxable income reduces substantially when exemptions and deductions are applied. The regime that results in a lower overall tax liability, including cess, should be selected regardless of which regime was used for TDS during the year.
It is also important to understand that TDS deducted under the new regime does not restrict the ability to opt for the old regime later. If excess tax has been deducted due to the default application of the new regime, the difference is adjusted at the time of filing and refunded by the tax department. This makes the return filing stage the most critical point for regime selection.
Another factor to consider is consistency with long-term financial planning. Tax decisions should not be driven only by short-term slab benefits. Salaried employees who regularly invest in tax-saving instruments, pay rent, or service housing loans often find that the old regime aligns better with their financial habits and obligations. Ignoring these aspects can lead to higher taxes over time, even if the immediate numbers appear favourable.
Platforms like TaxBuddy simplify this evaluation by pulling actual salary details, deductions, and investment data to compute tax liability under both regimes side by side. This removes guesswork and helps identify the option that genuinely reduces tax outflow. By relying on real data rather than assumptions, salaried employees can make an informed choice that reflects their financial reality and avoids unnecessary tax payments.
Conclusion
The default new tax regime prioritises simplicity but overlooks the financial structure of a large section of salaried employees. For those with rent, investments, and long-term commitments, the old tax regime continues to deliver better outcomes despite higher slab rates. Careful comparison remains essential before finalising the return. For anyone looking for assistance in tax filing, it is strongly recommended to download the TaxBuddy mobile app for a simplified, secure, and hassle-free experience.
FAQs
Q1. Does TaxBuddy offer both self-filing and expert-assisted plans for ITR filing, or only expert-assisted options?
TaxBuddy offers both self-filing and expert-assisted plans for income tax return filing. The self-filing option is designed for individuals with straightforward income and basic deductions who are comfortable filing on their own using guided tools and automated checks. The expert-assisted option is suitable for salaried employees with complex salary structures, multiple deductions, regime comparisons, or compliance-related questions, where a tax expert reviews and files the return to ensure accuracy and optimisation.
Q2. Which is the best site to file ITR?
The best site to file an income tax return is one that combines accuracy, ease of use, data security, and support. While the official income tax portal allows direct filing, many taxpayers prefer platforms that provide guided workflows, automatic error checks, and regime comparison features. Platforms that integrate directly with the government portal and offer post-filing support tend to provide a smoother and more reliable filing experience, especially for salaried employees.
Q3. Where to file an income tax return?
An income tax return can be filed either on the official Income Tax Department e-filing portal or through authorised online platforms that are integrated with the government system. These platforms submit returns directly to the tax department after validation. Filing through an authorised platform does not change the legal process but often simplifies data entry, verification, and compliance tracking for the taxpayer.
Q4. Is the new tax regime mandatory for salaried employees?
The new tax regime is not mandatory for salaried employees. It is the default regime used for TDS calculation by employers, but employees retain the right to opt for the old tax regime at the time of filing their income tax return. This option allows salaried individuals to claim eligible deductions and exemptions under the old regime even if tax was initially deducted under the new regime during the year.
Q5. Can the tax regime be changed every year?
Yes, salaried employees are allowed to choose between the old and new tax regimes every financial year. The decision is not permanent and can be revised annually based on changes in income, deductions, rent payments, or financial goals. This flexibility makes it important to evaluate both regimes each year rather than continuing with the default option without comparison.
Q6. Does paying rent automatically make the old regime better?
Paying rent does not automatically make the old tax regime better, but it often creates a strong advantage due to the availability of HRA exemption. The actual benefit depends on factors such as the amount of rent paid, salary structure, city of residence, and other deductions claimed. A proper calculation is necessary to determine whether the HRA exemption under the old regime outweighs the lower slab rates of the new regime.
Q7. Is standard deduction available in both regimes?
Standard deduction is available in both the old and new tax regimes, but the amount differs. Under the old tax regime, salaried employees can claim a standard deduction of ₹50,000. Under the new tax regime, the standard deduction has been increased to ₹75,000. While this higher deduction offers relief, it may not fully offset the loss of other exemptions and deductions for many salaried individuals.
Q8. Are health insurance deductions allowed in the new regime?
Health insurance deductions under Section 80D are not allowed in the new tax regime. Premiums paid for self, family, parents, or senior citizens do not reduce taxable income under Section 115BAC. These deductions remain available only under the old tax regime, making it more beneficial for individuals who maintain comprehensive health insurance coverage.
Q9. Does the new regime increase take-home salary?
The new tax regime can increase the monthly take-home salary because lower TDS is deducted by employers due to fewer exemptions. However, a higher monthly take-home does not always translate into lower annual tax liability. For salaried employees with significant deductions, the overall tax paid during the year can be higher under the new regime despite the apparent increase in monthly income.
Q10. How does Budget 2025 impact salaried taxpayers?
Budget 2025 introduced revised tax slabs and enhanced rebates under the new tax regime, including tax-free income up to ₹12 lakh through rebate provisions. While these changes benefit low and mid-income earners with minimal deductions, the budget did not restore major exemptions such as HRA, 80C, or housing loan interest. As a result, salaried employees with deduction-heavy profiles continue to find the old regime more beneficial.
Q11. Is opting out of the default regime complicated?
Opting out of the default new tax regime is not complicated for salaried employees. The choice can be made while filing the income tax return by selecting the old regime option. Even if TDS was deducted under the new regime during the year, the final tax liability is recalculated based on the selected regime, and excess tax, if any, is refunded.
Q12. How can regime comparison be done accurately?
Accurate regime comparison requires evaluating actual salary components, rent paid, investments, insurance premiums, housing loan interest, and other eligible deductions. Comparing only slab rates often leads to incorrect conclusions. Using structured comparison tools or tax filing platforms that calculate tax liability under both regimes side by side helps salaried employees make an informed decision based on real financial data rather than assumptions.
