Difference Between Old Vs New Tax Regime: Which is Better?

As stated earlier, introduced in 2020, the new tax regime in India offers a simplified approach to tax filing. This regime offers lower tax rates compared to the old regime.

Income slabs are defined, and each slab has a specific tax rate. For example, for the financial year
2025-26 (the assessment year 2026-27), individuals earning up to ₹4 lakhs will not be taxed, while income between ₹4 lakhs and ₹8 lakhs will be taxed at 5%, and so on.

However, unlike the old regime, the new regime eliminates most deductions and exemptions for expenses like medical bills, housing loan interest (beyond ₹2 lakhs on self-occupied property), travel allowances, and investments under sections 80C and 80D.

The new regime offers a simplified approach with potentially lower taxes for some. However, it is crucial to compare it to the old regime based on your specific financial situation to make an informed decision.

The Union Budget 2025 updated the income tax slabs under the new tax regime to provide progressive taxation based on income brackets. The changes are likely to significantly lower tax burdens for individuals, with potential annual tax savings of ₹1.14 lakhs. Here are the key highlights:

Default Regime: The new tax regime is still the default option. This means that unless you specifically opt out and switch to the old regime, your income will be taxed under the new regime’s structure. This could potentially benefit some taxpayers who might not have been aware of the new regime or its advantages.

Simpler Tax Brackets: The old tax regime has multiple tax slabs with different rates. The new tax regime slabs offer a more streamlined structure with fewer tax brackets. This can simplify tax calculations and potentially reduce confusion when determining your tax liability.

Surcharge for High-income Earners: The surcharge benefit for high-income earners (those with an income above ₹5 crore) remains 25%, as reduced from 37% in the Budget 2023-24. The surcharge relief encourages high-income earners to switch from the old regime.

Increased Standard Deduction: A standard deduction of ₹50,000 was introduced in the Budget 2023-24. This has been increased to ₹75,000. Salaried individuals can now deduct the revised deduction from their salary income.

Standardisation of Employer Contributions Limit: Earlier, government employees could deduct 14% of the employer’s contribution, while private employees could deduct 10%. This limit has been standardised to 14% for all salaried employees. The change enhances tax savings, thereby encouraging taxpayers to opt for the new regime.

Revised Basic Exemption Limit and Rebate: The basic exemption limit, the minimum income not taxed, has been increased to ₹4 lakhs from ₹3 lakhs. Additionally, the tax rebate under Section 87A has been raised to ₹60,000 for individuals with a net taxable income of ₹12 lakhs. This limit was previously set at ₹25,000, applicable to incomes up to ₹7 lakhs. The change benefits lower and middle-income taxpayers significantly.

The revised tax rates if the net taxable income exceeds ₹12 lakhs are as follows:

Enhanced TDS Thresholds: There is also a change in the TDS threshold limits to reduce compliance burden. The previous threshold of ₹50,000 on interest on deposits for senior citizens has been raised to ₹1 lakh to provide further relief to elderly taxpayers. The threshold for rental payments has been increased to ₹6 lakhs from ₹2.4 lakhs.

The new tax regime introduced in India focuses on lower tax rates and a simpler filing process. However, this comes at the cost of eliminating most exemptions available under the old regime.

Let us clarify the status of a few important exempts and non-exempts under this regime:

Income from Life Insurance (Not Exempt): Maturity proceeds from most life insurance policies are taxable under the new regime. However, there are exceptions for certain types of policies, like term insurance or policies with premiums not exceeding 10% of the sum assured.

Agricultural Income (Exempt): Agricultural income remains exempt from tax under both the new and old regimes.

Standard Reduction on Rent (HRA) (Not Exempt - Replaced by Standard Deduction): The new regime does not offer a separate deduction for house rent allowance.

Retrenchment Compensation and Leave Encashment on Retirement (Not Exempt): Payments received as compensation for retrenchment and leave encashment on retirement are taxable under the new regime.

VRS Proceeds up to ₹5 lakhs (Not Exempt): Voluntary Retirement Scheme (VRS) proceeds are generally taxable under the new regime. However, there might be a partial exemption for a specific amount depending on the terms of the VRS package.

Death cum Retirement Benefit (Not Exempt): The new regime generally taxes death cum retirement benefits. Exceptions might exist for specific benefits from employers based on their terms and conditions.

Money Obtained as a Scholarship for Education, etc. (Exempt): Scholarships granted by a government, university, or other approved institutions for pursuing full-time education remain exempt from tax under the new regime.

The old tax regime, also known as the regular regime, offers a more traditional approach to tax filing in India. If you compare the old vs the new tax regime, the process is slightly more complex in the old tax regime, but it can be beneficial for certain taxpayers due to the various deductions and exemptions available.

The old tax regime slab has a progressive tax structure with more tax brackets compared to the new regime. Tax rates increase as your income rises, ensuring those with higher incomes contribute a larger share. Below are the tax rates for FY 2025-26 (AY 2026-27):

Under the old tax regime, various deductions and exemptions can be claimed under several sections of the Income Tax Act to reduce your taxable income. Some popular deductions include:

Section 80C: This allows deductions for investments up to ₹1.5 lakh in a financial year in instruments like Public Provident Fund (PPF), Employee Provident Fund (EPF), Unit Linked Insurance Plans (ULIPs), etc.

House Rent Allowance (HRA): Salaried individuals can claim a deduction for rent paid, subject to certain limits.

Leave Travel Allowance (LTA): This allows salaried individuals to deduct travel expenses for themselves and their families.

Section 80D: Deductions can be claimed for medical insurance policy premiums paid for yourself, spouse, parents, and dependent children.

The old tax regime presents a complex landscape for some taxpayers, characterised by higher tax rates compared to the new regime. However, amidst its intricacies, it offers a plethora of avenues for reducing tax liabilities.

In recent years, the array of exemptions and deductions available under the Old Regime has expanded significantly, providing taxpayers over 70 options to mitigate their taxable income.

Exemptions, integral components of one's salary, such as House Rent Allowance (HRA) and Leave Travel Allowance (LTA), serve as prime examples. Conversely, deductions enable taxpayers to decrease their tax burden through investments, savings, or specific expenditures.

Notably, Section 80C allows for a reduction of taxable income by up to ₹1.5 lakhs. Furthermore, tax savings opportunities abound when undertaking activities like acquiring a home loan or purchasing a health insurance plan for oneself, family members, and parents.

Also Read: Health Insurance Tax Benefits

When deciding between the old and new tax regimes, it is crucial to evaluate your financial goals, income, and potential deductions and exemptions. If your claimed deductions and exemptions exceed ₹3.75 lakhs, the old regime may be more advantageous.

Conversely, if your claimed deductions and exemptions fall below ₹3.75 lakhs, the new regime might offer greater benefits. Deductions significantly reduce taxable income, thereby minimising your overall tax liability.

Let us consider Rahul, a salaried individual, with the following details for the financial year 2025-26:

Salary: ₹10 lakh

Investments (deductible under Section 80C): ₹1.5 lakhs (PPF, Equity Linked Savings Scheme)

House Rent Allowance (HRA): ₹2 lakhs

Medical Insurance Premium (deductible under Section 80D): ₹50,000 for self and parents

We will calculate his tax liability under the old and new regimes to see which one is more suitable for him.

Income Tax Calculation:

The new tax regime is recommended for you, as it helps you save ₹23,400.

Are you feeling overwhelmed by tax filing complexity and unsure - ‘Is the new tax regime better than the old?’ The new tax regime might be your answer! It offers a simpler process with potentially lower tax rates, but there is a catch - you miss out on most deductions and exemptions.

On the other hand, the old regime allows you to claim these benefits, potentially further lowering your tax burden. However, it requires more paperwork. So, if you have minimal deductions, less than ₹1.5 lakhs annually, and prioritise a hassle-free experience, the new regime is a good fit.

Conversely, if you have significant deductions and do not mind the extra paperwork, the old regime could save you more money. Ultimately, the best choice depends on your income level and financial goals. Consider consulting a tax advisor for personalised advice.

Choosing the right income tax slab new vs old requires careful analysis. Consider your income structure, potential deductions, investment plans, and comfort level with record-keeping. Utilise online tax calculators or consult a tax professional to determine which regime minimises your tax liability.

The most prominent difference between the new & old tax regimes is the applicability of deductions. When you file taxes under the old tax regime, you can claim deductions of up to ₹1 lakh under Section 80D on health insurance plan premiums paid. The taxpayer can claim deductions on medical insurance paid for self, spouse, dependent children, and parents. The deduction limit on insurance premiums paid for oneself is ₹25,000. The limit is relaxed to ₹50,000 in case of a senior citizen.

If you want to buy health insurance for parents and increase your deductions under the old tax regime, head to TATA AIG. We have an array of online health insurance plans at affordable premiums, enabling you to protect your family against medical challenges and benefit from tax savings.

Also Read: Health Insurance Calculator