Old vs New Tax Regime FY 2025-26: Making the Right Choice for Salaried Employees
Choosing between the old and new tax regimes has become one of the most common dilemmas for salaried employees in India. With recent changes announced in the Union Budget 2025, the decision is now even more critical as the new regime offers higher basic exemption limits and simpler compliance, while the old regime continues to provide attractive deductions and exemptions.
In this article, we’ll break down the differences, provide practical examples, and help you determine which tax regime works best for your salary structure and financial goals.
1. Understanding the Basics: Old vs New Tax Regime
Before you make a choice, it’s essential to understand how both regimes work
Old Tax Regime
- Offers various exemptions and deductions such as:
- HRA (House Rent Allowance)
- Standard deduction of ₹50,000
- Section 80C deductions (up to ₹1.5 lakh)
- Section 80D for medical insurance
- Home loan interest deduction
- Ideal for taxpayers who actively invest in tax-saving instruments.
New Tax Regime
- Provides reduced tax rates but no major deductions (except for standard deduction and NPS employer contribution).
- Simplifies tax filing by eliminating the need for extensive documentation.
- Suitable for individuals who don’t invest heavily in tax-saving options or prefer hassle-free filing.
2. Updated Income Tax Slabs FY 2025-26 (New Regime)
The Union Budget 2025 introduced revised slabs under the new tax regime to provide relief to middle-class taxpayers.
Income Range (₹) | Tax Rate |
Up to 4,00,000 | NIL |
4,00,001 – 8,00,000 | 5% |
8,00,001 – 12,00,000 | 10% |
12,00,001 – 16,00,000 | 15% |
16,00,001 – 20,00,000 | 20% |
20,00,001 – 24,00,000 | 25% |
Above 24,00,000 | 30% |
💡Key Update:
- Basic exemption limit raised to ₹4 lakh (from ₹3 lakh earlier).
- Increased standard deduction under the new regime to ₹75,000.
- Family pension deduction enhanced to ₹25,000.
3. Income Tax Slabs Under Old Regime
The old regime continues with traditional slab rates:
Income Range (₹) | Tax Rate |
Up to 2,50,000 | NIL |
2,50,001 – 5,00,000 | 5% |
5,00,001 – 10,00,000 | 20% |
Above 10,00,000 | 30% |
4. Key Differences Between Old and New Tax Regime
Feature | Old Regime | New Regime |
Standard Deduction | ₹50,000 | ₹75,000 |
HRA, LTA, Food Coupons | Allowed | Not Allowed |
Section 80C (Investments) | Up to ₹1.5 lakh | Not Applicable |
Home Loan Interest (Self-Occupied) | Up to ₹2 lakh | Not Allowed |
Ease of Filing | Complex, documentation required | Simple, minimal paperwork |
Best For | Taxpayers with significant deductions | Salaried individuals with fewer deductions |
5. Practical Example: Which Regime Saves More?
Scenario 1: Minimal Investments
- Annual Salary: ₹10,00,000
- Investments under Section 80C: ₹60,000
- Medical Insurance Premium (80D): ₹15,000
Particulars | Old Regime (₹) | New Regime (₹) |
Salary Income | 10,00,000 | 10,00,000 |
Standard Deduction | -50,000 | -75,000 |
Section 80C Deduction | -60,000 | – |
Section 80D Deduction | -15,000 | – |
Taxable Income | 8,75,000 | 9,25,000 |
Tax Payable | 91,000 | 0 (due to rebate) |
✅Winner:New Regime due to higher rebate and simpler tax process.
Scenario 2: High Deductions
- Annual Salary: ₹22,00,000
- Section 80C Investments: ₹1,50,000
- HRA exemption: 5,00,000
- Medical Insurance Premium (80D): ₹50,000
- Home Loan Interest: ₹2,00,000
Particulars | Old Regime (₹) | New Regime (₹) |
Salary Income | 27,00,000 | 27,00,000 |
HRA exempt | -5,00,000 |
|
Standard Deduction | -50,000 | -75,000 |
Home Loan Deduction | -2,00,000 | – |
Section 80C Deduction | -1,50,000 | – |
Section 80D Deduction | -40,000 | – |
Taxable Income | 17,60,000 | 26,25,000 |
Tax Payable | 3,54,120 | 3,82,200 |
✅Winner:Old Regime due to multiple deductions reducing taxable income.
6. How to Decide: Old vs New Regime
Here’s a simple framework to make the decision easier:
- Choose New Regime If:
- You have minimal investments in tax-saving instruments.
- You prefer hassle-free filing without documentation.
- Your annual income is below ₹15–16 lakh.
- Choose Old Regime If:
- You actively invest in Section 80C instruments, pay home loan interest, or have medical expenses.
- You receive allowances like HRA, LTA, or food coupons.
- You want to maximize deductions and reduce taxable income.
💡Pro Tip: Use an online income tax calculator to compare tax liability under both regimes before finalizing.
7. Key Takeaways
- The new regimefavors simplicity and lower tax rates but no major deductions.
- The old regime benefits individuals who invest strategically to save tax.
- Salaried employees must inform their employer about their preferred regime for accurate TDS.
- Regularly review your salary structure and investment patterns to make the best annual choice.
Conclusion
The debate between the old and new tax regimes boils down to personal financial planning. If you are disciplined with investments and can leverage deductions like HRA, 80C, and home loan interest, the old regime is your best bet. However, if you prefer simplicity, flexibility, and don’t want to tie up funds in tax-saving products, the new regime offers a hassle-free path.
Bottom Line:
Evaluate both regimes carefully each financial year. A well-informed choice today can lead to significant tax savings and smarter financial growth in the long run.
FAQ
Q1. What is the difference between the old and new tax regime for salaried employees in FY 2025-26?
The old regime offers multiple exemptions and deductions such as HRA, 80C, and home loan interest, while the new regime provides lower tax rates, higher exemption limits, and simpler compliance but very limited deductions.
Q2. Which tax regime is better for salaried employees in FY 2025-26?
If you claim high deductions like HRA, 80C, and home loan interest, the old regime may save more tax. If you prefer hassle-free filing with minimal documentation, the new regime is better.
Q3. What is the standard deduction in the new tax regime FY 2025-26?
The standard deduction under the new regime has been increased to ₹75,000 for salaried individuals, compared to ₹50,000 in the old regime.
Q4. Can salaried employees claim HRA under the new tax regime?
No, House Rent Allowance (HRA) exemption is available only in the old tax regime. The new regime does not allow HRA, LTA, or other allowances.
Q5. What is the income tax slab for salaried employees in FY 2025-26 under the new regime?
The new regime has zero tax on income up to ₹4 lakh, 5% on ₹4–8 lakh, 10% on ₹8–12 lakh, 15% on ₹12–16 lakh, 20% on ₹16–20 lakh, 25% on ₹20–24 lakh, and 30% above ₹24 lakh.
Q6. How do I choose between the old and new tax regime for FY 2025-26?
Use an income tax calculator to compare your liability under both regimes. If your deductions exceed ₹5–6 lakh, the old regime is usually better. Otherwise, the new regime offers more savings.
Q7. Can I switch between old and new tax regime every year?
Salaried employees can switch regimes every financial year while filing ITR. However, business owners with professional income can switch only once.
Q8. Is rebate under Section 87A available in the new regime FY 2025-26?
Yes. Under the new regime, income up to ₹12 lakh qualifies for a full rebate under Section 87A, making the effective tax liability zero.
Q9. Do I need to inform my employer about my chosen tax regime?
Yes. Salaried employees must inform their employer at the start of the financial year to ensure correct TDS deduction.
Q10. Which tax regime reduces TDS for salaried employees?
The new regime generally reduces TDS for employees with fewer deductions, while the old regime benefits those claiming maximum exemptions.
