New Tax Regime vs. Old Tax Regime: Which is Best in FY 2025-26?

The concept of ‘New Tax Regime’ was introduced for the first time vide Budget 2020. Post which the taxpayer had two options i.e. either to opt under the new tax regime or to continue under the old tax regime.

Particularly, new tax regime offers lower tax rates but the benefits of various deductions and exemptions, which includes Section 80C, House Rent Allowance [HRA], Leave Travel Allowance [LTA] and interest on home loans, are not available.

Notably, with the amendment to section 115BAC of the Income Tax Act as effective from F.Y. 2023-2024 [A.Y. 2024-2025], the new tax regime is made as a default tax regime for persons other than companies and firms. Accordingly, eligible taxpayers will have to opt out of the new tax regime in order to continue under the old tax regime.

Interestingly, Budget 2025 offered a significant income tax relief by increasing the zero-tax threshold to a whooping INR 12 Lakhs (INR 12.75 Lakhs in case of salaried taxpayers). The said increase in income tax relief is really tempting and has put the taxpayer in a dilemma to opt for new tax regime. However, the option should be chosen wisely.

The present article covers applicable tax rates under the new tax regime and old tax regime; an analysis of exemptions and deductions under the new tax regime and old tax regime and new tax regime vs. old tax regime.

Applicable tax rates under the New Tax Regime and Old Tax Regime –

Income Tax Slab rates for FY 2025-2026 (AY 2026-2027) under New Tax Regime –

The tax rebate limit under the new tax regime has been increased to INR 12 Lakhs from INR 7 Lakhs vide Budget 2025. Further, the rebate under section 87A has also been increased to INR 60,000 from INR 25,000. This makes zero-tax threshold to INR 12 Lakhs.

Additionally, the new tax regime also offers a standard deduction of INR 75,000 to salaried individuals. Thus, this makes the zero-tax threshold to INR 12.75 Lakhs in case of salaried individuals.

Income Tax Slab rates for FY 2025-2026 (AY 2026-2027) under Old Tax Regime –

The tax rebate limit under the old tax regime is INR 5 Lakhs. Thus, the rebate under section 87A is INR 12,500.

Analysis of exemption and deductions under New Tax Regime and Old Tax Regime –

Around 70 exemptions and deductions are available under the Old Tax Regime which are not covered under the New Tax Regime. Thus, analysis of exemptions and deductions plays a vital role while choosing a specific tax regime.

List of some of the important exemptions and deductions which are available under the Old Tax Regime but not available under the New Tax Regime –

• Deductions of Chapter VI-A of the Income Tax Act –
  • Section 80C – Deduction in respect of life insurance premium, contribution to PF, subscription to certain equity shares/ debentures, deferred annuity, etc. ;
  • Section 80D – Deduction towards health insurance premium;
  • Section 80E – Deduction towards interest on loan taken for higher education;
  • Section 80CCC – Deduction for contribution to certain pension funds;
  • Section 80CCD – Deduction towards contribution to Pension Scheme of Central Government;
  • Section 80DD – Deduction towards maintenance including medical treatment of a disabled dependant;
  • Section 80DDB – Deduction towards medical treatment of specified diseases;
  • Section 80E – Deduction for interest on loan taken for higher education;
  • Section 80EE – Deduction towards interest payment on loan taken for residential house property;
  • Section 80EEA – Deduction for interest on loan taken for certain house property;
  • Section 80G – Deduction for donations to specified funds, charitable institutions, etc.;
  • Section 80GG – Deduction towards rent paid;
  • Section 80U – Deduction in respect of persons with disability; etc.
• Deduction under section 80TTA – Deduction on interest on deposits in savings account;
• Deduction under Section 80TTB – Deduction towards interest on deposits in case of senior citizens;
• House Rent Allowance [HRA];
• Leave Travel Allowance [LTA];
• Child Education Allowance;
• Minor Child Income Allowance;
• Helper Allowance;
• Other special allowance under section 10(14);
• Professional Tax; etc.

List of some of the important exemptions and deductions admissible under New Tax Regime –

• Section 10(10) – Exemption on Gratuity;
• Section 10(10AA) – Exemption of Leave Encasement;
• Section 10(10C) – Exemption on amount received under Voluntary Retirement Scheme;
• Section 24(b) – Deduction towards interest paid on home loan in case of let-out property;
• Section 80CCD(2) – Deduction towards employer’s contribution to NPS;
• Section 80CCH(2) – Deduction towards deposit in Agniveer Corpus Fund; etc.

New Tax Regime vs. Old Tax Regime –

Post the above analysis, one thing is crystal clear that taxpayers earning up to INR 12 Lakhs [INR 12.75 in case of salaried taxpayers] should straightforwardly choose New Tax Regime.

Higher income taxpayers need to evaluate both the options and select the one which is best for them. Here, the availability of exemptions and deductions to respective taxpayers plays a vital role. In case, the taxpayer is able to claim more exemptions and deductions, it is most likely that Old Tax Regime could still prove to be more beneficial. However, the analysis varies from person to person.

The following table provides a broad scenario of the most preferred option between the New Tax Regime and the Old Tax Regime –