Tax Savings Under New Regime of 2025: Guide to Deductions & Exemptions

How Can You Save Tax Under the New Regime of 2025?
A Complete Guide to Deductions and Exemptions

Introduction

Taxes are an essential part of a country’s economy, and every earning individual is required to pay them as per the Income Tax Act, 1961. The taxes that an individual or business has to pay are determined by their income slab, in addition to different exemptions and deductions offered by the government to lower tax payment obligation. However, with the introduction of the new tax regime in 2025, many traditional tax-saving options have been removed, leaving taxpayers confused about the best way to save on taxes. The latest tax reforms have introduced lower tax rates but have removed many common deductions and exemptions available under the old regime. This has left individuals wondering: Which tax regime should I choose? How can I still save tax under the new system?

In this blog, we will provide a detailed comparison of the old and new tax regimes, explaining who benefits more under each system. With real-life examples, we will help you understand how different income groups from salaried employees to freelancers and business owners can make the most tax-efficient choices. Whether you are filing taxes for the first time or looking for ways to optimize your tax burden, this complete blog will answer all your questions.

Understanding New Tax Regime of 2025

The income tax is a direct tax that follows a progressive slab rate, meaning the tax rate increases as a taxpayer’s income rises. The Income-tax Act, 1961 provides for two tax regimes: the old regime, which allows taxpayers to claim various deductions and exemptions, and the new regime, which offers lower tax rates but removes most exemptions. The new tax regime was first introduced in 2020 under Section 115BAC  as an optional alternative to the old system, for individuals and Hindu undivided families with the aim of simplifying taxation . However, despite its lower tax rates, many taxpayers continued choosing the old regime due to its tax-saving benefits. In the Union Budget 2023, the government promoted the new regime by making it the default tax system, while still allowing individuals to opt for the old regime if they found it more beneficial. The new tax regime for 2025 continues this approach, with lower tax rates and fewer deductions, making it crucial for taxpayers to carefully evaluate which regime works best for them.

Below are the modified income tax slabs and rates under the new regime:

These slab rates highlight that taxpayers earning up to ₹4,00,000 are fully exempt from tax, while those in higher income brackets are taxed at progressively higher rates. Compared to the old tax regime, which had a higher tax burden but allowed deductions, this new structure offers lower rates but removes most exemptions. [1]

Tax Deductions Available Under the New Regime (2025)

The Union Budget 2025, presented in the Parliament Session on February 1, 2025, introduced major reforms in exemptions and deductions under the new tax regime for the Financial Year (FY) 2025-26 and Assessment Year (AY) 2026-27. These changes aim to simplify taxation while providing relief to salaried individuals and taxpayers.

1. Increase in Tax Rebate Limits (₹12 Lakh Rebate Benefit) : The latest Union Budget for FY 2025-26 has raised the tax rebate limit to ₹12 lakh per annum. Previously, in Budget 2024, the rebate limit was increased from ₹5 lakh to ₹7 lakh under Section 87A of the Income Tax Act, 1961. With this new increase, taxpayers earning up to ₹12 lakh annually can now enjoy zero tax liability if they claim the standard deduction of ₹75,000, effectively making the tax-free limit ₹12.75 lakh.

Tax Rebate Limit Under Old & New Regimes:

Old Tax Regime (FY 2024-25): ₹5 lakh

New Tax Regime (FY 2024-25): ₹7 lakh

New Tax Regime (FY 2025-26): ₹12 lakh

2. Increase in Basic Tax Exemption Limit (2025) : To provide further relief, the basic exemption limit has been increased:

In Budget 2024, the exemption limit was raised from ₹2.5 lakh to ₹3 lakh. Union Budget 2025 has now further increased the exemption limit to ₹4 lakh, reducing the tax burden for lower-income groups.

3. Section 80TTB – Standard Deductions and Family Pension Benefits : There are no changes in the standard deduction amount in Budget 2025, as salaried individuals remain eligible to claim the benefit of standard deductions of Rs. 75,000. This change was declared for the new tax regime in the Union Budget of July 2024.

The standard deduction was ₹50,000 as per Union Budget 2023. You can avail of this benefit as Section 80TTB deduction under the Income Tax Act, 1961.

Union Budget 2025 Update: Family pensioners can claim the standard deductions of Rs. 25,000 under the new tax regime from ₹15,000 in 2023.[3]

4. Lower Surcharge for High-Income Earners : People who make Rs. 50 lakhs or more are covered under high-income category. High-income earners are subject to a surcharge imposed by the Indian government.

The government has provided relief to high-net-worth individuals (HNIs) by reducing the surcharge rates for income above ₹5 crore from 37% to 25%, lowering their effective tax rate from 42.74% to 39%.

5. Retirement Benefits: Gratuity & Leave Encashment : Retirement benefits such as gratuity and leave encashment received at the time of retirement remain non-taxable under the new tax regime. This ensures financial security for retirees and prevents additional tax burdens on their accumulated savings.

6. Employer Contributions to NPS & PF : Contributions made by an employer towards the National Pension System (NPS) and Employees’ Provident Fund (PF) continue to exempt from taxation. This exemption encourages long-term savings and provides financial stability for employees post-retirement. 

7. Income from Agnipath Scheme (Section 80CCH) : The Agnipath Scheme, introduced to recruit individuals into the Indian Armed Forces, continues to enjoy tax benefits under Section 80CCH. The financial assistance or earnings under this scheme remain tax-exempt, ensuring additional relief for beneficiaries.

8. Allowances Still Exempt Under the New Regime : Although many deductions have been removed under the new tax structure, certain allowances remain exempt, benefiting employees in different sectors:

• Transfer-Related Allowance :  Employees relocating for work can claim tax-free transition expenses, reducing financial strain during job transfers.
• Conveyance Allowance : Employees who incur work-related travel expenses without employer-provided transport can claim this allowance tax-free.
• Allowance for Disabled Employees : Transport allowances for employees with disabilities remain tax-free, ensuring inclusivity and financial support.

These significant changes in Budget 2025 aim to make taxation simpler and more beneficial for salaried individuals, helping taxpayers save more while complying with the revised tax structure.[4]

Exemptions and Deductions NOT Available in the New Regime

Under the new tax regime of 2025, several key exemptions have been discontinued, including:

• Leave Travel Allowance (LTA) under Section 10(5): Previously allowed taxpayers to claim exemptions for travel expenses incurred during leave.
• House Rent Allowance (HRA) under Section 10(13A): Provided exemptions for individuals paying rent.
• Other Special Allowances under Sections 10(14) and 10(17): Covered various allowances such as children’s education allowance and hostel expenditure allowance
• Entertainment Allowance & Professional Tax under Sections 16(ii) and 16(iii): Allowed deductions for entertainment expenses and professional tax paid by employees. [5]
• Standard Deduction for Business & Self-Employed Professionals : Unlike salaried employees who still get a standard deduction of ₹75,000, self-employed professionals and freelancers cannot claim any standard deductions under the new regime, impacting their net income.\

The possible deductions under the previous and current tax regimes are compared in the table below:

Should You Choose the Old or New Tax Regime?

Choosing between the old and new tax regimes depends on various factors, including your income, expenses, investments, and tax-saving goals. The new tax regime offers lower tax rates but eliminates several exemptions and deductions, while the old regime allows you to reduce taxable income through deductions but has higher slab rates.[7]

Let’s break it down based on different types of taxpayers:

Who Benefits More from the New Tax Regime? 

The new tax regime is beneficial for those who:

• Do not invest much in tax-saving instruments (like PPF, ELSS, or LIC).
• Prefer a simpler tax filing process with no need to track exemptions.
• Have a higher income but fewer deductions (e.g., young professionals or high-salaried employees with no home loans or dependents).
• Receive employer contributions to NPS/EPF, which are still tax-free under the new regime.

Best for ?

• High-income salaried employees (₹12 lakh & above) without major deductions.
• Self-employed professionals/freelancers who do not have business expenses.
• Individuals who want a straightforward tax calculation.

Example : Riya – A 27-Year-Old IT Employee

• Annual Salary: ₹14 lakh
• Investments in 80C: None
• Rent Paid: ₹25,000 per month
• Home Loan: No

Under the old tax regime, Riya wouldn’t benefit much from deductions, so she chooses the new tax regime, which lets her pay a lower tax without dealing with exemptions.

Who Should Stick to the Old Tax Regime?

The old tax regime remains a better choice for those who:

• Invest significantly in tax-saving schemes (e.g., PPF, ELSS, insurance, NPS).
• Claim house rent allowance (HRA) or deductions on home loans.
• Have medical insurance and other deductions under 80D/80E/80G.
• Have business expenses that can be deducted from taxable income.

Best for:

• Salaried employees with high deductions (HRA, LTA, 80C, home loan interest, etc.).
• Business owners who can claim expenses like rent, depreciation, and professional costs.
• Freelancers with work-related expenses, such as office rent, travel, and internet costs.

Example: Ankit – A Business Owner Running a Small Retail Shop 

• Annual Income: ₹18 lakh
• Expenses (Rent, Employee Salaries, Utilities): ₹5 lakh
• Investments in 80C: ₹1.5 lakh
• Home Loan Interest: ₹2 lakh

Under the old tax regime, Ankit can claim deductions on business expenses, home loan interest, and investments. If he shifts to the new tax regime, he loses these deductions and ends up paying more tax. Thus, the old tax regime is better for him.

Tax Benefits for Senior Citizens Under the New Regime

The 2025 tax regime have introduced specific benefits for senior citizens:

a. Higher Exemption Limits and Standard Deduction

• Increased Basic Exemption Limit: For senior citizens (aged 60 to below 80), the basic exemption limit has been raised to ₹4 lakh. For super senior citizens (aged 80 and above), it stands at ₹5 lakh.
• Standard Deduction: A standard deduction of ₹75,000 is available, further reducing taxable income. [8]

b. Medical Insurance and Healthcare-Related Benefits

• Tax Deduction on Interest Income: The deduction limit for interest income has been increased to ₹1 lakh, providing relief to senior citizens relying on interest earnings.
• Exemption on National Savings Scheme Withdrawals: Withdrawals from old National Savings Scheme accounts after August 29, 2024, are exempt from taxation, offering additional financial relief. [9]

These measures aim to provide financial ease and encourage savings among senior citizens, ensuring a secure and comfortable post-retirement life.

Common Tax-Saving Mistakes to Avoid

Since many taxpayers choose their tax regime by making costly mistakes, it is crucial to emphasize this fact. Here’s how it can be structured:

• Choosing the Wrong Regime Without Proper Evaluation : One of the most common mistakes taxpayers make is opting for the new tax regime without assessing whether it actually benefits them. The new regime offers lower tax rates but eliminates several deductions and exemptions available under the old regime. If a taxpayer has significant deductions (such as home loan interest, insurance premiums, or HRA), the old regime might still be the better choice.

Example: A salaried individual earning ₹15 lakh switched to the new regime without calculating deductions, only to realize later that they lost ₹2 lakh worth of exemptions. This resulted in higher tax liability than they would have paid under the old regime.

• Not Investing in Tax-Efficient Financial Products : Even though the new tax regime eliminates popular deductions like Section 80C (PPF, ELSS, etc.), taxpayers should still invest in tax-efficient financial instruments. For example, the National Pension System (NPS) and employer contributions to EPF continue to provide benefits. Not leveraging these options could lead to unnecessary tax outflow.

• Ignoring Long-Term Financial Planning While Saving Tax : Many individuals focus solely on minimizing their tax liability for the current year rather than considering their long-term financial goals. Choosing the right tax regime should align with both short-term and long-term financial planning, including retirement savings and wealth accumulation.
• Not Understanding the Rules for Switching Between Tax Regimes : While taxpayers can currently choose between the new and old tax regimes, there are restrictions:

1. • Business Owners & Professionals: If they opt for the new regime and later switch back to the old regime, they cannot revert to the new regime again. This means they must carefully evaluate before making the switch.
   • Salaried Individuals: They can switch between regimes every year but must notify their employer in advance and finalize their choice before filing their income tax return.

Example : Mistake to Avoid: A self-employed professional opted for the old tax regime after initially choosing the new one. Later, they realized they wanted to return to the new regime but were unable to do so due to restrictions under the Income Tax Act. Such mistakes can lead to higher tax payments in the long run.

Key Takeaway: Before selecting a tax regime, individuals should carefully evaluate their deductions, exemptions, and financial goals. Taxpayers must ensure they are making an informed decision rather than opting for the new regime solely because of its lower tax rates.

Conclusion

The new tax regime, introduced in 2020, was designed to simplify taxation with lower slab rates and fewer deductions. Over the years, it has evolved with increased rebates, higher exemption limits, and additional benefits for taxpayers. The Union Budget 2025 has further refined the regime, making it a compelling option for those who prefer straightforward tax calculations without the hassle of claiming multiple exemptions. However, the new tax regime offers taxpayers the flexibility to choose between lower tax rates with limited deductions or higher tax rates with multiple deductions and exemptions, as per the Union Budget 2024.

It is crucial for taxpayers to carefully evaluate their deductions under both tax regimes and select the one that best aligns with their financial goals and circumstances. Those with minimal tax-saving investments may find the new regime more beneficial, while individuals with significant deductions—such as home loans, EPF contributions, and insurance premiums—may still benefit from the old regime. The best tax-saving strategies under the new regime include maximizing employer contributions to NPS and EPF, utilizing the standard deduction of ₹75,000, and investing in tax-efficient alternatives like tax-free bonds and long-term capital gains exemptions. Business owners and freelancers can further optimize their tax outflows by structuring their income strategically and leveraging available deductions.

Ultimately, the choice between the old and new tax regimes should be based on careful financial planning, ensuring that taxpayers minimize their tax liabilities while securing their long-term financial well-being.

References

• Government of India, Union Budget 2025-26, Ministry of Finance, available athttps://www.indiabudget.gov.in/  (last visited   14, 2025).
• Key Takeaways from Union Budget 2025: Tax Updates and More, available at: https://www.rblbank.com/blog/banking/tax/union-budget-2025-tax-updates-economic-highlights(last visited Feb. 15, 2025).
• Mohammed S Chokhawala, “Old Tax Regime vs New Tax Regime”, ClearTax (Feb. 10, 2025), available at https://cleartax.in/s/old-tax-regime-vs-new-tax-regime
• Deductions in New Tax Regime under Union Budget 2025, available at : https://www.policybazaar.com/income-tax/some-of-the-important-deductions-available-in-the-new-tax-regime/ (last visited on 11^th Feb, 2025)
• Income Tax Slabs for FY 2025-26, available at:https://m.economictimes.com/wealth/income-tax-slabs (last accessed on February 15, 2025).
• Budget 2025: New vs Old Tax Regime, available at :  https://www.financialexpress.com/budget/budget-2025-new-vs-old-tax-regime/  (last visited Feb. 13, 2025).
• Budget 2025: Relief for Seniors Earning Interest but Worries Remain, available at: https://www.hindustantimes.com/india-news/budget-2025-relief-for-seniors-earning-interest-but-worries-remain-101738435745848.html  (last accessed on February 15, 2025).
• Income Tax Act, 1961 (Act 43 of 1961)

[1] Mohammed S Chokhawala, “Old Tax Regime vs New Tax Regime”, ClearTax (Feb. 10, 2025), available at https://cleartax.in/s/old-tax-regime-vs-new-tax-regime.

[2] Deductions in New Tax Regime under Union Budget 2025, available at :  https://www.policybazaar.com/income-tax/some-of-the-important-deductions-available-in-the-new-tax-regime/ (last visited on 11^th Feb, 2025)

[3] Ibid

[4] Key Takeaways from Union Budget 2025: Tax Updates and More, available  at : https://www.rblbank.com/blog/banking/tax/union-budget-2025-tax-updates-economic-highlights

[5] Income Tax Act, 1961 (Act 43 of 1961)

[6] Supra, note 2

[7] Budget 2025: New vs Old Tax Regime, available at :  https://www.financialexpress.com/budget/budget-2025-new-vs-old-tax-regime/  (last visited Feb. 13, 2025).

[8] Income Tax Slabs for FY 2025-26, available at: https://m.economictimes.com/wealth/income-tax-slabs (last accessed on February 15, 2025).

[9] Budget 2025: Relief for Seniors Earning Interest but Worries Remain, available at: https://www.hindustantimes.com/india-news/budget-2025-relief-for-seniors-earning-interest-but-worries-remain-101738435745848.html  (last accessed on February 15, 2025).

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This blog is written by Hargun Kaur, a 4^th-year law student pursuing BBA LLB (Hons.) from Lovely Professional University. It compares the old and new tax regimes and describes how deductions and exemptions might help you save money on taxes. Whether you are a salaried employee, a business owner, or a freelancer, this blog will help you understand the best ways to reduce your tax burden in 2025 and choose the most beneficial tax regime.