New vs. Old Tax Regime: Making the Right Choice for Your Income

As India gears up for the Union Budget 2025, taxpayers are eagerly awaiting the proposed changes in the income tax slabs. This year, the spotlight is on the new tax regime and how it compares to the old tax regime, especially in the context of Section 87A, tax-saving investments, and deductions. Let’s dive deeper into the details and explore how these changes could impact your income and taxes.

Understanding the Income Tax Slabs in Union Budget 2025

The Union Budget 2025 introduces exciting developments in the tax structure. One of the major highlights is the introduction of a Rs 60,000 rebate for individuals earning up to Rs 12 lakh (Rs 12.75 lakh for salaried individuals) under Section 87A. This rebate makes the new tax regime even more attractive, particularly for those with an income of Rs 12 lakh or below.

The new tax slabs under the regime offer a more streamlined approach, where taxpayers are no longer required to rely on tax-saving investments to reduce their tax burden. On the other hand, the old tax regime retains its more traditional approach, with income tax slabs of 5%, 20%, and 30%, along with opportunities for deductions based on eligible investments, such as PPF, ELSS, and NPS.

Also read: Understanding the Key Highlights of Union Budget 2025 Income Tax Reforms and Slab Changes Explained

New Regime vs. Old Regime: Which One is Right for You?

While the new tax regime seems to offer benefits for those earning up to Rs 12 lakh, the story changes for those with a higher income. Here’s a quick comparison to help you understand how the two regimes stack up against each other.

For Incomes Up to Rs 12 Lakh

If you earn Rs 12 lakh (Rs 12.75 lakh for salaried individuals), the new tax regime allows a rebate of Rs 60,000 under Section 87A. This effectively reduces your tax liability and makes it a highly attractive option. The old tax regime, on the other hand, would allow you to claim deductions based on tax-saving investments, such as contributions to EPF, NPS, and more. However, even when utilizing these deductions, the tax burden would still be heavier compared to the new regime.

For Incomes Between Rs 13.75 Lakh and Rs 15.75 Lakh

For individuals earning between Rs 13.75 lakh and Rs 15.75 lakh, the old tax regime still holds an edge, but only if you’re actively investing in tax-saving schemes. To break it down, Rs 5.25 lakh in tax-saving investments would make the old regime more beneficial. For example, a taxpayer earning Rs 13.75 lakh without claiming House Rent Allowance (HRA) will have a tax burden of Rs 57,500 in the old tax regime compared to Rs 75,000 under the new regime.

For Incomes Above Rs 20 Lakh

For individuals earning Rs 20 lakh (Rs 20.75 lakh for salaried individuals), the new tax regime outperforms the old regime. Even after investing Rs 5.25 lakh in savings schemes, taxpayers under the old regime would still pay around Rs 2.4 lakh in taxes, while the new regime would only require Rs 2 lakh in tax. This is because the new tax regime does not allow any deductions but offers a simpler and lower tax structure.

For Incomes Above Rs 24.75 Lakh

For those earning above Rs 24.75 lakh, the old tax regime remains an option, but it is only advantageous if the taxpayer’s total deductions and exemptions (excluding the standard deduction) are less than Rs 8 lakh. For example, someone with an income of Rs 24 lakh would save Rs 60,000 under the new regime, while the old regime, after factoring in tax-saving investments of Rs 5.25 lakh, would result in a tax liability of Rs 3.6 lakh. In contrast, under the new regime, it’s reduced to Rs 3 lakh.

Also read: Union Budget 2025 Major Taxation Changes for ULIPs and Life Insurance Policies

Comparison of Tax Regimes for Different Income Slabs and Deductions

Here's a table about the income and deductions under both the New Tax Regime and Old Tax Regime:

Expert Insights on the New vs. Old Tax Regime

Experts have pointed out that the new tax regime benefits individuals who prefer simplicity and lower tax liabilities, especially for those with incomes up to Rs 12 lakh. The rebates under Section 87A make the new regime appealing for salaried individuals, where deductions are fewer, but taxes are reduced.

The old tax regime, on the other hand, continues to be the better option for individuals who are keen on utilizing tax-saving instruments and exemptions to reduce their overall tax liability. However, the complexity and documentation required may not suit everyone, especially for those with higher income levels.

Which Tax Regime is Best for You?

In conclusion, choosing between the new tax regime and the old tax regime depends largely on your income, your ability to invest in tax-saving schemes, and your preference for simplicity. If you have an income up to Rs 12 lakh and prefer to avoid the hassle of tax-saving investments, the new regime offers more benefits. However, if you're earning above Rs 15 lakh and have the capacity to invest in tax-saving instruments, the old regime may still be worth considering.

At TaxSpanner, we understand that tax planning can be complex, and we’re here to help you make the right choice. Our expert insights and tools are designed to make sure you maximize your savings, whether you’re opting for the new tax regime or the old tax regime.