Old vs. New Tax Regime: Which One Should Salaried Employees Choose?

Old vs New Tax Regime: Which Is Better New Or Old Tax Regime For Salaried Employees?

The Indian government has introduced various incentives to encourage taxpayers to switch to the new tax regime. With recent changes in the Budget 2025, the new regime has become the default option, although the old tax regime remains available. This article provides an in-depth comparison of both regimes, highlighting the key differences and helping salaried employees make an informed choice.

Budget 2025 Update: What’s New?

One of the most significant updates is that under the new tax regime, income up to Rs. 12 lakhs will have zero tax liability, thanks to a higher rebate under Section 87A. The revised tax slabs for FY 2025-26 under the new tax regime are:

Additionally, the rebate under Section 87A has increased from Rs. 25,000 to Rs. 60,000, making the tax incidence for income up to Rs. 12 lakhs effectively zero. The standard deduction under the new tax regime has also been raised to Rs. 75,000, benefiting salaried employees and pensioners alike.

Comparison of Old vs. New Tax Regime

Old Tax Regime: Best for High Deductions

• Offers over 70 exemptions and deductions, including HRA, LTA, Section 80C (PPF, LIC, ELSS, EPF), Section 80D (health insurance), and home loan interest deductions.
• Best suited for individuals with significant deductions and investments.
• Allows a standard deduction of Rs. 50,000.
• Income tax slabs vary based on age (general, senior citizens, and super senior citizens).
• Requires detailed tax planning and documentation to maximize savings.

New Tax Regime: Simplified and Lower Rates

• Provides lower tax rates but eliminates most deductions and exemptions.
• Standard deduction of Rs. 75,000 is now available under the new regime.
• Default option for taxpayers but allows switching back to the old regime if beneficial.
• Offers a streamlined tax structure with fewer compliance requirements.
• Ideal for those who do not invest heavily in tax-saving instruments.

Which Regime is Better?

The choice between the two regimes depends on an individual’s income level and deductions. Here’s a simple guideline:

• Old Tax Regime is better if your total deductions (HRA, 80C, 80D, home loan interest, etc.) exceed Rs. 4.5 lakhs.
• New Tax Regime is beneficial if your deductions are less than Rs. 1.75 lakhs, as it results in a lower tax liability.
• For deductions between Rs. 1.75 lakhs to Rs. 4.5 lakhs, the choice depends on your income level and specific exemptions.

Key Takeaways

• The new tax regime is more attractive for individuals without substantial deductions and those seeking lower tax rates with minimal compliance.
• Those heavily investing in tax-saving instruments may still benefit from the old regime.
• Salaried employees should calculate their tax liability under both regimes before making a decision.

By carefully analyzing income, deductions, and financial goals, employees can optimize their tax savings and make an informed choice for the upcoming financial year.

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