New vs Old Tax Regime: Which is better for you after the Union Budget 2025-26?

The 2025-26 Budget generated excitement among taxpayers with its higher tax exemption limit and reduced rates under the new tax regime. Many are now wondering if it is time to make the switch as the new regime promises simplicity and higher take-home pay, thanks to lower tax rates and a generous rebate. 

But there’s a catch!. The new regime offers lower rates and a higher rebate but it achieves this by cutting out the deductions and exemptions that the old tax regime offers, which millions of taxpayers rely on to reduce their taxable income.

At first glance, the new regime seems perfect for those who do not claim many deductions, such as people without home loans, minimal investments in Sections like 80C, 80D, or limited contributions to schemes like NPS. It’s also a great option if you want a simple, hassle-free way to file taxes without having to manage multiple tax-saving investments.

Understanding the differences between the old and new tax regimes for the fiscal year 2025-26 is essential to answer these questions and make well-informed decisions for your income tax filing.

Key Highlights of Union Budget 2025

In Union Budget 2025-26, Finance Minister Nirmala Sitharaman proposed an increase in the basic exemption limit and raised the income threshold for rebate under Section 87A. 

• Zero Tax Up to ₹12.75 Lakh: Salaried individuals under the new regime enjoy zero tax up to ₹12.75 lakh due to increased deductions.
• Higher Basic Exemption Limit: The basic exemption limit has been raised to ₹4 lakh from ₹3 lakh earlier for all salaried taxpayers.
• ₹75,000 Standard Deduction: Salaried taxpayers get a standard deduction of ₹75,000, making income up to ₹12.75 lakh tax-free.
• New Income Tax Slabs: The new tax regime introduces seven slabs, starting at 0% up to ₹4 lakh and rising to 30% for income above ₹24 lakh.
• Minimal Deductions: Traditional exemptions like HRA, LTA, Section 80C, and 80D are still unavailable under the new regime. However, a  ₹75,000 standard deduction is available. Additionally, employer contributions of up to 14% to NPS and 12% to EPF (if part of your CTC) are deductible from taxable income.

What are the tax slabs under both regimes?

New Tax Regime

With new slabs and rates, people earning an income of Rs 12 lakh from salary won't have to pay any tax. Additionally, with a standard deduction of Rs 75,000, people with an annual income of Rs 12.75 lakh won't have to pay tax under this regime. 

How the new income tax slabs will work

Moreover, with the right combination of salary structure and smart use of exemptions, you can achieve zero tax liability on an annual income of Rs 14.65 lakh under the new tax regime. Here's how one can enjoy zero tax liability on an annual income of up to Rs 14.65 lakh by maximizing EPF and NPS contributions.

For income above Rs 12.75 lakh, salaried individuals will have to go on a case to case basis comparison to figure out whether they will be saving more tax in the new regime or old regime. 

Old Tax Regime

The Old Tax Regime offers taxpayers across all age groups access to around 70 exemptions and deductions that are not available under the New Tax Regime. Some key exemptions include Leave Travel Allowance (LTA), House Rent Allowance (HRA), and interest paid on home loans. 

Old tax regime also covers benefits like the employer’s contribution to the employee’s NPS account and several deductions under various sections, including HRA, 80C, 80CCC, 80CCD, 80TTA, 80TTB, 80E, 80DD, 80DDB, 80EE, 80EEA, 80EEB, 80G, and many others. Additionally, allowances for MPs/MLAs are included. These extensive deductions make the Old Tax Regime an attractive option for those who invest strategically or have expenses that qualify for exemptions.

Exemptions and Deductions under the Old Tax and New Tax Regimes

Old tax regime vs New Tax Regime example

Both regimes have their pros and cons. While the old regime encourages savings and investments through various deductions, the new regime is simpler and works well for those with lower income or fewer investments. When choosing between the old and new tax regimes, it's important to consider the exemptions and deductions offered by the old regime. 

Start by applying all eligible deductions to find your net taxable income. Then, calculate the tax based on this adjusted income under the old regime and compare it with the tax you’d pay under the new regime. This comparison will help you decide which option saves you more.

Across most salary bands, especially for incomes below Rs 24 lakh, the new regime consistently offers lower tax liability, even with varying levels of deductions. 

When deductions exceed ₹6.5 lakh, especially for salaries between ₹13.5 lakh and ₹17 lakh, the old regime offers better tax savings. For those with deductions around ₹5 lakh to ₹6.5 lakh, both regimes provide similar outcomes, marking a breakeven point where the tax liability is the same.

If your deductions are above this breakeven point, the old regime is likely more beneficial. If they fall below, the new regime is the better choice. Personalized tax planning can help fine-tune this decision.

For high earners (₹40 lakh or more), the new regime is ideal when deductions are minimal. But if deductions exceed ₹7.15 lakh, the old regime may save you more. Overall, the new regime is best for those with fewer deductions (below ₹2.5 lakh) or minimal investments.

Hence, the choice between the two regimes largely depends on income and one's ability to claim deductions. Since individual financial situations vary, it’s important to compare the tax liability under both regimes to choose the one that offers the most savings and suits your needs.

Frequently Asked Questions