For FY25, taxpayers could choose between the Old Tax Regime with higher rates but multiple deductions, and the New Tax Regime offering lower slabs, limited deductions, a standard deduction and a larger rebate for simpler taxation.
For taxpayers in India, choosing between the Old Tax Regime and the New Tax Regime when filing returns for Financial Year 2024-25 (Assessment Year 2025-26) has a major impact on overall tax liability. Both systems coexist and allow individuals to opt during filing, but each has distinct advantages depending on income levels, available deductions and personal financial circumstances.
The Old Tax Regime relies on higher slab rates but allows taxpayers to claim a wide variety of deductions and exemptions, including Section 80C (up to ₹1.5 lakh) for investments like PPF and ELSS, 80D for health insurance, House Rent Allowance (HRA), Leave Travel Allowance (LTA) and interest on home loans. These deductions can significantly reduce taxable income for taxpayers who actively invest or have substantial eligible expenses.
Under the New Tax Regime, introduced through Section 115BAC, tax slabs are more numerous and concessional, with lower marginal rates across income ranges but few deductions available. For FY25, the new regime includes a raised standard deduction of ₹75,000 for salaried individuals and an expanded rebate under Section 87A that can make income up to around ₹12.75 lakh effectively tax-free after accounting for the rebate and standard deduction, a change that enhances its appeal for many middle-class earners.
The Difference
The key structural difference lies in simplicity versus optimisation: the new regime offers a straightforward calculation with minimal paperwork and immediate tax relief through lower slab rates, while the old regime rewards taxpayers who can fully utilise deductions and exemptions to lower their taxable income. For example, a taxpayer with several eligible investments under 80C and significant HRA can often reduce more tax under the old regime than with the basic concession offered in the new regime.
Experts suggest a “rule of thumb” approach: if total eligible deductions are below a certain threshold (e.g., around ₹2 lakh), the new tax regime typically results in lower tax; conversely, taxpayers with extensive deductions (for insurance, pension schemes, home loan interest, etc.) often benefit more under the old regime.
Demographically, a large proportion of taxpayers — particularly middle-class salaried individuals — have shifted toward the new tax regime, drawn by its simplicity and effective zero tax up to a higher income band, while a significant minority still prefers the old regime for its deduction-based savings.
In conclusion, neither tax system is universally better; the optimal choice for FY25 depends on a taxpayer’s income level, investment profile and deduction potential. Careful evaluation or consultation with a tax professional can help individuals determine which regime yields the highest net savings.