New vs Old Tax Regime 2025-26: Which Saves More Tax?
- New regime is the default since FY 2023-24. Lower rates, almost no deductions.
- Below Rs 12 lakh income, new regime wins easily. Section 87A rebate makes tax zero up to Rs 12 lakh under the new regime.
- Old regime wins if your deductions exceed roughly Rs 4 lakh. Section 80C, 80D, HRA, home loan, and standard deduction combined.
- Switch rules: Salaried can switch yearly. Business income can switch once only.
Starting FY 2023-24, the new tax regime became the default option for individual taxpayers in India. With further amendments introduced in the Union Budget 2025-26, the gap between the two regimes has widened. If you have not revisited your choice recently, now is the time. This article provides a clear, practical comparison to help you decide which regime saves you more money in FY 2025-26.
Understanding the Two Regimes
The old regime allows you to claim a wide range of deductions and exemptions, including Section 80C (investments up to Rs 1.5 lakh), Section 80D (health insurance premiums), HRA, LTA, and standard deduction. The trade-off is that the tax slabs are higher.
The new regime offers significantly lower tax rates but eliminates most deductions and exemptions. The idea is simplicity: lower rates, fewer calculations, no need to invest specifically for tax-saving purposes.
Tax Slabs Comparison for FY 2025-26
New Regime (Default)
- Up to Rs 4,00,000: Nil
- Rs 4,00,001 to Rs 8,00,000: 5%
- Rs 8,00,001 to Rs 12,00,000: 10%
- Rs 12,00,001 to Rs 16,00,000: 15%
- Rs 16,00,001 to Rs 20,00,000: 20%
- Rs 20,00,001 to Rs 24,00,000: 25%
- Above Rs 24,00,000: 30%
Standard deduction of Rs 75,000 is available. Rebate under Section 87A ensures that individuals with taxable income up to Rs 12,00,000 pay zero tax under the new regime.
Old Regime
- Up to Rs 2,50,000: Nil
- Rs 2,50,001 to Rs 5,00,000: 5%
- Rs 5,00,001 to Rs 10,00,000: 20%
- Above Rs 10,00,000: 30%
Standard deduction of Rs 50,000 is available. You can claim HRA, 80C, 80D, 80E, 80TTA, home loan interest under Section 24, and other applicable exemptions.
Who Benefits from Which Regime?
Low deductions, simple finances
No home loan, no major HRA claim, total deductions under Rs 3.75 lakh, or income below Rs 12 lakh (where the Section 87A rebate makes tax zero). Prefer simplicity over locking funds in ELSS or PPF.
Heavy deductions, home loan, big HRA
Paying home loan EMIs (80C principal plus Section 24 interest), living in a metro on rent (HRA), maxing 80C and 80D and 80CCD(1B). Total deductions above Rs 4 lakh per year.
Practical Example
Consider Priya, a salaried professional earning Rs 15,00,000 per annum (gross). She pays rent of Rs 25,000 per month in Mumbai, invests Rs 1,50,000 under 80C, pays Rs 25,000 for health insurance (80D), and contributes Rs 50,000 to NPS (80CCD(1B)).
Tax: ~Rs 1,17,000
Total deductions roughly Rs 4,75,000 (HRA, 80C, 80D, NPS, standard deduction). Taxable income: ~Rs 10,25,000. Plus cess.
Tax: ~Rs 1,42,500
Taxable income after Rs 75,000 standard deduction: Rs 14,25,000. Plus cess. No HRA, no 80C, no NPS deduction available.
In Priya's case, the old regime saves her roughly Rs 25,000 to Rs 30,000 in tax. Without her rent and NPS contribution, the new regime would be cheaper.
A Decision Framework
Salaried individuals can switch between regimes every year. Business and professional income earners who opt out of the new regime can switch back only ONCE in their lifetime, so model both regimes over 3 to 5 years before opting out.
Frequently Asked Questions
Which is better, new tax regime or old tax regime?
The new regime is better if your total deductions are less than Rs 3.75 lakh or your income is below Rs 12 lakh (where the Section 87A rebate makes tax zero). The old regime is better if you claim HRA, home loan interest, and other deductions totalling more than Rs 4 lakh.
Can I switch between old and new tax regime?
Salaried individuals can switch between regimes every financial year when filing their return. Business owners and professionals who opt out of the new regime can switch back only once in their lifetime.
What deductions are allowed in the new tax regime?
Very few. The Rs 75,000 standard deduction and employer's NPS contribution under Section 80CCD(2). Most deductions like 80C, 80D, HRA, and home loan interest are not available.
Is the new tax regime the default option?
Yes. Since FY 2023-24, the new tax regime is the default for all individual taxpayers. You are automatically in the new regime unless you specifically opt out by filing Form 10-IEA before the due date.
For the exact slab structure under the new Income Tax Act 2025, read our guide to income tax slabs 2025-26. For HRA in the old regime, see HRA exemption rules under the new Act.
Not Sure Which Regime Saves You More?
Our tax advisors can run a personalised comparison based on your actual income and deduction profile, ensuring you pick the optimal regime for FY 2025-26.