Old vs New Income Tax Regime (2025) – Which is Better for You?
1. Introduction – Why This Topic Matters in 2025
The Indian income tax system has undergone several changes in recent years, but none has sparked more debate than the Old vs New Income Tax Regime choice introduced in Budget 2020.
What was meant to simplify taxation has instead left many taxpayers scratching their heads —
“Which regime should I choose?”
The Union Budget 2023 made the New Regime the default option from FY 2023-24 onwards. This shift signals the government’s intent to nudge people toward the New Regime. Yet, the Old Regime remains available, offering tax deductions and exemptions that can significantly reduce tax liability for some individuals.
In 2025, with updated tax slabs, higher standard deduction limits, and subtle policy shifts, it’s crucial to evaluate both regimes before filing your income tax return (ITR). Choosing the wrong one can cost you thousands — or even lakhs — in extra taxes.
In this guide, we’ll go beyond just listing slab rates. We’ll break down:
- The structural differences between the two regimes
- Who benefits more from each system
- Real-world case studies
- Updated numbers for AY 2025–26
- A clear decision-making framework
By the end, you’ll be able to confidently decide which regime maximizes your savings in 2025.
2. Understanding the Indian Income Tax System – A Brief Overview
Before we dive deep, let’s recap how the income tax system works in India.
What is Income Tax?
Income tax is a direct tax levied by the Government of India on the income of individuals, Hindu Undivided Families (HUFs), firms, and companies. It is governed by the Income-tax Act, 1961.
Key Concepts to Know
- Assessment Year (AY) – The year following the financial year in which income is assessed and tax is paid.
- Example: Income earned in FY 2024–25 is taxed in AY 2025–26.
- Financial Year (FY) – The 12-month period from April 1 to March 31 during which income is earned.
- Tax Slabs – Different income ranges are taxed at different rates. India follows a progressive taxation system — higher income attracts higher tax rates.
- Deductions & Exemptions –
- Deductions reduce taxable income (e.g., Section 80C investments, 80D medical insurance).
- Exemptions remove certain income from taxation (e.g., HRA, LTA).
- Two Parallel Regimes –
- Old Regime – Allows most exemptions & deductions, higher tax rates.
- New Regime – Lower tax rates, but removes most exemptions & deductions.
3. Old Income Tax Regime – Structure & Features
The Old Income Tax Regime has been in place for decades. It operates on a system of tax slabs and offers a wide range of exemptions and deductions to reduce taxable income.
Key Features
- Higher tax rates compared to the New Regime.
- Multiple tax-saving avenues through deductions and exemptions.
- Complexity – Requires careful documentation of proofs and investments.
- Flexibility – Beneficial for those who invest in tax-saving schemes.
Tax Slabs – Old Regime (AY 2025–26)
| Annual Income | Tax Rate |
|---|---|
| Up to ₹2.5 lakh | Nil |
| ₹2.5 lakh – ₹5 lakh | 5% |
| ₹5 lakh – ₹10 lakh | 20% |
| Above ₹10 lakh | 30% |
Rebate u/s 87A – For resident individuals with taxable income up to ₹5 lakh, tax liability is zero after rebate.
Popular Deductions & Exemptions in Old Regime
- Section 80C – Up to ₹1.5 lakh for investments in PPF, ELSS, life insurance, etc.
- Section 80D – Medical insurance premium deduction (₹25,000–₹50,000).
- HRA Exemption – For salaried individuals living in rented accommodation.
- LTA Exemption – Travel expenses for self and family.
- Standard Deduction – ₹50,000 for salaried taxpayers.
- Home Loan Benefits – Interest deduction under Section 24(b) and principal under 80C.
4. New Income Tax Regime – Structure & Features
Introduced in Budget 2020, the New Regime was designed to simplify taxation and remove dependency on exemptions.
Key Features
- Lower tax rates across most slabs.
- No major deductions/exemptions allowed (except NPS employer contribution, standard deduction from 2023 onwards).
- Simpler compliance – Fewer proofs and documents needed.
- Became default regime from FY 2023–24.
Tax Slabs – New Regime (AY 2025–26)
| Annual Income | Tax Rate |
|---|---|
| Up to ₹3 lakh | Nil |
| ₹3 lakh – ₹6 lakh | 5% |
| ₹6 lakh – ₹9 lakh | 10% |
| ₹9 lakh – ₹12 lakh | 15% |
| ₹12 lakh – ₹15 lakh | 20% |
| Above ₹15 lakh | 30% |
Rebate u/s 87A – Under the New Regime, individuals with taxable income up to ₹7 lakh pay zero tax after rebate.
What’s Allowed in the New Regime?
- Standard Deduction: ₹50,000 for salaried individuals.
- Employer’s contribution to NPS (Section 80CCD(2)).
- Some allowances for government employees.
5. Income Tax Slabs: Old vs New Regime (AY 2025–26) – Quick Comparison
| Income Range | Old Regime Rate | New Regime Rate |
|---|---|---|
| Up to ₹2.5 lakh | Nil | Nil |
| ₹2.5–₹3 lakh | 5% | Nil |
| ₹3–₹5 lakh | 5% | 5% |
| ₹5–₹6 lakh | 20% | 5% |
| ₹6–₹9 lakh | 20% | 10% |
| ₹9–₹10 lakh | 20% | 15% |
| ₹10–₹12 lakh | 30% | 15% |
| ₹12–₹15 lakh | 30% | 20% |
| Above ₹15 lakh | 30% | 30% |
Key Takeaway:
The New Regime offers lower rates for most income levels but lacks the extensive deductions of the Old Regime. The choice depends on your income structure and investment habits.
6. Key Differences Between Old & New Regimes
While both regimes aim to tax income progressively, they differ fundamentally in their approach.
Here’s a point-by-point comparison:
| Criteria | Old Income Tax Regime | New Income Tax Regime |
|---|---|---|
| Tax Slab Rates | Higher | Lower |
| Exemptions & Deductions | More than 70 available | Bare minimum |
| Standard Deduction | ₹50,000 (salaried) | ₹50,000 (from 2023 onwards) |
| Section 80C Benefits | Available up to ₹1.5 lakh | Not available |
| HRA / LTA | Available | Not available |
| NPS Deduction | Available | Only employer contribution under 80CCD(2) |
| Simplicity | Complex | Simple |
| Record Keeping | More documents needed | Minimal |
| Best For | Taxpayers who invest/spend in eligible areas | Taxpayers without major deductions |
| Default Status | Optional | Default from FY 2023–24 |
7. Deductions & Exemptions – What You Gain, What You Lose
One of the biggest decision points between the two regimes is the availability (or lack) of deductions and exemptions.
Old Regime – Major Deductions Available
- Section 80C: ₹1.5 lakh limit (PPF, ELSS, life insurance, home loan principal)
- Section 80D: ₹25,000–₹50,000 (health insurance)
- Section 24(b): ₹2 lakh interest on home loan
- HRA: Rent paid deduction
- LTA: Travel for self/family
- Education Loan Interest (80E): Full amount without limit
New Regime – Limited Deductions
- Standard deduction ₹50,000
- Employer NPS contribution (80CCD(2))
- Agniveer Corpus Fund contribution (80CCH)
- No HRA, LTA, 80C, or 80D benefits
Impact Example:
If you claim ₹3.5 lakh deductions in the Old Regime, it could significantly lower your tax slab, making it more beneficial than the New Regime despite higher rates.
8. Pros & Cons of Old Income Tax Regime
Pros
- Maximum deductions → Tax savings for those investing/spending in eligible schemes
- Home loan benefits
- Encourages savings & investment
- Familiarity — Taxpayers are used to it
Cons
- Complex — More paperwork and proof submission
- Higher slab rates
- Tax savings depend on compliance (must invest in eligible schemes)
- Less suitable for those without tax-saving investments
9. Pros & Cons of New Income Tax Regime
Pros
- Lower tax rates
- Simplicity — Minimal documentation
- More in-hand salary for those who don’t invest in tax-saving schemes
- Good for young earners with minimal commitments
Cons
- Loss of major deductions
- Less motivation to invest for tax purposes
- May be costlier for those with housing loans, insurance, or large deductions
10. Who Should Choose the Old Regime?
The Old Regime is generally better for:
- Salaried individuals with HRA benefits and insurance investments
- Home loan borrowers claiming both principal & interest deductions
- Families with large medical insurance and tuition fee expenses
- Those who max out 80C and 80D deductions
Example:
A salaried person earning ₹12 lakh, claiming:
- 80C: ₹1.5 lakh
- 80D: ₹25,000
- HRA: ₹1 lakh
- Home loan interest: ₹2 lakh
→ Taxable income drops significantly, making Old Regime cheaper.
11. Who Should Choose the New Regime?
The New Regime is generally better for:
- Fresh graduates or young professionals with no investments yet
- Individuals without home loans or major deductions
- Freelancers/self-employed with irregular income
- People who prefer no documentation hassle
Example:
A 26-year-old earning ₹8 lakh, no investments, no insurance → Will save more tax in New Regime due to lower rates.
12. Tax Saving Opportunities – Old Regime vs New Regime
Even though the New Regime offers fewer deductions, there are still ways to optimize.
| Tax Saving Option | Old Regime | New Regime |
|---|---|---|
| 80C Investments | ✅ | ❌ |
| Health Insurance 80D | ✅ | ❌ |
| Home Loan Interest | ✅ | ❌ |
| NPS Employer Contribution | ✅ | ✅ |
| Standard Deduction | ✅ | ✅ |
| Agniveer Corpus (80CCH) | ❌ | ✅ |
📌 Pro Tip:
If your total deductions are above ₹2.5–₹3 lakh, the Old Regime often works better.
If not, the New Regime’s lower rates will usually save you more.
13. Practical Examples & Case Studies
One of the easiest ways to understand the Old vs New Income Tax Regime decision is by looking at real-life scenarios.
Below are case studies for different salary levels.
Case Study 1: Annual Income ₹5 lakh
Profile: Fresh graduate, no investments, no home loan.
- Old Regime:
Taxable income = ₹5,00,000
Tax = ₹12,500 – ₹12,500 rebate = ₹0 - New Regime:
Taxable income = ₹5,00,000
Tax = ₹12,500 – ₹12,500 rebate = ₹0
Result: No difference — both regimes result in zero tax.
Case Study 2: Annual Income ₹8 lakh (No investments)
Profile: Young professional, no deductions.
- Old Regime:
Tax = ₹75,000 (after slab calculation)
Effective Tax Rate: 9.37% - New Regime:
Tax = ₹37,500
Effective Tax Rate: 4.68%
Result: New Regime is cheaper by ₹37,500.
Case Study 3: Annual Income ₹12 lakh (Invests in 80C, 80D, HRA)
Profile: Salaried, home loan, health insurance.
- Old Regime:
80C = ₹1.5 lakh
80D = ₹25,000
HRA = ₹1 lakh
Home Loan Interest = ₹2 lakh
Taxable income reduces to ₹7.25 lakh.
Tax = ₹52,500 - New Regime:
No major deductions → Taxable income remains ₹12 lakh.
Tax = ₹90,000
Result: Old Regime saves ₹37,500.
Case Study 4: Annual Income ₹20 lakh
Profile 1: No deductions → New Regime wins
Profile 2: High deductions (₹4 lakh+) → Old Regime wins
Key Learning:
The break-even point is around ₹2.5–₹3 lakh in deductions. Above this, Old Regime usually wins.
14. Budget 2025 Changes & Their Impact
The Union Budget 2025 introduced several tweaks that affect regime choice:
- Standard Deduction retained – ₹50,000 available in both regimes.
- Higher basic exemption in New Regime – ₹3 lakh vs ₹2.5 lakh in Old Regime.
- Additional rebate in New Regime – No tax up to ₹7 lakh taxable income.
- Push towards New Regime – More communication and defaults set in portals.
Impact:
These changes tilt the scales slightly in favor of the New Regime for middle-income earners without heavy deductions.
15. Step-by-Step Process to Switch Between Regimes
You can choose your regime each year when filing your ITR.
For Salaried Employees:
- Choose via Form 10-IEA in the income tax portal before filing.
- Inform employer (optional — only affects TDS).
For Business/Profession Income:
- Once you opt for New Regime, you can only switch back once.
Steps:
- Calculate tax under both regimes.
- Download Form 10-IEA.
- Fill and submit online before filing ITR.
- File ITR with the chosen regime.
16. Government’s Push Towards the New Regime – Policy Analysis
The Government is clearly steering taxpayers toward the New Regime:
- Made it default from FY 2023–24.
- Increased rebate limit to ₹7 lakh in New Regime.
- Reduced exemptions to simplify compliance.
Reasoning:
- Reduce administrative burden of verifying deductions.
- Move towards a simplified tax code.
- Increase disposable income in short term (though may reduce long-term savings).
17. Myth Busting – Common Misconceptions
- “Old Regime is being abolished soon” → Not officially announced; still available.
- “New Regime always saves more tax” → Only true if deductions < ₹2.5–₹3 lakh.
- “No need to invest if choosing New Regime” → True for tax-saving, but investments are still important for wealth building.
- “You can’t change regime later” → Salaried can change every year; restrictions apply only for business income.
18. Expert Opinions – What CAs & Tax Consultants Say
- For Salaried with Deductions: Old Regime usually wins.
- For Young Earners: New Regime provides more liquidity.
- For Retirees: New Regime may work better unless high deductions exist (medical, 80C).
Many CAs recommend calculating both annually before deciding.
19. Future of Taxation in India – Is Old Regime Going Away?
While there’s no official phase-out date, the trend suggests:
- Gradual shift toward New Regime
- Reduction of tax-saving-linked investments
- Simpler return filing in future
Likely outcome: Old Regime may exist for another 3–5 years before being retired.
20. Conclusion – Making the Right Choice for Your Finances
The Old vs New Income Tax Regime debate is not about which is better in general — it’s about which is better for you.
If you:
- Have high deductions (₹3 lakh+)
- Own a house with a loan
- Claim HRA, LTA, insurance benefits
→ Old Regime likely saves you more.
If you:
- Have few/no deductions
- Prefer simplicity
- Want more liquidity now
→ New Regime likely works better.
The best strategy? Run the numbers every year.
21. FAQs on Old vs New Income Tax Regime
Q1: Can I switch regimes every year?
Yes, if you’re salaried. Business income taxpayers have restrictions.
Q2: Is the New Regime mandatory?
No, but it’s the default.
Q3: Which regime has higher exemption limit?
New Regime – ₹3 lakh basic exemption vs ₹2.5 lakh in Old.
Q4: Can I claim 80C in New Regime?
No, except certain employer NPS contributions.
Q5: Which regime is better for middle class?
Depends on deduction amount — above ₹3 lakh, Old Regime often wins.
Follow the link for the Income Tax Calculator:- Income Tax Calculator