Introduction
The Indian tax landscape has undergone significant changes with the introduction of the new tax regime. As the Financial Year 2025–26 unfolds, taxpayers are presented with a choice: stick with the traditional old tax regime or switch to the new one. This decision can have a substantial impact on your tax liability and overall financial planning. In this blog, we'll delve deep into both regimes, comparing their features, benefits, and drawbacks to help you make an informed choice.
Understanding the Tax Regimes
Old Tax Regime
The old tax regime allows taxpayers to avail themselves of various exemptions and deductions under sections like 80C, 80D, HRA, LTA, and more. This regime is beneficial for those who have significant investments and expenses that qualify for deductions.
New Tax Regime
Introduced in 2020, the new tax regime offers lower tax rates but removes most exemptions and deductions. It's designed for taxpayers who prefer a simplified tax structure without the need to invest in specific instruments to claim deductions.
Tax Slabs Comparison for FY 2025–26
Old Tax Regime Slabs:
- Up to ₹2.5 lakh: Nil
- ₹2.5 lakh – ₹5 lakh: 5%
- ₹5 lakh – ₹10 lakh: 20%
- Above ₹10 lakh: 30%
New Tax Regime Slabs:
- Up to ₹4 lakh: Nil
- ₹4 lakh – ₹8 lakh: 5%
- ₹8 lakh – ₹12 lakh: 10%
- ₹12 lakh – ₹16 lakh: 15%
- ₹16 lakh – ₹20 lakh: 20%
- ₹20 lakh – ₹24 lakh: 25%
- Above ₹24 lakh: 30%
Note: The new regime offers a standard deduction of ₹75,000 for salaried individuals.
Key Changes in FY 2025–26
- Increased Basic Exemption Limit: The new regime's basic exemption limit has been raised to ₹4 lakh.
- Enhanced Standard Deduction: Salaried individuals can now claim a standard deduction of ₹75,000 under the new regime.
- Higher Rebate Under Section 87A: Taxpayers with income up to ₹12 lakh can avail a rebate of ₹60,000, effectively making their tax liability zero under the new regime.
- Adjusted Surcharge Rates: The highest surcharge rate of 30% now applies only to incomes above ₹24 lakh under the new regime.
Comparative Analysis: Which Regime Saves More?
Income up to ₹7 lakh:
Under the new regime, individuals earning up to ₹7 lakh can avail the rebate under Section 87A, resulting in zero tax liability.
Income between ₹7 lakh – ₹15 lakh:
The choice depends on the deductions and exemptions you can claim. If your deductions exceed a certain threshold, the old regime may be more beneficial.
Income above ₹15 lakh:
For those with fewer deductions, the new regime's lower tax rates could result in tax savings.
Case Studies
Case 1:
- Gross Income: ₹10 lakh
- Deductions under Old Regime: ₹1.5 lakh (80C) + ₹25,000 (80D)
- Tax Liability:
- Old Regime: Tax calculated after deductions.
New Regime: No deductions; tax calculated on full income.
Case 2:
- Gross Income: ₹20 lakh
- Deductions under Old Regime: ₹2 lakh (various sections)
- Tax Liability:
- Old Regime: Tax calculated after deductions.
New Regime: No deductions; tax calculated on full income.
Decision-Making Guide
Choose Old Regime If:
- You have significant deductions and exemptions.
- Your investments align with eligible sections.
Choose New Regime If:
- You prefer simplified tax filing.
- You have minimal deductions or investments.
Conclusion
Selecting the appropriate tax regime requires careful analysis of your income, eligible deductions, and financial goals. Evaluate both regimes annually to maximize tax savings.
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