The Union Budget 2025 brought significant changes to India’s income tax system, primarily benefiting middle-class taxpayers. The new tax regime has been revised to offer a zero-tax liability for individuals earning up to ₹12.75 lakh per annum. Finance Minister Nirmala Sitharaman raised the basic exemption limit to ₹4 lakh and the Section 87A rebate threshold to ₹12 lakh, ensuring that taxpayers earning up to ₹12 lakh do not have to pay any income tax.
For salaried individuals, an additional standard deduction of ₹75,000 is applicable, effectively making incomes up to ₹12.75 lakh tax-free. However, if your annual income exceeds ₹12.75 lakh, the choice between the old tax regime and the new tax regime becomes more complex.
In this article, we analyze which tax regime suits different income groups, the benefits and drawbacks of each system, and how tax deductions impact overall tax liability.
When Should You Opt for the New Tax Regime?
The new tax regime is a simplified structure that offers lower tax rates but removes various deductions and exemptions available under the old regime. You should consider opting for the new tax regime if:
- Your annual income is ₹12 lakh or below – You qualify for a full rebate under Section 87A, making your tax liability zero.
- You do not claim deductions under Section 80C or 80D – The new regime eliminates deductions such as Provident Fund (PF), Public Provident Fund (PPF), life insurance premiums, housing loan principal repayment, and medical insurance premiums.
- You prefer a hassle-free tax filing process – The new regime requires minimal documentation and is easier to comply with.
- You do not have high tax-saving investments – If your deductions are limited, the lower tax rates of the new regime can result in lower overall tax payments.
New Tax Regime Slabs (Post Budget 2025-26)
| Annual Income (₹) | Tax Rate (%) |
|---|---|
| 0 – 4,00,000 | No Tax |
| 4,00,001 – 8,00,000 | 5% |
| 8,00,001 – 12,00,000 | 10% |
| 12,00,001 – 16,00,000 | 15% |
| 16,00,001 – 20,00,000 | 20% |
| 20,00,001 – 24,00,000 | 25% |
| Above 24,00,000 | 30% |
Key Takeaways of the New Tax Regime:
- Income up to ₹12.75 lakh is tax-free due to the rebate and standard deduction.
- Lower tax rates compared to the old regime.
- No need for detailed documentation since deductions and exemptions are eliminated.
- Suitable for individuals with minimal investments in tax-saving instruments.
When Should You Opt for the Old Tax Regime?
The old tax regime allows taxpayers to claim multiple deductions and exemptions, reducing taxable income significantly. If you are eligible for substantial deductions, the old regime may be more beneficial.
You should choose the old tax regime if:
- You claim high deductions under Section 80C, 80D, HRA, and LTA – These deductions help lower taxable income.
- You have a home loan – Interest on home loans qualifies for deductions, making the old regime more beneficial.
- You receive House Rent Allowance (HRA) and Leave Travel Allowance (LTA) – These exemptions help in tax reduction.
- Your deductions exceed the break-even savings in taxes – If your total tax deductions exceed the breakeven limit for your income slab, you should stick to the old tax regime.
Old Tax Regime Slabs (Unchanged in Budget 2025)
| Annual Income (₹) | Tax Rate (%) |
|---|---|
| 0 – 2,50,000 | No Tax |
| 2,50,001 – 5,00,000 | 5% |
| 5,00,001 – 10,00,000 | 20% |
| Above 10,00,000 | 30% |
Deductions Available in the Old Tax Regime
The old tax regime provides various deductions that can significantly reduce taxable income. Key deductions include:
✅ Section 80C – Contributions to PF, PPF, life insurance premiums, housing loan principal repayment (Limit: ₹1.5 lakh).
✅ Section 80D – Medical insurance premiums for self and family.
✅ House Rent Allowance (HRA) and Leave Travel Allowance (LTA) – Available for salaried employees.
✅ Home Loan Interest Deductions – Interest on home loans can be claimed under Section 24(b), reducing taxable income further.
Break-even Analysis: When is the Old Tax Regime More Beneficial?
Tax experts suggest that if your total deductions exceed the break-even point, you should stick with the old regime. The following table provides a break-even analysis for individuals earning higher salaries:
| Annual Income (₹) | Minimum Deductions Required for Old Regime to be More Beneficial (₹) |
|---|---|
| 12,75,000 | 0 (New regime is better) |
| 15,00,000 | 2,00,000 |
| 20,00,000 | 3,50,000 |
| 30,00,000 | 6,00,000 |
| 50,00,000 | 12,00,000 |
Which Tax Regime Should You Choose?
✅ Opt for the New Tax Regime If:
- You earn up to ₹12.75 lakh (Tax-free under new regime).
- You do not claim significant deductions (Low savings under Section 80C, 80D, etc.).
- You want a simplified tax filing process (Minimal compliance, no deductions required).
✅ Opt for the Old Tax Regime If:
- You claim high deductions under Section 80C, 80D, HRA, and home loan interest.
- Your total deductions exceed the break-even amount for your income level.
- You want to maximize tax savings through available exemptions and deductions.
Making the Right Choice
The new tax regime simplifies compliance and offers lower tax rates, making it ideal for individuals with low deductions. However, if you have significant deductions exceeding the break-even amount, the old tax regime remains the better choice.
Before choosing a tax regime, consider:
- Your total taxable income.
- Your eligible deductions under Section 80C, 80D, and other exemptions.
- Your preference for a simple tax process versus maximizing tax savings.
Consulting a tax professional or CA can help evaluate the best option based on your financial situation, deductions, and long-term tax planning. With the new tax changes in Budget 2025, taxpayers now have more flexibility to select the best tax regime that aligns with their financial goals.
