Old Vs New Income Tax Regime

Which Tax Regime is Better, Old or New in 2026?

The old income tax regime offers more deductions and benefits, while the new regime simplifies tax structure with lower rates but fewer deductions.

Written by : Knowledge Center Team

2025-10-05

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10 minutes read

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Budget 2020 introduced a new personal income tax regime for individual taxpayers with lower tax rates but more tax slabs. Also, it removed all available deductions and exemptions. The Finance Minister gave taxpayers an option to choose between the new regime and the old one, which, in fact, made the whole process seem complex. 

In the 2023 Budget, Finance Minister Nirmala Sitharaman implemented significant updates to the New Tax Regime, establishing it as the default choice for tax calculations. This shift implies that salaried individuals will have their taxes automatically computed under the new regime unless they specifically opt for an alternative approach.

Thus, understanding income tax is extremely crucial, but can often be overwhelming for taxpayers, and a lot of factors can even make it confusing. For instance, several people end up calculating the wrong value by deducting the allowable deductions from total tax liability instead of their Gross Total Income. 

This article intends to explain the older tax system and compare it with the new regime in the most layman manner possible.

Key Takeaways

  • The new tax regime offers lower tax rates but removes most deductions and exemptions.

  • The old tax regime allows multiple deductions (e.g., 80C, HRA, home loan interest) that reduce taxable income.

  • Taxpayers earning up to ₹7 lakh get a full rebate under the new tax regime (Section 87A), compared to ₹5 lakh in the old regime.

  • Salaried individuals with high deductions may benefit from the old regime.

  • Those with lower deductions or who prefer simplified filing may find the new regime more suitable.

What is Old Tax Regime and Its Advantages?

India's gross savings rate was approximately 30% in March 2019, and domestic savings significantly contributed to the overall rate. This was because the old income tax regime helped promote savings for any future eventuality like marriage, education, purchase of house property, medical exigency, etc., by enforcing investments in specified tax-saving instruments like ULIPs, which over a period inculcated the savings culture in individuals. So, if more individuals will opt for the new regime, the savings rate will decrease. Nevertheless, the consumption cycle and demand would be revived.

It is the best tax regime option for those who invest in tax-saving instruments. Here are some of the key advantages of this old tax regime:

  • Under the old tax regime, the basic tax exemption limit is ₹2.5 lakh. So, if an individual’s income lies within this limit, they will not be obliged to pay the tax.
  • If the income does not exceed ₹5 lakh, then the individual can avail a tax rebate of up to ₹12,500. This means that under the old tax regime, they may end up paying zero tax if their income is up to ₹5 lakh.
  • Taxpayers can claim deductions under various sections, such as Section 80C, 80D, 80E, 80EE, 80U, 80G, 80TTA, etc., which reduce their taxable income and thereby lower their overall tax liability.

What is New Tax Regime and Its Advantages?

The new tax regime, with concessional tax rates, was introduced in Budget 2020. Also, as most of the exemptions and deductions are not available, tax filing becomes simpler as less documentation is required. Moreover, the reduced tax rate provides more disposable income to people who could not invest in specified instruments due to certain financial or personal reasons. Therefore, offering increased liquidity in the hands of the taxpayers and allowing the flexibility of customising the investment choice.

Under the new regime, all taxpayers would be treated at par because the benefits of new tax regime deduction/allowance does affect tax liability. This can be especially helpful for taxpayers who may not subscribe to the specified modes of investments, as most of these investments have a lock-in period. They can instead invest in open-ended instruments, which provide them good returns as well as the flexibility of quicker withdrawal.

However, taxpayers who chose the new tax regime could not avail themselves of significant deductions such as HRA, LTA, 80C, etc. As a result, fewer taxpayers opted for this regime. Thus, the government introduced five key changes in the Budget 2023 to encourage taxpayers to adopt the new regime, which remains unchanged for FY 2024-2025.

Here are the key changes introduced in Budget 2023 to make the new tax regime more attractive:

  • A new tax regime is set as the default; TDS is calculated based on the new regime if it is not specified by the taxpayer from FY 23-24.
  • The basic exemption limit under this tax regime was raised to ₹3 lakh. Also, the highest tax rate of 30% applies above ₹15 lakh income.
  • Section 87A rebate increased to ₹7 lakh, providing a maximum rebate of ₹25,000 for incomes up to ₹7 lakh from FY 23-24.
  • From FY 23-24 onwards, individuals earning a salary can avail of a standard deduction of ₹50,000 from their gross salary income. Family pensioners who choose the new regime benefits can claim a standard deduction of ₹15,000 from their pension income.
  • The surcharge on annual incomes exceeding ₹5crores has been slashed from 37% to 25% under the new regime. This adjustment lowers the highest tax rate to 42.74%, ultimately reducing the maximum tax rate to 39%.
  • Non-government salaried employees now enjoy the benefit of new tax regime from an increased tax exemption limit on leave encashment, raised significantly from ₹3 lakh to ₹25 lakh.
  • One of the best new tax regime benefits is it simplifies the structure by reducing the number of income tax slabs from 6 to 5, streamlining the tax assessment process.

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What Is the New Tax Regime and Its Advantages?

The new tax regime was introduced to simplify the tax filing process and provide lower tax rates with reduced deductions and exemptions. It aims to offer taxpayers flexibility and ease of compliance. Below are its key advantages:

  • Increased Tax Rebate Limit in the New Tax Regime: One of the significant benefits of the new tax regime is the increase in the tax rebate limit. Under the latest revision, taxpayers with an income of up to ₹7 lakh can claim a full rebate under Section 87A, meaning they will not have to pay any tax. This is higher compared to the old tax regime, where the rebate was limited to income up to ₹5 lakh.
  • Simplified Tax Slabs in the New Tax Regime: The new tax regime introduces fewer and broader tax slabs, making tax calculations easier. The simplified structure eliminates the need to consider various exemptions and deductions, reducing paperwork and making the process more straightforward for taxpayers.

Difference Between Old vs New Tax Regime

Understanding the key differences between the two tax regimes can help taxpayers make an informed decision about which one to choose.

List of Deductions and Exemptions in the Old Tax Regime

The old tax regime allowed taxpayers to claim various deductions and exemptions, such as:

  • Standard deduction of ₹50,000

  • House Rent Allowance (HRA)

  • Leave Travel Allowance (LTA)

  • Deductions under Section 80C (e.g., EPF, PPF, ELSS, life insurance premiums)

  • Health insurance premium deduction under Section 80D

  • Interest on a home loan under Section 24(b)

These deductions significantly reduced taxable income, providing tax-saving opportunities.

Significant Exemptions in the New Tax Regime

Unlike the old tax regime, the new tax regime has minimal exemptions and deductions. However, it still allows:

  • Standard deduction of ₹50,000 (introduced in the 2023 budget)

  • Employer’s contribution to NPS under Section 80CCD(2)

  • Transport allowance for disabled individuals

  • Deduction for family pension income

While the overall number of exemptions is lower, the lower tax rates aim to compensate for the reduced deductions.

Old vs New Regime Example: Practical Comparison

Consider two individuals earning ₹10 lakh per year. One opts for the old tax regime, claiming deductions under Section 80C, 80D, and HRA, while the other chooses the new tax regime without deductions.

  • Old Tax Regime: After deductions of ₹2 lakh, taxable income = ₹8 lakh, resulting in a tax liability of around ₹54,600 (post-rebate, if applicable).

  • New Tax Regime: Taxable income remains ₹10 lakh, but with lower tax rates, the tax liability is around ₹54,600.

Depending on the available deductions, one regime may be more beneficial than the other.

Breakeven Threshold for Choosing Between Old vs New Regime

The breakeven point determines when a taxpayer should opt for the old or new tax regime based on their deductions.

  • If You Have Salary Income: Salaried employees with high deductions (e.g., HRA, EPF, 80C investments) may find the old regime more beneficial. However, those with fewer deductions might save more under the new regime.
  • If You Have Income Other Than Salary: For individuals with business or rental income, tax benefits depend on expenses claimed. The old regime may allow more deductions, while the new regime provides straightforward calculations.
  • Mixed-Income Situations: Individuals with multiple sources of income, such as salary, freelancing, or capital gains, must evaluate which deductions apply to them. If significant deductions are available, the old regime may be preferable; otherwise, the new regime’s lower rates could be more advantageous.

Choosing between the old and new tax regimes depends on individual financial situations, deductions, and tax-saving goals. Taxpayers should assess their total deductions and calculate tax liability under both regimes before making a decision.

Which tax regime is better? New or Old Regime

For income segments up to ₹15 lakh, the New Tax Regime has proposed lower income tax rates but only at the cost of taxpayers giving up exemptions and deductions available under various provisions of the Income Tax Act. This means they will have to let go of some exemptions, including Leave Travel Allowance (LTA), House Rent Allowance (HRA), and deductions available, including Insurance Premium payout and Savings Account Interest under Chapter VI A of the IT Act Section 80 such as 80C, 80CCC, 80CCD, 80D, 80DD, 80E, 80EE, 80G, 80GG, 80GGA, 80GGC, etc.

Even the standard deduction of ₹50,000 under Section 16 is available to salaried individuals, and the deduction on home loan interest, under Section 24(b), will not be allowed. However, the deduction under Section 80CCD (2), which is the employer’s contribution on account of an employee in a notified pension scheme, and Section 80JJAA for new employment can be claimed.

One should deeply understand both sides before choosing the regime that is most beneficial for them. The older regime will work in the interest of taxpayers' financial well-being if they are looking to fulfil their financial goals like wealth creation through investments in tax-saving instruments, paying premiums to meet health and life insurance needs, paying children’s school fees, buying a house with a home loan, etc. On the inverse, the new regime will do well for someone who does not intend to invest major amounts in tax-saving plans. Opting for the new tax regime streamlines documentation by eliminating the complexities of calculating and claiming deductions and exemptions. This simplification accelerates the filing of income tax returns (ITR).

Tax Under Old vs New Regime for FY 2024-25

The Indian Income Tax system offers two tax regimes: the Old Regime and the New Regime. While the Old Regime provides various deductions and exemptions, the New Regime comes with lower tax rates but without most deductions. Taxpayers must evaluate their income, deductions, and financial goals to determine which regime benefits them the most.

1. When Total Deductions Are Less Than ₹1.5 Lakhs

If your total deductions (including 80C, 80D, HRA, and others) are below ₹1.5 lakhs, the New Tax Regime is generally more beneficial. The lower tax rates in the New Regime often result in lower tax liability compared to the Old Regime, where deductions are necessary to offset higher slab rates. Opting for the New Regime simplifies tax filing and eliminates the need for investment-based deductions.

2. When Total Deductions Are Between ₹1.5 Lakhs to ₹3.75 Lakhs

For taxpayers with deductions in this range, the decision becomes more nuanced. If deductions are closer to ₹1.5 lakhs, the New Regime may still be preferable due to lower slab rates. However, as deductions approach ₹3.75 lakhs, the Old Regime starts to provide better tax savings, as the benefit of available deductions outweighs the advantage of lower tax rates under the New Regime.

3. When Total Deductions Exceed ₹3.75 Lakhs

If your total deductions exceed ₹3.75 lakhs, the Old Regime is generally the better choice. The significant tax savings from deductions like EPF, PPF, home loan interest, NPS, and medical insurance can reduce taxable income substantially. The New Regime lower rates may not be sufficient to offset these benefits, making the Old Regime more tax-efficient.

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How to Choose Between Old and New Tax Regimes?

Selecting the right tax regime requires analysing multiple factors, including deductions, tax liability, and personal financial preferences. Here’s a step-by-step approach to making an informed decision:

  • Evaluate Your Deductions and Exemptions: Start by calculating the total deductions and exemptions you usually claim under the Old Regime. If they are minimal, the New Regime might be more advantageous. However, if you claim significant deductions, particularly above ₹3.75 lakhs, the Old Regime typically results in lower tax payments.
  • Assess the Simplification Benefits of the New Regime: The New Tax Regime eliminates the need for complex tax planning by offering straightforward tax rates without requiring investments in tax-saving instruments. If you prefer simplicity and do not want to lock funds into specific financial products, the New Regime is an attractive choice.
  • Consider the Tax Rebate Eligibility: Under both regimes, taxpayers with taxable income up to ₹7 lakhs can benefit from rebates under Section 87A, leading to zero tax liability. If your income falls within this range, the New Regime might be more appealing due to its simpler structure. However, for incomes exceeding this limit, evaluating overall tax liability under both regimes is essential.

By carefully analyzing these factors, you can make an informed decision that maximizes tax savings while aligning with your financial goals.

Key Benefits of Investing in Tax-Saving Instruments

Investing in tax-saving instruments provides multiple financial advantages beyond just reducing your tax burden. Some key benefits include:

  1. Tax Deductions: Investments in options like ELSS funds, Public Provident Fund (PPF), and National Savings Certificate (NSC) qualify for deductions under Section 80C, helping you save up to ₹1.5 lakh in taxable income.

  2. Wealth Growth: Instruments such as ELSS and Unit-Linked Insurance Plans (ULIPs) offer market-linked returns, allowing your investment to grow while enjoying tax benefits.

  3. Stable Returns and Security: Fixed-income options like Senior Citizens Savings Scheme (SCSS) and tax-free bonds provide consistent, risk-free returns, making them ideal for retirees.

  4. Dual Benefits of ELSS: These funds reduce tax liability and have the potential to deliver higher returns compared to traditional fixed-income instruments.

  5. Tax-Free Maturity Proceeds: Some investments, such as PPF and tax-free bonds, offer tax-exempt maturity proceeds, ensuring better post-tax earnings.

Risks to Consider for Senior Citizens While Investing

While investing can help preserve wealth and generate income, senior citizens must be mindful of potential risks:

  1. Market Volatility: Investments in equities or ELSS funds are subject to market fluctuations, which can impact short-term returns. It's important to allocate funds based on your risk tolerance.

  2. Liquidity Constraints: Some tax-saving instruments, like ELSS (3-year lock-in) and PPF (15-year tenure), have restricted access to funds, which may not be ideal for unexpected financial needs.

  3. Interest Rate Fluctuations: Fixed-income options such as SCSS and bank FDs can be affected by changing interest rates, impacting future returns.

  4. Inflation Risk: Traditional fixed deposits may offer lower returns that fail to outpace inflation, reducing purchasing power over time.

  5. Tax Implications on Withdrawals: While interest from tax-free bonds remains untaxed, selling them prematurely can attract capital gains tax.

Glossary

  1. Tax Rebate: A reduction in tax liability directly applied to the total tax payable, often based on income thresholds or specific conditions like Section 87A, which offers rebates up to a specific limit.
  2. Surcharge: An additional tax levied on top of the regular income tax for high-income earners. It is typically applied progressively based on income brackets.
  3. Leave Encashment Exemption: A provision that allows non-government salaried employees to exclude a portion of their leave encashment amount from taxable income up to a specified limit.
glossary-img
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FAQs Related to Old vs New Income Tax Regime

The decision between the old and new tax regimes depends on individual financial circumstances and goals. The old regime offers more deductions and exemptions, suitable for those with significant investments or loans. In contrast, the new regime provides lower tax rates and simplicity, benefiting those looking for streamlined tax filing and who don't heavily rely on deductions. 

For an income of ₹12 lakhs, the new tax regime might be more advantageous due to its lower tax rates and simplified structure. This results in lower tax liability than the old regime, which had deductions. 

In the new tax regime, you cannot claim House Rent Allowance (HRA) deductions, as it eliminates most deductions and exemptions in favour of lower tax rates.

In the new tax regime, deductions under Section 80C (such as investments in PPF, EPF, ELSS, etc.) are not allowed. The government aims to simplify taxes by offering lower tax rates but without the benefit of traditional deductions.

No, PPF (Public Provident Fund) contributions are not exempted in the new tax regime.

In the new tax regime, deductions such as those under Section 80C (PPF, ELSS, etc.), Section 80D (health insurance premiums), Section 24 (home loan interest), and other commonly claimed deductions are not allowed. This regime prioritises lower tax rates over deductions for simplicity and fairness.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

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The decision between the old and new tax regimes depends on individual financial circumstances and goals. The old regime offers more deductions and exemptions, suitable for those with significant investments or loans. In contrast, the new regime provides lower tax rates and simplicity, benefiting those looking for streamlined tax filing and who don't heavily rely on deductions. 

For an income of ₹12 lakhs, the new tax regime might be more advantageous due to its lower tax rates and simplified structure. This results in lower tax liability than the old regime, which had deductions. 

In the new tax regime, you cannot claim House Rent Allowance (HRA) deductions, as it eliminates most deductions and exemptions in favour of lower tax rates.

In the new tax regime, deductions under Section 80C (such as investments in PPF, EPF, ELSS, etc.) are not allowed. The government aims to simplify taxes by offering lower tax rates but without the benefit of traditional deductions.

No, PPF (Public Provident Fund) contributions are not exempted in the new tax regime.

In the new tax regime, deductions such as those under Section 80C (PPF, ELSS, etc.), Section 80D (health insurance premiums), Section 24 (home loan interest), and other commonly claimed deductions are not allowed. This regime prioritises lower tax rates over deductions for simplicity and fairness.