What Should You Pick?
Your HR will soon ask you: Old Regime or New Regime?
After Budget 2025, the New Regime appears more attractive at first glance—but don’t rush your decision. For some, the Old Regime may still be the smarter option.
Let’s break it down 👇
Understanding Both Regimes
OLD REGIME
- Offers deductions (like PPF, ELSS, NPS) and exemptions (HRA, LTA).
- Effective if you can claim high deductions.
Let’s say your total annual income is ₹10 lakh.
You claim deductions and exemptions worth ₹2 lakh, so your taxable income becomes ₹8 lakh.
Now, this ₹8 lakh is not taxed at a flat rate. Instead, it’s divided into parts, and each part is taxed as per the slab rates defined under the old tax regime.
| Slab (₹) | Tax Rate |
|---|---|
|
0 - 2.5 lakh |
Nil |
|
2.5 - 5 lakh |
5% |
|
5 - 10 lakh |
20% |
|
Above 10 lakh |
30% |
Tax rebate of up to ₹12,500 for total income of up to ₹5 lakh. Standard deduction of ₹50,000.
Example: Tax Calculation under Old Regime
Let’s assume your taxable income is Rs. 8 lakh (after all deductions and exemptions).
Here’s how your tax will be calculated based on the old regime slabs:
- ✅ 0% tax on the first Rs. 2.5 lakh → Rs. 0
- ✅ 5% tax on Rs. 2.5 lakh to Rs. 5 lakh → Rs. 12,500
- ✅ 20% tax on Rs. 5 lakh to Rs. 8 lakh → Rs. 60,000
Key Insight:
The more deductions and exemptions you claim, the lower your taxable income—and consequently, your tax outgo. That’s the power of the Old Tax Regime.
On the other hand, the New Regime simplifies taxation by offering lower slab rates but removes most deductions and exemptions.
NEW REGIME
The New Tax Regime comes with lower tax rates. For instance, while the Old Regime applies a 30% tax rate starting at ₹10 lakh, under the New Regime, the 30% slab kicks in only after ₹24 lakh.
But here’s the trade-off — most deductions and exemptions (like HRA, 80C, etc.) are not available in the New Regime.
| Slab (₹) | Tax Rate |
|---|---|
|
0 - 4 lakh |
Nil |
|
4 - 8 lakh |
5% |
|
8 - 12 lakh |
10% |
|
12 - 16 lakh |
15% |
|
16 - 20 lakh |
20% |
|
20 - 24 lakh |
25% |
|
Above 24 lakh |
30% |
Tax rebate of up to ₹60,000 for total income of up to ₹12 lakh. Standard deduction of ₹75,000.
Old vs New Regime: Which One Should You Choose?
If your salary is below ₹12 lakh – the New Regime is the clear winner.
If your salary exceeds ₹12 lakh – then the choice depends on how much you can claim through deductions and exemptions.
Let’s break it down:
Case 1: Income Below ₹12 Lakh
Under the New Regime, individuals with taxable income up to ₹12 lakh can pay zero tax (thanks to the rebate and standard deduction).
In comparison, under the Old Regime, you’d still owe tax—unless you can claim substantial deductions. But for most people, achieving such high deductions isn’t practical.
Income Up to ₹12 Lakh: How Much Tax Will You Pay?
| Income (₹) | Tax in the New Regime (₹) | Tax in the Old Regime (₹) |
|---|---|---|
|
6,00,000 |
0 |
22,500 |
|
7,00,000 |
0 |
42,500 |
|
8,00,000 |
0 |
62,500 |
|
9,00,000 |
0 |
82,500 |
|
10,00,000 |
0 |
1,02,500 |
|
11,00,000 |
0 |
1,27,500 |
|
12,00,000 |
0 |
1,57,500 |
*Standard deduction of ₹50,000.
Case 2: Income Above ₹12 Lakh
When your income exceeds ₹12 lakh, the decision between the two regimes hinges entirely on the deductions and exemptions you can claim.
For instance, with an annual income of ₹20 lakh:
- Under the New Regime, your tax liability would be ₹1,85,000
- Under the Old Regime, it would be ₹3,97,500 (Refer to table)
Unless you can claim significant deductions, the New Regime generally works out to be more tax-efficient.
We analyzed the break-even point across different income levels (refer to the table).
To make the Old Regime more beneficial than the New Regime, you’d need to claim very high deductions—up to ₹8 lakh in some cases.
Interestingly, once your income crosses ₹25 lakh, the required deduction remains fixed at ₹8 lakh, regardless of how much your income increases.
Why is ₹8 Lakh the Magic Number?
Beyond ₹24L, tax rates are the same (30%) in both regimes.
So, if you can somehow claim ₹8L in deductions, the Old Regime can still make sense.
But can you claim ₹8L in deductions? Let’s see. Consider a person whose income is ₹20L per annum.
- ₹10L basic salary
- ₹5L HRA -₹3L rent (non-metro)
- Home loan in another city
He has multiple avenues to claim 8 lakh in deductions. (See table)
For people like him, the Old Regime works. But for most people, it may not.
Wrap up :
- If your income is ₹12 lakh or less → the New Regime is usually the better choice due to zero tax liability.
- If your income exceeds ₹12 lakh → the decision depends on your ability to claim high deductions.
A large home loan, substantial HRA, and other exemptions can tilt the balance in favor of the Old Regime.
Otherwise, the New Regime continues to offer better tax efficiency for most taxpayers.
Disclaimer – The information provided in this newsletter is applicable to resident individuals below 60 years of age. Different provisions may apply to senior citizens and non-resident individuals. It is not intended to serve as financial, investment, or trading advice, nor does it constitute a recommendation to buy, sell, or hold any securities. The analysis shared herein is based on publicly available information, which may be subject to inaccuracies or changes without notice. Readers are strongly encouraged to perform their own research and consult with a licensed financial advisor before making any investment decisions. Past performance is not indicative of future results, and all investments carry risks, including the potential loss of principal.
Disclosure: Investment in the equity market and securities is subject to market risk; read all the scheme-related documents carefully.
