Old vs New Tax Regime: Which One Should You Choose?

Since 2020, Indian taxpayers have had the flexibility to choose between the old tax regime and the new tax regime while filing their income tax returns (ITR). While the old regime allows multiple exemptions and deductions under sections like 80C, 80D, and 24(b), the new regime offers reduced tax rates but eliminates most of these benefits for a simpler tax filing process.

For the financial year 2024–25, choosing the correct regime can make a significant difference in your tax outgo. This blog provides a detailed comparison of both regimes, helping you make an informed decision.

Understanding the Old Tax Regime

The old regime has been the default choice for decades, offering higher tax rates but also numerous deductions and exemptions that can reduce your taxable income.

Key Features of the Old Tax Regime

• Higher tax rates compared to the new regime.

• Multiple deductions and exemptions such as HRA, LTA, and standard deduction.

• Encourages disciplined savings and investments in tax-saving instruments.

• Requires maintaining proofs like rent receipts, insurance premium receipts, or investment details.

Popular Deductions & Exemptions

• Section 80C: Deduction up to ₹1.5 lakh for investments like PPF, ELSS, EPF, Sukanya Samriddhi Yojana, 5-year tax-saving FDs, and life insurance premiums.

• Section 80D: Deduction up to ₹25,000 for health insurance premiums (₹50,000 for senior citizens).

• HRA: Exemption for salaried individuals paying rent.

• LTA: Exemption for domestic travel expenses, claimable twice in 4 years.

• Home Loan Interest (Section 24b): Deduction up to ₹2 lakh for self-occupied properties.

• Standard Deduction: ₹50,000 flat deduction for all salaried employees and pensioners.

• Section 80TTA/80TTB: Deductions on interest earned from savings accounts (up to ₹10,000) and up to ₹50,000 for senior citizens.

Understanding the New Tax Regime

The new regime was introduced in FY 2020–21 to simplify tax calculations. It offers lower tax rates but removes most traditional exemptions and deductions.

Key Features of the New Tax Regime

• Lower slab rates, starting at 5% for income above ₹3 lakh.

• Minimal paperwork—no need to maintain proof of investments or expenses.

• Best suited for individuals who do not invest heavily in tax-saving products or claim housing/rent benefits.

• Default option from FY 2023–24 unless the old regime is selected manually.

Tax Slabs Under the New Regime (FY 2024–25)

• 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%

Limited Deductions Under the New Regime

• Standard Deduction: ₹50,000 for salaried individuals and pensioners.

• Employer’s NPS Contribution (80CCD(2)): Up to 10% of salary.

• Section 87A Rebate: Full tax rebate if taxable income is up to ₹7 lakh.

• Agniveer Corpus Fund (80CCH): Deduction for contributions by individuals under the Agnipath Scheme.

Old vs New Tax Regime: Key Differences

How to Decide Which Regime to Choose?

When filing ITR for FY 2024–25, consider:

1. Your Annual Income:

   • If your income is below ₹7 lakh and you have no deductions, the new regime is more beneficial due to the ₹7 lakh rebate.

2. Your Investments:

   • If you invest in instruments like PPF, ELSS, or pay home loan EMIs, the old regime can save you more tax.

3. Your Allowances:

   • If your salary structure includes HRA or LTA, the old regime provides added benefits.

4. Flexibility:

   • Salaried individuals can switch between regimes each year, while business/professional taxpayers have limited flexibility.

Making the Choice While E-Filing

• Default Regime: If no selection is made, your tax will be computed under the new regime.

• Switching to Old Regime: Select the option manually while filing your ITR. Taxpayers with business income must submit Form 10-IEA before filing returns.

Conclusion

Both tax regimes have unique advantages. The old regime works best for those who utilize deductions under sections like 80C, 80D, or have housing loans and HRA. The new regime is ideal for individuals who prefer a straightforward, hassle-free filing process with fewer deductions.

Before filing your ITR for FY 2024–25, calculate your tax liability under both regimes and choose the one that reduces your total tax outflow.