New Tax Regime Vs Old Tax Regime: Selecting the most tax-efficient income tax regime, either the old or new, can be a challenging decision for many salaried taxpayers. The optimal choice depends on the amount of deductions from gross total income that can be claimed to reduce the taxable income.
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If the gross total income and the minimum amount of deductions at which the tax liability would be the same under both the new tax regime and the old tax regime were known, the decision would be straightforward.
When deductions exceed this minimum threshold, the old tax regime would be more advantageous, while the new tax regime would result in lower taxes if the deductions fall below this level.
When determining the tax regime for TDS on salary, taxpayers typically use estimated figures for gross total income and proposed deductions. However, once the financial year concludes and the final income and deduction figures are available, precise calculations must be performed before selecting an income tax regime while filing the income tax return. Taxpayers can change the tax regime chosen by them earlier at the time of filing income tax return, provided they file within the deadline. Also, one very important point to note is that the new income tax regime is now the default tax regime, so if you don’t tell your employer your preferred regime, the tax will be deducted as per the new tax regime.
New Income Tax Regime: Important points to know
The income tax laws under the new tax regime underwent revisions effective from April 1, 2023, and remain unchanged for the current FY, 2024-25 (April 1, 2024-March 31, 2025). The new tax regime offers a basic income exemption limit of Rs 3 lakh for all taxpayers and introduces additional income tax slabs with reduced tax rates.
Under the new tax regime, salaried individuals are entitled to two deductions: a standard deduction of Rs 50,000 from their salary or pension income, and an employer’s contribution to their NPS account, which can be up to 10% of their salary (or 14% of the basic salary for government employees), states an ET report.
New vs Old Tax Regime
When comparing the tax regimes, it’s crucial to note that the minimum deductions required to equalize the tax outgo in both regimes vary depending on the income level. Individuals with different gross taxable incomes, such as Rs 8 lakh and Rs 12 lakh, will need to claim different total deductions in the old tax regime to make the tax payable equal in both regimes. If an individual’s actual total deduction in the old tax regime falls below this break-even level, the new tax regime becomes more advantageous.
To illustrate this point, ET considers the example of two individuals, A and B, with gross taxable incomes of Rs 8 lakh and Rs 12 lakh, respectively. Both can claim a deduction of Rs 2.5 lakh in a financial year, which includes a standard deduction of Rs 50,000.
Calculation under old tax regime (Rs)
| Gross taxable income | Total deductions including standard deduction | Net taxable income | Final tax payable |
| 8 lakh | 2.5 lakh | 5.5 lakh | 23,400 |
| 12 lakh | 2.5 lakh | 9.5 lakh | 1,06,600 |
Calculation under new tax regime (Rs)
| Gross taxable income | Standard deduction (only deduction available) | Net taxable income | Final tax payable |
| 8 lakh | 50,000 | 7.5 lakh | 31,200 |
| 12 lakh | 50,000 | 11.5 lakh | 85,800 |
The final tax liability incorporates a 4% cess. In both tax regime calculations, the deduction claimed on the employer’s contribution to NPS has been excluded. It is important to note that the table is based on specific assumptions mentioned earlier and does not cover all possible scenarios.
The above table shows that for Mr A with gross taxable income of Rs 8 lakh, the final tax amount payable is lower in the old tax regime if the total deduction of Rs 2.5 lakh is claimed.
However, despite the same deduction amount, Mr B with a gross taxable income of Rs 12 lakh will find the tax outgo lower in the new tax regime. The old tax regime will be favourable for a person with taxable income of Rs 12 lakh only if more deductions are claimed.
Deductions that can be claimed under old tax regime
Under the old tax regime, individuals can avail various deductions from their gross total income and claim tax exemptions. Both salaried and non-salaried individuals can claim deductions of up to Rs 1.5 lakh under Section 80C by making specified investments and expenditures. These include investing in Employees’ Provident Fund (EPF), Public Provident Fund (PPF), ELSS mutual fund, repayment of principal of home loan and payment of children’s tuition fees.
In addition to Section 80C, individuals can claim an extra deduction of Rs 50,000 for investments made in the National Pension System (NPS) according to specified rules, bringing the total deduction to Rs 2 lakh. Deductions can also be claimed for health insurance premium payments, with the amount varying based on the individual’s age and whether the policy covers their parents.
Furthermore, individuals can claim a deduction of Rs 2 lakh for interest paid on a home loan during the financial year, while interest paid on an education loan is eligible for deduction under Section 80E without any monetary limit.
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Savings account interest is eligible for deduction under Section 80TTA, and senior citizens can claim a deduction of Rs 50,000 under Section 80TTB for interest earned from various deposits, including savings accounts and fixed deposits.
