The Union Budget 2025 has introduced significant changes to the income tax regime, particularly benefiting middle-class taxpayers with an increase in the basic exemption limit and an expansion of the rebate under Section 87A. Finance Minister Nirmala Sitharaman proposed raising the basic exemption limit to Rs 4 lakh and also increasing the income threshold for the rebate under Section 87A to Rs 12 lakh. As a result, individuals earning Rs 12 lakh annually from salary are exempt from paying taxes, and with a standard deduction of Rs 75,000, those earning up to Rs 12.75 lakh won’t have to pay tax.
This simplification has made the decision easier for millions of taxpayers earning up to Rs 12.75 lakh annually. However, for those earning more than this amount, the dilemma remains whether to opt for the new tax regime, which offers lower rates and simplified compliance, or the old tax regime, which allows for various deductions but requires more detailed documentation and tax planning.
When Should You Opt for the New Tax Regime?
The new tax regime is beneficial for individuals who:
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Earn Rs 12 lakh or below: These individuals qualify for a full rebate under Section 87A, allowing them to pay no taxes, especially with the standard deduction of Rs 75,000.
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Have minimal deductions: If you don't have deductions under Section 80C (such as Provident Fund, PPF, life insurance, or housing loan principal repayment) or Section 80D (such as medical insurance premiums), the new tax regime is suitable. The simplified filing process and lower tax rates make it ideal for individuals who do not want the hassle of maintaining and reporting multiple deductions.
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Prefer simplicity: The new tax regime provides a hassle-free filing process with fewer compliance requirements, which is especially beneficial for individuals who prefer not to engage in detailed tax-saving planning or documentation.
If you don’t claim significant deductions and prefer to avoid the complexity of detailed tax returns, the new tax regime is likely the better option. It offers lower tax rates with less paperwork.
When Should You Opt for the Old Tax Regime?
The old tax regime is more advantageous for individuals who can claim substantial deductions under various sections:
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Section 80C: Contributions to Provident Fund (PF), Public Provident Fund (PPF), life insurance premiums, and housing loan principal repayments.
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Section 80D: Premiums for medical insurance for yourself and your family.
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House Rent Allowance (HRA) and Leave Travel Allowance (LTA): These allowances, often claimed by salaried employees, reduce taxable income.
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Home Loan Interest: Deductions available for home loan interest under Section 24.
The old tax regime allows you to reduce your taxable income significantly by maximizing deductions. However, for the old regime to be more beneficial than the new one, the total deductions you claim must be greater than the break-even threshold for your income level.
Break-Even Analysis
A break-even analysis prepared by CA Dr. Suresh Surana provides a comparative look at the tax liability under both regimes and calculates the minimum deductions needed to make the old tax regime more beneficial for various income levels.
If your deductions exceed the break-even threshold for your income slab (as shown in the table), the old tax regime will result in a lower overall tax liability. However, for individuals with minimal deductions, the new tax regime becomes more appealing as it simplifies the process while reducing the tax burden.
Which Tax Regime Should You Choose?
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For high deduction claimers: If you are claiming significant deductions (especially above Rs 8.5 lakh), the old tax regime remains preferable. You can use the deductions under Section 80C, Section 80D, and others to lower your taxable income, which could outweigh the benefits of the new tax regime.
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For individuals with low deductions: If you have few deductions, the new tax regime offers the advantage of lower tax rates and a simpler filing process. The standard deduction of Rs 75,000 under the new regime further strengthens its appeal.
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For salaried individuals: If you are earning up to Rs 12.75 lakh, you can benefit from a tax-free income due to the rebate under Section 87A and the standard deduction, making the new tax regime a clear choice. However, those with high deductions or additional allowances like HRA and LTA may still find the old tax regime advantageous.
Conclusion
Ultimately, the choice between the old and new tax regimes should be based on individual financial situations and tax-saving strategies. For those with minimal deductions or preferences for simpler tax filing, the new tax regime is the way to go. On the other hand, individuals who can maximize their deductions (e.g., contributions to PF, PPF, or medical insurance premiums) might find the old tax regime more beneficial.
Given the complexity of the decision, it is advisable to consult with a tax consultant or chartered accountant (CA) who can assess your income, deductions, and financial goals to help you determine which tax regime will result in the most favorable tax liability for your specific circumstances.
