Quick Summary:
– India has two tax regimes to choose from: the Old Regime with various deductions and exemptions, and the New Regime with lower tax rates but limited deductions.
– Those who have significant deductions and exemptions benefit from the Old Regime.
– The New Regime is more beneficial for taxpayers with lower deductions, since it simplifies the tax calculation process.
– Taxpayers can select the regime that best reflects their financial reasons during the assessment year.
– Knowing what the considerable differences are between the two tax regimes will assist in understanding how to minimize tax liabilities and make more reasonable financial decisions.
Choosing between the old and new tax regime is one of the most important decisions you’ll make while planning your income tax. The two systems differ in tax rates and how they treat deductions, exemptions, and income types. While the old regime rewards disciplined saving through tax benefits, the new regime offers lower rates with fewer conditions.
In this blog, we’ll explain the key differences between the old and new tax regimes, compare tax slabs, analyse which regime may suit different income levels, and guide you on choosing the right one for your financial situation. Read along!
Introduction to Tax Regimes in India
India follows a progressive income tax system, where the tax rate increases with the taxpayer’s income. Until the financial year 2019–20, the country operated under a single tax structure, now referred to as the old tax regime.
However, in April 2020, the government introduced a parallel system called the new tax regime under Section 115BAC of the Income Tax Act. This structure offered reduced tax rates but removed most deductions and exemptions.
The objective was to simplify the tax process, reduce compliance requirements, and offer flexibility to taxpayers with different financial behaviours.
What is the Old Tax Regime?
The old tax regime refers to the tax structure before April 1, 2020. It allows individuals and Hindu Undivided Families (HUFs) to reduce taxable income using various exemptions and deductions.
This includes benefits like House Rent Allowance (HRA), Leave Travel Allowance (LTA), deductions under Section 80C (up to ₹1.5 lakh), 80D (health insurance), and many more — nearly 70 in total.
Structure and Tax Slabs under the Old Regime
The old regime follows a progressive slab system with standard rates and no restrictions on claiming deductions. Below are the tax slabs:
| Annual Income (₹) | Tax Rate |
| Up to ₹2,50,000 | Nil |
| ₹2,50,001 – ₹5,00,000 | 5% |
| ₹5,00,001 – ₹10,00,000 | 20% |
| Above ₹10,00,000 | 30% |
Note: Under Section 87A, if your total taxable income (after deductions) does not exceed ₹5 lakh, you are eligible for a full tax rebate; bringing your tax liability to zero.
Special Exemption Limits:
- Senior citizens (60–80 years): Basic exemption limit is ₹3,00,000
- Super senior citizens (80+ years): Basic exemption limit is ₹5,00,000
Therefore, the old tax regime remains favourable for those who have significant deductions under sections like 80C, 80D, and 24(b).
What is the New Tax Regime?
The new tax regime, introduced under Section 115BAC of the Income Tax Act in FY 2020-21, offers lower tax rates with limited deductions and exemptions. As of the Union Budget 2023, it is now the default regime—taxpayers must specifically opt for the old one if they wish to continue using it.
Structure and Revised Tax Slabs (FY 2024–25)
The new tax regime offers simplified slabs but removes most traditional deductions. However, key updates in Budget 2023–24 and 2024–25 have improved its attractiveness:
| Annual Income (₹) | Tax Rate (New Regime) |
| Up to ₹4,00,000 | Nil |
| ₹4,00,001 – ₹8,00,000 | 5% |
| ₹8,00,001 – ₹12,00,000 | 10% |
| ₹12,00,001 – ₹16,00,000 | 15% |
| ₹16,00,001 – ₹20,00,000 | 20% |
| ₹20,00,001 – ₹24,00,000 | 25% |
| Above ₹24,00,000 | 30% |
Old Regime vs New Regime: Key Differences
The difference between the old and new tax regimes lies mainly in the trade-off between lower tax rates and the ability to claim deductions. Here’s a quick comparison:
| Aspect | Old Tax Regime | New Tax Regime |
| Deductions Allowed | Yes (HRA, 80C, 80D, etc.) | Limited (standard deduction only) |
| Tax Rates | Higher | Lower |
| Suitable For | Those claiming multiple deductions | Those with fewer exemptions |
| Default Structure | No | Yes (from FY 2023–24 onwards) |
Pros and Cons of the Old and New Tax Regime
When comparing the old and new tax regimes, it’s important to understand their benefits and limitations in the context of your financial goals, income structure, and deductions. Here’s a clear breakdown of the pros and cons of each to help you assess the difference between the old and new tax regimes.
Old Tax Regime
Pros:
- Wide range of deductions and exemptions: You can reduce your taxable income using Section 80C, 80D, HRA, LTA, home loan interest, and other allowances.
- Promotes savings and investment: Encourages disciplined financial planning through tax-saving instruments like ELSS, PPF, NPS, and insurance.
- Favourable for high earners with high deductions: If your total deductions exceed ₹3–4 lakh, this regime typically results in lower tax liability.
- Allows set-off of losses: House property losses and carried forward business losses can be adjusted under this regime.
Cons:
- Complex structure: Requires maintaining records, submitting proofs, and tracking multiple deductions and exemptions.
- Higher tax slabs: Tax rates are higher than the new regime for the same income bracket if you don’t claim many deductions.
New Tax Regime
Pros:
- Lower tax rates: Offers reduced tax rates across income slabs with minimal conditions.
- Simplified filing process: Fewer exemptions mean less paperwork and a reduced compliance burden, which is suitable for those with straightforward income.
- Attractive for low-dedication taxpayers: Ideal for individuals with limited investments or those not eligible for key exemptions.
- Rebate up to ₹7 lakh income: Full tax rebate for individuals earning up to ₹7 lakh, effectively resulting in zero tax.
Cons:
- No major deductions or exemptions: You cannot claim 80C, 80D, HRA, LTA, or most other deductions under this structure.
- Limited long-term financial incentives: Does not encourage structured saving or investment behaviour linked to tax benefits.
- Set-off of losses not allowed: Income from house property or business cannot be adjusted or carried forward, which may lead to higher taxes over time.
How to Choose Between the Two
Choosing between the old and new tax regime is a financial decision that requires more than just comparing tax slabs. The best regime for you depends on your income composition, deductions, and how you plan your finances.
Below are the key factors to evaluate when deciding between the two, followed by the switching rules.
Total Deductions and Exemptions Available
Start by calculating how much you can claim under the old regime. This includes:
- Section 80C (up to ₹1.5 lakh) for ELSS, PPF, life insurance, etc.
- Section 80D for health insurance premiums
- HRA, LTA, and home loan interest exemptions
- NPS contributions under Section 80CCD(1B)
- Standard deduction of ₹50,000
If your total deductions exceed ₹2–2.5 lakh, the old regime may offer better tax savings. If your deductions are minimal, the new regime with lower tax rates might be more favourable.
Nature of Income and Losses
If you have losses from house property (e.g., home loan interest), capital gains, or business income, these can be adjusted under the old regime. Under the new regime, such losses are not eligible for set-off or carry forward. This can increase your tax liability in the long run.
Simplicity and Compliance
The new tax regime offers a simplified structure with fewer exemptions and less documentation. It can be beneficial if you prefer minimal record-keeping or have a straightforward salary structure with few deductions.
Long-Term Financial Planning
The old tax regime promotes disciplined saving and wealth building through tax-linked investments. This structure may align better with your goals if you aim to build long-term financial security.
New Versus Old Tax Regime: Which is Better for You?
Choosing between the old and new tax regimes can significantly impact your take-home income and long-term savings. There is no one-size-fits-all answer—the better option depends on your income level, eligibility for deductions, and financial goals.
In this section, we’ll break down real-life scenarios and income-based comparisons to help you understand the difference between the old and new tax regimes.
| Components | Old Tax Regime | New Tax Regime |
| Gross Salary | ₹9,20,000 | ₹9,20,000 |
| Standard Deduction | ₹50,000 | ₹75,000 |
| Section 80C Deduction | ₹1,50,000 | Not applicable |
| Section 80D Deduction | ₹25,000 | Not applicable |
| Total Taxable Income | ₹6,95,000 | ₹8,70,000 |
| Tax Payable (before rebate and cess) | ₹51,500 | ₹42,000 |
| Section 87A Rebate | Not applicable | Applicable |
| Health & Education Cess (4%) | ₹2,060 | 0 |
| Final Tax Payable | ₹53,560 | 0 |
In this case, even with ₹2.25 lakh in deductions under the old tax regime, the new tax regime results in slightly lower tax liability due to lower slab rates. However, if the taxpayer had home loan interest or additional deductions, the balance might shift in favour of the old regime.
Analysis by Income Bracket
Let’s evaluate how the choice differs across different income levels for salaried individuals under 60.
Income up to ₹7 lakh
- New Regime Advantage: Full rebate under Section 87A makes the total tax zero.
- Old Regime: You’ll pay tax unless you claim at least ₹2.5–3 lakh in deductions.
- Better Option: New regime — no tax with minimal documentation.
Income between ₹7–10 lakh
- New Regime: Lower rates, but fewer deductions.
- Old Regime: Works better only if you can claim around ₹2–3 lakh in deductions.
- Better Option: Depends on your deduction amount. Suppose below ₹2 lakh, the new regime may be better.
Income above ₹10 lakh
- New Regime: Standard deduction + slab benefits, but fewer tax-saving opportunities.
- Old Regime: Useful if you maximise deductions like 80C, 80D, HRA, NPS, and home loan interest.
- Better Option: If deductions > ₹3.75 lakh, the old regime wins; otherwise, the new regime is simpler.
When to Choose Which?
| Total Deductions Claimed | Recommended Regime |
| Less than ₹1.5 lakh | New Tax Regime |
| ₹1.5 lakh to ₹3.75 lakh | Depends on income & slabs |
| More than ₹3.75 lakh | Old Tax Regime |
Conclusion
Understanding the old and new tax regimes helps you make an informed choice based on your income, expenses, and investment habits. If you actively claim deductions, the old regime may offer better savings. But if your finances are simple and deductions are minimal, the new regime’s lower tax rates might suit you better.
To make this choice strategically, integrate it into your broader tax planning and management. Tools like Appreciate can help you streamline your investments, whether you’re maximising Section 80C benefits under the old regime or focusing on long-term wealth creation under the new regime.
FAQs
What is the main difference between the old and new tax regime?
The main difference between the old and new tax regimes lies in the treatment of deductions and exemptions. The old regime allows you to claim various deductions like HRA, LTA, Section 80C, 80D, and home loan interest to reduce taxable income. The new regime, in contrast, offers lower tax rates but does not allow most exemptions and deductions.
Can I switch between the old and new tax regimes every year?
If you’re a salaried individual, you can switch between the old and new tax regimes every financial year. However, switching is restricted if you have income from a business or profession. Once you opt for the new regime, you can revert to the old regime only once unless your business income ceases.
Which tax regime is better for salaried individuals?
The better regime depends on how much you can claim in deductions. If your total deductions exceed around ₹3.5–4 lakh, the old tax regime may result in lower tax. If your deductions are minimal, the new tax regime, with lower slab rates and a ₹7 lakh rebate, might be more beneficial. Use a tax calculator to compare both before making a choice.
What deductions are not allowed in the new tax regime?
Under the new tax regime, you cannot claim commonly used deductions and exemptions such as:
- Section 80C (ELSS, PPF, life insurance)
- Section 80D (health insurance)
- House Rent Allowance (HRA)
- Leave Travel Allowance (LTA)
- Interest on home loan (for self-occupied property)
Only a few benefits are allowed, like the standard deduction of ₹50,000 and family pension deduction.,
Is the new tax regime mandatory for all taxpayers?
No, the new tax regime is not mandatory. It has been made the default option from FY 2023–24 onwards, but taxpayers can opt for the old regime by informing their employer or selecting it while filing their income tax return. You should choose based on which regime offers lower tax liability after considering all applicable deductions and exemptions.
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