Every year during tax filing season, millions of Indian taxpayers face the same dilemma: Should I choose the old tax regime or the new one?
Since FY 2020-21, India has offered two parallel income tax systems. The old regime offers dozens of deductions and exemptions (80C, HRA, home loan interest). The new regime offers lower tax rates but strips away most deductions.
The problem? Most people choose based on assumptions—not actual calculations. They either stick with the old regime because "that's what I've always done" or switch to the new one because "lower rates sound better."
This complete guide breaks down both regimes with real salary examples (₹8L, ₹12L, ₹20L), shows you exactly how to calculate which saves you more money, and provides a decision framework you can use in 5 minutes.
Quick Overview: Old vs New Tax Regime
🏛️ Old Tax Regime
- Higher tax rates
- 70+ deductions available
- 80C, HRA, home loan benefits
- Standard deduction: ₹50,000
- Best if you have many deductions
⚡ New Tax Regime
- Lower tax rates
- Only 5 deductions allowed
- No 80C, HRA, home loan
- Standard deduction: ₹75,000
- Best if you have minimal deductions
Tax Slab Comparison (FY 2025-26)
| Income Range | Old Regime Tax Rate | New Regime Tax Rate |
|---|---|---|
| ₹0 - ₹2.5 lakhs | Nil | Nil |
| ₹2.5 - ₹3 lakhs | Nil (Rebate u/s 87A) | Nil |
| ₹3 - ₹5 lakhs | 5% | Nil |
| ₹5 - ₹6 lakhs | 5% | 5% |
| ₹6 - ₹7 lakhs | 20% | 5% |
| ₹7 - ₹9 lakhs | 20% | 10% |
| ₹9 - ₹10 lakhs | 20% | 15% |
| ₹10 - ₹12 lakhs | 20% | 20% |
| ₹12 - ₹15 lakhs | 30% | 20% |
| Above ₹15 lakhs | 30% | 30% |
Key Difference: New regime has more granular slabs at lower rates in the ₹5-15L range.
What Deductions Are Available?
Old Regime - Full Deduction Buffet
- Section 80C: ₹1.5 lakhs (EPF, PPF, ELSS, life insurance, children's tuition, home loan principal)
- Section 80D: ₹25,000-₹75,000 (health insurance for self and parents)
- Section 80CCD(1B): ₹50,000 (NPS additional deduction)
- HRA: Varies (house rent allowance exemption)
- Section 24: ₹2 lakhs (home loan interest)
- LTA: Actual (leave travel allowance, twice in 4 years)
- Standard Deduction: ₹50,000 (salaried)
- Section 80E: Full interest on education loan
- Section 80G: 50-100% of charitable donations
- ...and 60+ more deductions
New Regime - Only 5 Deductions
- Standard Deduction: ₹75,000 (increased from ₹50,000)
- Employer NPS contribution: Section 80CCD(2)
- Family Pension: ₹15,000 or 1/3rd (whichever lower)
- Transport/Conveyance for disabled: ₹3,200
- Interest on housing loan: Only for rented property
⚠️ What You Lose in New Regime
No 80C, no 80D, no HRA, no home loan (self-occupied), no LTA. That's potentially ₹2-4 lakhs in deductions gone.
Real Salary Examples: Which Regime Wins?
Example 1: ₹8 Lakhs Annual Salary (Middle-Class Salaried)
Scenario Details
Gross Salary: ₹8,00,000
Investments/Deductions:
- EPF: ₹60,000
- PPF: ₹30,000
- ELSS: ₹10,000
- Health Insurance (80D): ₹15,000
- HRA: ₹50,000
- Standard Deduction: ₹50,000 (old) / ₹75,000 (new)
| Calculation Step | Old Regime | New Regime |
|---|---|---|
| Gross Salary | ₹8,00,000 | ₹8,00,000 |
| Standard Deduction | - ₹50,000 | - ₹75,000 |
| Section 80C | - ₹1,00,000 | ₹0 |
| Section 80D | - ₹15,000 | ₹0 |
| HRA | - ₹50,000 | ₹0 |
| Taxable Income | ₹5,85,000 | ₹7,25,000 |
| Total Tax + Cess | ₹23,400 | ₹31,200 |
Example 2: ₹12 Lakhs Annual Salary (Senior Professional)
Scenario Details
Gross Salary: ₹12,00,000
Investments/Deductions:
- EPF: ₹72,000
- ELSS: ₹50,000
- Health Insurance: ₹25,000 (self) + ₹25,000 (parents)
- Home Loan Interest: ₹1,50,000
- HRA: ₹1,20,000
- Standard Deduction: ₹50,000 / ₹75,000
| Calculation Step | Old Regime | New Regime |
|---|---|---|
| Gross Salary | ₹12,00,000 | ₹12,00,000 |
| Standard Deduction | - ₹50,000 | - ₹75,000 |
| Section 80C | - ₹1,22,000 | ₹0 |
| Section 80D | - ₹50,000 | ₹0 |
| HRA | - ₹1,20,000 | ₹0 |
| Home Loan Interest (24) | - ₹1,50,000 | ₹0 |
| Taxable Income | ₹7,08,000 | ₹11,25,000 |
| Total Tax + Cess | ₹53,040 | ₹1,33,900 |
Example 3: ₹20 Lakhs Annual Salary (Minimal Deductions)
Scenario Details
Gross Salary: ₹20,00,000
Investments/Deductions:
- EPF: ₹96,000
- No HRA (lives with parents)
- No home loan
- Health insurance: ₹15,000
- Standard Deduction: ₹50,000 / ₹75,000
| Calculation Step | Old Regime | New Regime |
|---|---|---|
| Gross Salary | ₹20,00,000 | ₹20,00,000 |
| Standard Deduction | - ₹50,000 | - ₹75,000 |
| Section 80C (EPF only) | - ₹96,000 | ₹0 |
| Section 80D | - ₹15,000 | ₹0 |
| Taxable Income | ₹18,39,000 | ₹19,25,000 |
| Total Tax + Cess | ₹5,01,060 | ₹5,13,500 |
Decision Framework: Which Regime is Right for You?
Choose OLD REGIME if...
Choose NEW REGIME if...
Common Mistakes People Make
❌ Mistake 1: Assuming New = Better
"Lower rates" sounds attractive, but for most salaried employees with standard deductions (HRA, EPF, home loan), old regime saves more money. Always calculate both.
❌ Mistake 2: Not Switching Between Years
You can switch regimes every year (unless you have business income). Bought a house this year? Switch to old for home loan benefit. Paid off loan? Switch back to new.
❌ Mistake 3: Ignoring HRA Impact
HRA exemption is often the biggest deduction (₹1-2L for metro cities). If you're paying rent, old regime is almost always better.
❌ Mistake 4: Only Looking at Tax Slabs
The slabs are just part of the equation. Deductions reduce your taxable income before applying tax rates. That's where the real savings come from.
Quick Calculator Logic
Want to calculate manually? Here's the formula:
Step 1: Calculate Old Regime Tax
Gross Income - Standard Deduction (₹50K) - 80C - 80D - HRA - Home Loan Interest - Other Deductions = Taxable Income → Apply old tax slabs
Step 2: Calculate New Regime Tax
Gross Income - Standard Deduction (₹75K) = Taxable Income → Apply new tax slabs
Step 3: Compare
Lower tax = Better regime for you
Final Recommendation
For 80% of salaried individuals: Old regime saves more money if you have:
- EPF contributions (automatic)
- House rent payments (HRA claim)
- Health insurance (₹15K-₹50K)
- Any 80C investments beyond EPF
For the remaining 20%: New regime makes sense if you have minimal deductions and income in the ₹7-15L range with no HRA/home loan.
💡 Pro Tip
You can choose your regime when filing ITR (July deadline). So invest throughout the year, calculate in June, then decide which regime to use. Don't lock yourself in unnecessarily.
Confused About Which Regime to Choose?
Our CAs can calculate both regimes for your specific situation, recommend the optimal choice, and help you file your ITR correctly.
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