New Tax Regime vs Old Tax Regime: Which is Better for Employees

The Indian income tax system levies a tax on the taxpayers depending on their income levels. However, after 2020-21, the method of levying taxes has changed.

The new tax regime was announced where tax rates were reduced but with a reduction in tax-saving opportunities. Additionally, the government introduced several incentives and relief measures in the 2023 Budget to encourage adoption of the new tax regime.

If you are also a taxpayer and wondering about the new regime vs old tax regime and confused about which one to choose, then this article will help you out. Below we will discuss the key differences between these two regimes and their available deductions and exemptions to help you choose the right one.

What is a Tax Slab?

Tax slabs are tiers of the taxable income. Each slab represents a range of income earned by individuals and each slab has a different tax rate. The lower your income is, the less tax you will pay in terms of percentage. Tax slabs ensure that each taxpayer pays fairly as per their salary or income.

What is the New Tax Regime?

The new tax regime came into place in Budget 2020 where the tax slabs were changed, and taxpayers were provided concessional tax rates. But those taxpayers cannot claim various exemptions and deductions like HRA, LTA, 80C, 80D, etc.

As several deductions and exemptions are not available under this regime, some taxpayers may still find the old regime more beneficial depending on their tax-saving investments and eligible deductions.

Exemptions & Benefits Still Available Under the New Tax Regime
Agricultural income
Amount received from a life insurance policy subject to applicable conditions
Leave encashment on retirement (subject to prescribed limits)
Retrenchment compensation
Voluntary Retirement Scheme (VRS) compensation up to the prescribed limit
Death-cum-retirement gratuity
Employer’s contribution to NPS under Section 80CCD(2)
Conveyance and transport allowances allowed for official duties or specified categories of employees

The government introduced several significant changes to the new tax regime in Budget 2023. Further revisions were announced in Budget 2025 and are applicable for FY 2025-26 (AY 2026-27). These changes are:

• Higher Tax Rebate Limit: Under Section 87A, resident individuals opting for the new tax regime can claim a rebate of up to INR 60,000 if their taxable income does not exceed INR 12 lakh. Marginal relief is also available where income slightly exceeds INR 12 lakh, ensuring that additional tax does not exceed the amount by which income exceeds the threshold.
• Streamlined Tax Slabs: Under the new tax regime, the basic exemption limit for FY 2025-26 (AY 2026-27) is INR 4 lakhs, with rates ranging from 5% to 30% across seven slabs, which are as follows:

Total Income	Rate of Tax
Up to INR 4,00,000	Nil
INR 4,00,001- INR 8,00,000	5%
INR 8,00,001- INR 12,00,000	10%
INR 12,00,001- INR 16,00,000	15%
INR 16,00,001- INR 20,00,000	20%
INR 20,00,001 – INR 24,00,000	25%
Above INR 24,00,000	30%

• Tax rates under old and new tax regimes are compared below:

Income Slab	Old Tax Regime	New tax Regime (FY 2025-2026)
Up to INR 2,50,000	Nil	–
INR 2,50,000 – INR 4,00,000	5%	Nil
INR 4,00,000 – INR 5,00,000	5%	5%
INR 5,00,000 – INR 8,00,000	20%	5%
INR 8,00,000 – INR 10,00,000	20%	10%
INR 10,00,000 – INR 12,00,000	30%	10%
INR 12,00,000 – INR 16,00,000	30%	15%
INR 16,00,000 – INR 20,00,000	30%	20%
INR 20,00,000 – INR 24,00,000	30%	25%
Above INR 24,00,000	30%	30%

• Standard Deduction and Family Pension Deduction

1. Salary Income: The standard deduction under the new tax regime is INR 75,000 for FY 2025-26 (the old tax regime continues with INR 50,000). Combined with the INR 12 lakh rebate threshold, this makes salary income up to INR 12.75 lakhs effectively tax-free under the new regime.
2. Family Pension: Under the new tax regime, family pensioners can claim a deduction of INR 25,000 or one-third of the pension, whichever is less (raised from INR 15,000 effective FY 2024-25). The old regime continues to allow the original INR 15,000 deduction.
3. Reduced Surcharge for High-Net-Worth Individuals: Under the new tax regime, the surcharge rate on income over INR 5 crore is capped at 25% (versus 37% under the old regime), which helps bring down the effective tax rate.
4. High Leave Encashment Exemption: This exemption limit for non-government employees has been increased from INR 3 lakhs to INR 25 lakhs.
5. Default Regime: From FY 2023-24, the new income tax regime has been set as the default option. Salaried individuals can simply select the old regime within their ITR form (ITR-1 or ITR-2) each year, with no separate form needed. Those with business or professional income (filing ITR-3 or ITR-4) must instead submit Form 10-IEA before the ITR due date to opt out of the new regime.

Section 80C deductions such as EPF, PPF, ELSS, life insurance premiums, tax-saving fixed deposits, and children’s tuition fees are not available under the new tax regime. However, employer contributions to NPS under Section 80CCD(2) continue to be available.

What is Old Tax Regime?

The old tax regime was used before the new tax regime came. Within this regime, there were over 70 exemptions and deductions available like HRA and LTA which can decrease taxable income and tax payments.

One of the most popular deductions is Section 80C, that helps taxpayers to reduce taxable income up to INR 1.5 lakh. The taxpayers are provided with an option to choose between the old and new tax regime.

List of Exemptions and Deductions in Old Tax Regime Slabs

• Leave travel allowance
• House rent allowance
• A standard deduction of INR 50,000 was available for salaried individuals.
• Deductions under Section 80TTA (interest on savings accounts) and Section 80TTB (interest income for senior citizens)
• Entertainment allowance deduction and professional tax (For government employees)
• Tax relief on interest paid on home loan for self-occupied or vacant property u/s 24
• Deduction of INR 15,000 permitted from family pension under clause (ii a) (Section 57)
• Tax-saving deductions under Chapter VI-A, including Sections 80C, 80CCC, 80CCD(1), 80D, 80DD, 80DDB, 80E, 80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC and others.
• The popular tax-saving investment options include ELSS, NPS, PPF, and a tax break on insurance premiums.

Employer contributions to NPS under Section 80CCD(2) and deductions under Section 80JJAA for new employment continue to be available under both the old and new tax regimes.

It is also important to note that if the employee’s contribution to EPF and NPS is above INR 7.5 lakh in a given financial year, then an employee needs to pay tax.

Difference Between Old Vs New Tax Regime: Which Income Tax Regime is Better for Employees?

The decision to stay in the old regime or opt for the new regime depends on the deductions and exemptions you are eligible to claim under the old tax regime.

To make things easier for you, we have computed a breakeven point for different income levels of salaried individuals who are below 60 years of age.

In the next section, you can see the breakdown of old tax regime vs new tax regime and choose the right tax regime for yourself.

Breakdown of Old Tax Regime vs New Tax Regime

If the eligible deductions and exemptions under the old tax regime are higher than the breakeven threshold for the income level, then it is better you stay in the old regime. However, if the breakeven threshold for your income level is higher, then upgrading to the new tax regime is better.

The breakeven threshold point is the tax amount wherein there is no difference in tax liability for both the old and the new tax regimes.

1. If You Have Salary Income

Income Level	New Regime Std. Deduction	New Regime Net Income	New Regime Tax	Old Regime Tax (Std. Deduction Only)	Additional Deductions Needed in Old Regime to Break Even	Which Regime to Choose?
INR 7,00,000	INR 75,000	INR 6,25,000	INR 0	INR 44,200	INR 1,50,000	New regime better unless old-regime deductions exceed INR 1,50,000
INR 8,00,000	INR 75,000	INR 7,25,000	INR 0	INR 65,000	INR 2,50,000	New regime better unless old-regime deductions exceed INR 2,50,000
INR 9,00,000	INR 75,000	INR 8,25,000	INR 0	INR 85,800	INR 3,50,000	New regime better unless old-regime deductions exceed INR 3,50,000
INR 10,00,000	INR 75,000	INR 9,25,000	INR 0	INR 1,06,600	INR 4,50,000	New regime better unless old-regime deductions exceed INR 4,50,000
INR 12,50,000	INR 75,000	INR 11,75,000	INR 0	INR 1,79,400	INR 7,00,000	New regime better unless old-regime deductions exceed INR 7,00,000
INR 15,00,000	INR 75,000	INR 14,25,000	INR 97,500	INR 2,57,400	INR 5,43,750	Old regime if deductions > INR 5,43,750; New regime if deductions < INR 5,43,750
INR 15,50,000	INR 75,000	INR 14,75,000	INR 1,05,300	INR 2,73,000	INR 5,56,250	Old regime if deductions > INR 5,56,250; New regime if deductions < INR 5,56,250
INR 16,00,000	INR 75,000	INR 15,25,000	INR 1,13,100	INR 2,88,600	INR 5,68,750	Old regime if deductions > INR 5,68,750; New regime if deductions < INR 5,68,750
INR 18,00,000	INR 75,000	INR 17,25,000	INR 1,50,800	INR 3,51,000	INR 6,41,665	Old regime if deductions > INR 6,41,665; New regime if deductions < INR 6,41,665
INR 20,00,000	INR 75,000	INR 19,25,000	INR 1,92,400	INR 4,13,400	INR 7,08,332	Old regime if deductions > INR 7,08,332; New regime if deductions < INR 7,08,332

2. If You have Income Other than Salary

Tax Under Old vs New Regime

For taxpayers with income other than salary, the choice between the old and new tax regimes primarily depends on the deductions and exemptions available under the old regime.

In general, the new tax regime may be beneficial for taxpayers who do not claim significant deductions under provisions such as Sections 80C, 80D, 80E, 80G, or Section 24(b). On the other hand, taxpayers who claim substantial deductions and exemptions may find the old tax regime more beneficial.

Since the breakeven point differs based on income level, there is no single deduction threshold that applies to all taxpayers. Therefore, it is advisable to calculate tax liability under both regimes before making a decision.

Pro Tip: You can use an income tax calculator to compare your tax liability under both regimes and choose the option that results in lower tax outgo.

How to Calculate the Income Tax Amount with Calculator?

An income tax calculator is a tool that helps you calculate your tax amount based on your earnings. There are many income tax software available that provide this calculator as built-in tool to streamline your work. You can also check our website techjockey.com to get help with the top income taxation software.

Let’s see how you can use this calculator to get an idea about your tax amount:

Step 1: Select the financial year for which you want to calculate taxes.

Step 2: Select your age and click on ‘Go to Next Step‘.

Step 3: Enter the taxable salary after accounting for applicable exemptions and deductions under the old tax regime.

Step 4: Next, add details like rental income, interest paid on rented home, interest income, etc.

Step 5: For Digital Assets income, enter your net income and select ‘Go to Next Step‘.

Step 6: To calculate tax within the old tax slab, enter the tax saving investments within section 80C, 80D, 80G, 80E and 80TTA.

Step 7: After that, choose ‘Calculate‘ to get your tax liability. You will get a comparison of your tax liability under the old and new tax regimes.

Step 8: Lastly, you will get all the tax computation details from your mail.

Comparison of Deductions and Exemptions Under the Old & New Tax Regimes

Let’s compare the deductions and exemptions available under the old and new tax regimes:

Particulars	Old Tax Regime	New Tax Regime
Income level for rebate eligibility	INR 5 lakhs	INR 12 lakhs
Standard Deduction	INR 50,000	INR 75,000
Effective Tax-Free Salary income	INR 5.5 lakhs	INR 12.75 lakhs
Rebate u/s 87A	INR 12,500	INR 60,000
HRA Exemption	✓	X
Leave Travel Allowance (LTA)	✓	X
Entertainment Allowance and Professional Tax	✓	X
Perquisites for official purposes	✓	✓
Interest on Home Loan u/s 24b on: Self-occupied or vacant property	✓	X
Interest on Home Loan u/s 24b on: Let-out property	✓	✓
Deduction u/s 80C (EPF | LIC | ELSS | PPF | FD | Children’s tuition fee etc)	✓	X
Employee’s (own) contribution to NPS	✓	X
Employer’s contribution to NPS	✓	✓
Medical insurance premium – 80D	✓	X
Disabled Individual – 80U	✓	X
Interest on education loan – 80E	✓	X
Interest on Electric vehicle loan – 80EEB	✓	X
Donation to Political party/trust etc – 80G	✓	X
Savings Bank Interest u/s 80TTA and 80TTB	✓	X
Other Chapter VI-A deductions	✓	X
All contributions to Agniveer Corpus Fund – 80CCH	✓	✓
Deduction on Family Pension Income	✓	✓
Gifts upto INR 50,000	✓	✓
Exemption on voluntary retirement 10(10C)	✓	✓
Exemption on gratuity u/s 10(10)	✓	✓
Exemption on Leave encashment u/s 10(10AA)	✓	✓
Daily Allowance	✓	✓
Conveyance Allowance	✓	✓
Transport Allowance for a specially abled person	✓	✓

Drawbacks of Old Tax Regime

• The old regime has a more intricate structure with several deductions and exemptions distributed across various sections.
• Understanding different deductions, calculating their eligibility, and maintaining proper documentation can be time consuming
• With multiple deductions and exemptions, there’s a higher chance of misinterpreting the rules and claiming ineligible deductions.
• The advantages of deductions and exemptions are often maximized for individuals in higher tax brackets. Lower income earners who don’t utilize many deductions might not see a significant advantage in the old regime.

Drawbacks of New Tax Regime

• The new regime doesn’t offer specific incentives for saving through popular options such as Public Provident Fund (PPF) and Equity Linked Saving Schemes (ELSS).
• While the new regime structure is simpler, it offers less flexibility in tax planning compared to the old tax regime.
• The new regime may not be as beneficial for senior citizens who have various medical expense deductions or individuals with significant interest income on investments.

Which to Choose Between Old Tax Regime and New Tax Regime

The choice between the old tax regime and the new tax regime will impact your financial planning and tax liability. Consider factors such as deductions, exemptions, investments, and overall tax liability before choosing a regime.

Moreover, evaluate the tax liabilities of both these regimes to make an informed decision depending on your individual tax needs and requirements.

Factors to Choose Old Tax vs New Tax Regime 1. Rebate and marginal relief 2. Exemptions and deductions 3. Income Tax Rates 4. Surcharge Taxes

New Tax Regime vs Old Tax Regime FAQs