Old vs New Tax Regime: How to Choose the One That Saves You More
The new tax regime has lower rates but removes most deductions. The old regime allows 80C, HRA, and other benefits. The right choice depends on your income level and how much you claim in deductions.
Two income tax regimes have been available to individuals in India since FY 2020-21. From FY 2023-24, the new regime became the default, and Budget 2025 further sweetened it with higher rebates. But the old regime still makes sense for many taxpayers — particularly those with significant deductions.
The decision between the two regimes is one of the most impactful annual tax choices you make. This guide helps you calculate which one actually saves you more.
The Two Regimes at a Glance
New Tax Regime (FY 2025-26 slabs, post Budget 2025):
| Income Slab | Tax Rate |
|---|---|
| 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% |
New regime rebate: Under Section 87A, if taxable income is ₹12 lakh or below, the entire tax liability is nil (₹60,000 rebate). This means with standard deduction of ₹75,000 (new regime), gross salary up to ₹12.75 lakh results in zero tax. Add cess (4%) on any tax above the rebate threshold.
Standard deduction in new regime: ₹75,000 (increased from ₹50,000 in Budget 2024).
Old Tax Regime (unchanged for many years):
| Income Slab | 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% |
Old regime rebate: Under Section 87A, if taxable income (after all deductions) is ₹5 lakh or below, tax is nil.
Old regime advantage: Access to all deductions — Section 80C (₹1.5 lakh), HRA exemption, 80D (health insurance), 80CCD(1B) (NPS top-up ₹50,000), Section 24(b) (home loan interest ₹2 lakh), and others. These can significantly reduce taxable income.
What You Give Up in the New Regime
Switching to the new regime means you cannot claim:
- Section 80C deductions (EPF, ELSS, PPF, life insurance, school fees, home loan principal)
- Section 80D (health insurance premiums)
- Section 80CCD(1B) (NPS additional ₹50,000)
- Section 24(b) home loan interest on self-occupied property
- HRA exemption
- LTA (Leave Travel Allowance) exemption
- Professional tax deduction
- Most allowance exemptions (only a few, like NPS contribution by employer, remain)
You retain:
- Standard deduction (₹75,000 in new regime vs ₹50,000 in old)
- Section 80CCD(2) — employer's contribution to NPS (if your employer contributes)
- Gratuity exemption
- EPF corpus exemption on maturity
- Agricultural income exemption
The Breakeven Deductions Calculation
The key question is: at what level of deductions does the old regime equal the new regime in tax? Below this level, new regime is better. Above it, old regime is better.
The breakeven differs by income level. Here's a framework:
For annual income of ₹10 lakh:
New regime: income ₹10L − standard deduction ₹75K = taxable income ₹9,25,000. Because this is below ₹12,00,000, the Section 87A rebate makes the tax nil — the new-regime tax is ₹0.
Old regime: income ₹10L − standard deduction ₹50K = ₹9,50,000, less your deductions. With ₹2,00,000 of deductions (80C + 80D): taxable = ₹7,50,000. Tax: Nil on ₹2.5L + 5% on ₹2.5L (₹12,500) + 20% on ₹2.5L (₹50,000) = ₹62,500. Plus 4% cess = ₹65,000.
To make the old regime also nil, you would need to push taxable income down to ₹5,00,000 (the old-regime 87A limit) — that takes roughly ₹4,50,000 of deductions on a ₹10 lakh salary.
At ₹10 lakh income the new regime is already zero tax thanks to the rebate, so the old regime can at best match it — and only with very large deductions. For almost everyone at this income, the new regime wins outright.
For annual income of ₹15 lakh:
New regime tax: income ₹15L − ₹75K = ₹14,25,000. Tax: Nil on ₹4L + 5% on ₹4L (₹20K) + 10% on ₹4L (₹40K) + 15% on ₹2,25,000 (₹33,750) = ₹93,750. Plus 4% cess = ₹97,500.
Old regime with ₹3.75L deductions: taxable = ₹15L − ₹50K standard − ₹3.75L = ₹10,75,000. Tax: Nil on ₹2.5L + 5% on ₹2.5L (₹12,500) + 20% on ₹5L (₹1,00,000) + 30% on ₹75K (₹22,500) = ₹1,35,000. Plus 4% cess = ₹1,40,400.
So at ₹15 lakh with ₹3.75 lakh of deductions, the new regime (₹97,500) still wins. The old regime only pulls ahead once deductions are large enough to bring taxable income well below ₹10 lakh.
Rough breakeven guide by income (salaried, FY 2025-26):
| Gross salary | Who tends to win |
|---|---|
| Up to ~₹12.75 lakh | New regime — the 87A rebate makes its tax nil; the old regime can only match it (also nil), and only with very large deductions (~₹4.5 lakh+) |
| ₹15 lakh | New regime usually wins; old regime only if deductions exceed ~₹3.75–4 lakh |
| ₹20 lakh | Old regime only if deductions exceed ~₹4.5–5 lakh |
| ₹30 lakh+ | At 30% slab, ₹1.5L in 80C alone saves ₹45,000; old regime worth it with moderate deductions |
A Simple Decision Framework
Step 1: List your deductions under old regime Add up:
- EPF employee contribution (automatically happening)
- Additional 80C investments you actually make
- HRA exemption calculated properly
- Health insurance premium (yours + parents')
- Home loan interest (if applicable)
- NPS additional contribution (80CCD(1B))
Step 2: Calculate tax under both regimes
New regime: Gross salary − ₹75,000 standard deduction = taxable income → apply new regime slabs.
Old regime: Gross salary − ₹50,000 standard deduction − all deductions calculated above = taxable income → apply old regime slabs.
Step 3: Compare The regime with lower tax is your better choice.
If the difference is less than ₹5,000, the new regime's simplicity (no proofs, no deadlines, no investment requirements) may be worth the small extra cost.
When Old Regime Almost Certainly Wins
- You have a home loan on a self-occupied property with interest above ₹1.5 lakh
- You receive significant HRA and pay substantial rent (especially in a metro)
- You're maximising 80C (₹1.5 lakh) and paying NPS (₹50,000 via 80CCD(1B))
- You're in the 30% tax bracket (income above ₹15 lakh under old, ₹24 lakh under new)
- You have medical conditions requiring expensive health insurance for self or elderly parents
When New Regime Almost Certainly Wins
- You're a young earner below ₹12.75 lakh gross salary (likely zero tax under new regime)
- You have no home loan, don't claim HRA, and haven't been disciplined about 80C investments
- You value simplicity and don't want to track investment proofs and submission deadlines
- You prefer to make investment decisions based on returns rather than tax saving
Switching Regimes
Salaried individuals: Can switch once per year. Inform your employer at the beginning of the year (or when joining). Even if you picked the wrong regime for TDS purposes, you can switch when filing your actual ITR. The tax is squared up then.
Business owners: Once they opt out of the new regime, they must remain out for at least 5 years. This makes the decision more consequential for entrepreneurs.
The best approach: Run the numbers every April. Your income and deductions change year to year — what was right last year may not be right this year.
Detailed Comparison: ₹12 Lakh Salary, Both Regimes
Let's run through a complete example for Deepa, a software engineer in Pune with ₹12 lakh gross salary. She pays rent, has a health insurance policy for herself and parents, and has been contributing to ELSS.
Income profile:
- Gross salary: ₹12,00,000
- HRA received: ₹2,40,000; rent paid: ₹15,000/month (₹1,80,000/year)
- Basic salary: ₹6,00,000; city = non-metro (Pune)
HRA exemption calculation:
- Rule 1: ₹2,40,000 (actual HRA)
- Rule 2: ₹1,80,000 − 10% of ₹6,00,000 = ₹1,80,000 − ₹60,000 = ₹1,20,000
- Rule 3: 40% × ₹6,00,000 = ₹2,40,000
- HRA exempt: ₹1,20,000 (minimum)
Old Regime: Gross: ₹12,00,000 Less HRA exempt: ₹1,20,000 Less standard deduction: ₹50,000 Net salary: ₹10,30,000 Less 80C (EPF = 12% of ₹6L = ₹72,000; ELSS ₹78,000): ₹1,50,000 Less 80D (self ₹25,000 + parents ₹50,000, both senior citizens): ₹75,000 Less 80CCD(1B) NPS: ₹50,000 Taxable income: ₹10,30,000 − ₹2,75,000 = ₹7,55,000
Tax on ₹7,55,000:
- ₹0–2.5L: Nil
- ₹2.5–5L: 5% × ₹2.5L = ₹12,500
- ₹5–7.55L: 20% × ₹2.55L = ₹51,000
- Total: ₹63,500 + 4% cess = ₹66,040
New Regime: Gross: ₹12,00,000 Less standard deduction: ₹75,000 Taxable income: ₹11,25,000
Tax on ₹11,25,000: the slab tax works out to ₹52,500 — but because taxable income is below ₹12,00,000, the Section 87A rebate wipes it out entirely. Deepa's new-regime tax is ₹0.
Result: the new regime saves Deepa the full ₹66,040 — she pays zero tax — even though she has significant deductions (80C, 80D, NPS, HRA).
Why? At a ₹12 lakh salary, the ₹75,000 standard deduction pulls taxable income under ₹12 lakh, so the 87A rebate makes the new-regime tax nil. The old regime still leaves ₹7,55,000 taxable and ₹66,040 of tax. To beat zero, the old regime would have to reach zero too — which means getting taxable income down to ₹5 lakh, roughly ₹5.3 lakh of deductions beyond what Deepa already claims. That is rare at this income.
What if Deepa also had a home loan with ₹2L annual interest?
Old regime: taxable = ₹7,55,000 − ₹2,00,000 = ₹5,55,000 → tax = ₹12,500 + 20% × ₹55,000 = ₹23,500 + cess = ₹24,440.
Even then, the new regime stays at ₹0, so it still wins — by ₹24,440. Below roughly ₹12.75 lakh gross salary, the 87A rebate makes the new regime nil, so extra deductions like home-loan interest cannot make the old regime cheaper than zero. They only start to matter once income climbs above that threshold.
Tax on Specific Income Types Under Each Regime
Both regimes use the same tax rate for certain income types:
Capital gains: The rate on equity LTCG (12.5%), equity STCG (20%), and debt fund gains (slab rate) is the same regardless of whether you chose old or new regime. The regime choice only affects regular income slabs.
Special rates remain the same in both regimes:
| Income Type | Rate (Both Regimes) |
|---|---|
| Equity LTCG (>12 months) | 12.5% above ₹1.25L |
| Equity STCG (<12 months) | 20% |
| Winnings from lottery/gambling | 30% flat |
| VDA (crypto) gains | 30% flat |
What changes between regimes is only: the slab rate applied to regular income (salary, business, other sources).
What the Income Tax Portal Shows When You File
When you file on the IT portal (incometax.gov.in), the system now shows a real-time comparison after you enter income details:
- Enter income details for your applicable form (ITR-1 or ITR-2)
- The portal computes estimated tax under both regimes automatically
- You choose which regime to apply in the regime selection section
The portal's calculation is based on what you've entered, so its comparison is only as accurate as the data you input. If you've pre-filled deductions correctly, the comparison is reliable.
The Long-Term Regime Commitment Issue for Business Owners
Salaried employees can switch regimes every year — the regime is reselected annually when declaring to the employer and again at ITR filing time.
Business owners (sole proprietors, partners in firms, consultants without employment) face a different rule:
- Opting into the new regime: Available; they can switch from old to new
- Opting back to old regime from new: Allowed only once in their lifetime
- After switching back to old regime: They cannot re-enter the new regime
This asymmetry matters for entrepreneurs. A business owner who switches to the new regime in a high-income year (thinking the lower rates help) and then wants to return to the old regime in a year when deductions become available faces a permanent one-way door. The decision must be made with multi-year perspective.
For salaried employees, this one-time rule does not apply — they can freely switch year to year.
Impact of Employer Regime Declaration vs ITR Regime
When you inform your employer of your regime choice at the start of the year, they compute TDS based on that regime. But at the time of actual ITR filing, you can use either regime — regardless of what you told your employer.
Scenarios:
Declared new regime to employer, filing old regime in ITR: Employer deducted TDS based on new regime (lower TDS). When filing under old regime with deductions, your actual tax may be lower. Result: a refund for the excess TDS deducted.
Declared old regime to employer, filing new regime in ITR: Employer deducted TDS based on old regime (potentially higher, if deductions declared were substantial). When filing under new regime, your actual tax may be lower. Result: a refund.
In both cases, the regime difference settles at ITR filing time. There's no penalty for telling your employer one thing and filing another — the final ITR is what matters for tax compliance.
The practical advice: Declare the regime you're most likely to use to your employer, to minimise TDS and maximise monthly take-home. If uncertain, declare new regime (your employer will deduct lower TDS), and then calculate both at filing time to confirm. The worst case is a small amount due at filing; the best case is a refund.
Key Deductions That Shift the Calculation
When comparing regimes, these deductions have the most outsized impact:
Home loan interest (Section 24(b)): ₹2,00,000 deduction. At 30% rate = ₹60,000 + cess = ~₹62,400 saving. This single deduction often tilts the calculation toward old regime for those who have it.
HRA exemption: Variable but potentially ₹1–3 lakh for metro renters with high rent relative to basic salary. Can be very large.
Parents' health insurance (Section 80D, senior citizens): Up to ₹50,000. If your parents are senior citizens and you pay their insurance, this ₹50,000 deduction saves ₹15,000 at 30% — meaningful and often overlooked in regime calculations.
These deductions are worth less at lower marginal rates: At 5% slab (₹4–8L income), a ₹1.5 lakh 80C saves only ₹7,500. The administrative effort of tracking deductions vs the simplicity of new regime shifts toward new regime at low income levels.
The core rule: Old regime is worth maintaining when your total deductions above the standard deduction difference (₹75K new vs ₹50K old = ₹25K additional) generate more tax saving at your marginal rate than the rate advantage of the new regime slabs.
This article is for educational purposes only. Tax slabs and rules change with each Budget. Verify current rates at incometax.gov.in and consult a qualified chartered accountant for guidance specific to your situation.