CA. Urmila Mahalwal
Introduction
The Income Tax Act, 1961 provides two tax regimes for individuals - the Old Tax Regime and the New Tax Regime. From recent years, the New Tax Regime has been made the default option, but taxpayers still have the choice to opt for the Old Tax Regime if it is more beneficial.
This article explains the difference between both regimes, tax rates applicable for AY 2025- 26, deductions allowed, and how a taxpayer can choose the most suitable option.
1. Old Tax Regime - Key Features
Under the Old Tax Regime, taxpayers can claim various exemptions and deductions.
Tax Slabs - Old Regime (AY 2025- 26)
| Income Slab | Tax Rate |
|---|---|
| Up to Rs 2,50,000 | Nil |
| Rs 2,50,001 - Rs 5,00,000 | 5% |
| Rs 5,00,001 - Rs 10,00,000 | 20% |
| Above Rs 10,00,000 | 30% |
Major Deductions & Exemptions Available
- Section 80C - up to Rs 1,50,000
- Section 80D - medical insurance
- Section 24(b) - housing loan interest
- HRA exemption
- LTA exemption
- Standard deduction (Rs 50,000 for salaried)
2. New Tax Regime - Key Features
The New Tax Regime offers lower tax rates but removes most deductions and exemptions.
Tax Slabs - New Regime (AY 2025- 26)
| Income Slab | Tax Rate |
|---|---|
| Up to Rs 3,00,000 | Nil |
| Rs 3,00,001 - Rs 6,00,000 | 5% |
| Rs 6,00,001 - Rs 9,00,000 | 10% |
| Rs 9,00,001 - Rs 12,00,000 | 15% |
| Rs 12,00,001 - Rs 15,00,000 | 20% |
| Above Rs 15,00,000 | 30% |
Important Points
- Standard deduction of Rs 50,000 is allowed
- Section 87A rebate available up to Rs 7,00,000
- Most deductions under Chapter VI-A are not allowed
3. Comparison Between Old & New Regimes
| Particulars | Old Regime | New Regime |
|---|---|---|
| Deductions Allowed | Yes | Mostly Not Allowed |
| Tax Rates | Higher | Lower |
| Compliance | More planning required | Simple |
| Best for | Tax-saving investors | Salaried with fewer deductions |
4. Practical Example
Case Study:
Ms. A is a salaried individual having gross annual income of Rs 15,00,000.
Tax Calculation under Old Tax Regime
Deductions & Exemptions claimed:
- Standard Deduction: Rs 50,000
- Section 80C (PF/LIC/ELSS): Rs 1,50,000
- Section 80D (Medical Insurance): Rs 25,000
Total Deductions: Rs 2,25,000
Taxable Income: Rs 15,00,000 - Rs 2,25,000 = Rs 12,75,000
Tax Calculation:
- Up to Rs 2,50,000 → Nil
- Rs 2,50,001 - Rs 5,00,000 @5% = Rs 12,500
- Rs 5,00,001 - Rs 10,00,000 @20% = Rs 1,00,000
- Rs 10,00,001 - Rs 12,75,000 @30% = Rs 82,500
Total Tax: Rs 1,95,000
Add Health & Education Cess @4% = Rs 7,800
Total Tax Liability (Old Regime): Rs 2,02,800
Tax Calculation under New Tax Regime
Deductions allowed:
-
Standard Deduction: Rs 50,000
Taxable Income: Rs 15,00,000 - Rs 50,000 = Rs 14,50,000
Tax Calculation:
- Up to Rs 3,00,000 → Nil
- Rs 3,00,001 - Rs 6,00,000 @5% = Rs 15,000
- Rs 6,00,001 - Rs 9,00,000 @10% = Rs 30,000
- Rs 9,00,001 - Rs 12,00,000 @15% = Rs 45,000
- Rs 12,00,001 - Rs 14,50,000 @20% = Rs 50,000
Total Tax: Rs 1,40,000
Add Health & Education Cess @4% = Rs 5,600
Total Tax Liability (New Regime): Rs 1,45,600
Comparison Summary
| Particulars | Old Regime | New Regime |
|---|---|---|
| Taxable Income | Rs 12,75,000 | Rs 14,50,000 |
| Total Tax | Rs 2,02,800 | Rs 1,45,600 |
| Better Option | ❌ | ✔️ |
Conclusion
For a taxpayer earning Rs 15,00,000 per annum with limited deductions, the New Tax Regime results in significant tax savings. However, if deductions such as home loan interest or higher Chapter VI-A investments are available, the Old Regime may still be beneficial.
The above article is for informational purposes only and does not constitute professional advice. Readers are advised to consult a tax professional before taking any decision.
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