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For those with an annual income between Rs. 7 lakhs to Rs. 10 lakhs, the new regime also provides a 10% tax rate, compared to the higher rate in the old regime.

Taxpayers who benefit from exemptions and deductions under the old regime, which reduce their net tax liability, may opt to continue with the old regime if it results in a lower tax burden.

Let’s examine the tax slabs under both regimes for individuals below 60 years of age:

Under the revised tax regime for FY 2025-26, the basic exemption limit has been increased to Rs. 4,00,000. Additionally, the rebate under section 87A has been enhanced to Rs. 60,000, up from the previous Rs. 25,000.

As a result, individuals earning up to Rs. 12,00,000 will have zero tax liability after accounting for the increased rebate. This makes the new tax regime more favorable for taxpayers in this income bracket.

For taxable income beyond Rs. 12,00,000, the applicable tax rates progressively increase as per the latest slab structure.

Rebate under section 87A is not applicable on income taxable at special rates, such as capital gains under section 112A. Additionally, marginal relief on rebate continues to be available.

The Direct Tax Bill is set to be presented in Parliament next week, which may introduce further refinements to the tax structure.

Exemptions mean the taxpayer is free from the tax burden on certain incomes. For example, you do not have to pay tax on income from agriculture. 

Deduction means removing certain investments and expenditures the taxpayer makes and then calculating the gross income. For example, if you pay Rs. 20,000 as a health insurance premium. You can deduct this amount from your total income.

In the ‘old tax regime,’ there are 120 exemptions. Taxpayers do not benefit from all of them. Most of them complicate the direct tax system. After a thorough study, the Ministry of Finance has removed around 70 exemptions. Old vs new tax regime for salaried employees is a new change. Let’s view all deductions and exemptions that are available in each of the two regimes.

Here’s the list (not exhaustive) of exemptions-

• Leave Travel Allowance 
• House rent allowance
• Standard deduction of Rs 50,000 was available for salaried individuals
• Deductions available under Section 80TTA/TTB ( on interest from savings account deposits )
• 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 Rs 15000 allowed from family pension under clause (iia) ( Section 57)
• Tax-saving investment deductions under Chapter VI-A (80C,80D, 80E,80CCC, 80CCD, 80D, 80DD, 80DDB,, 80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA, etc) (Except, deduction under Section 80CCD(2)—employers contribution to NPS, and Section 80JJA) and so on. These popular tax saving investment options include ELSS, NPS,PPF, tax break on insurance premium among others. 

One can still claim deduction under sub-section ( 2) of section 80CCD which is basically an employer’s contribution towards an employee’s account in NPS and section 80JJAA ( for new employment).

Also note that if the employee’s contribution to EPF and NPS exceeds more than Rs 7.5 Lakh, in the financial year in question, then the employee is liable to pay tax. 

• Income from Life Insurance,
• Agricultural Income,
• Standard reduction on rent,
• Retrenchment compensation,
• Leave encashment on retirement,
• VRS proceeds up to Rs 5 lakhs,
• Death cum retirement benefit,
• Money received as a scholarship for education, etc.

Both systems have their own sets of pros and cons. The old system has many exemptions and deductions under numerous sections – availing a few of these required people to invest in tax-saving investment options, which helped inculcate a good habit of investing. On the other hand, the new system gives people more flexibility and tries to simplify the process.

It also varies based on which slab you are in as well. However, since the system is new, it makes sense to consult a competent tax expert who can suggest the optimal tax-saving route for you.

Finance Minister Nirmala Sitharaman in her budget has said that gradually the exemptions and deductions will be reviewed and reduced in number as the government wants a simple Income tax system in the country. Whether or not the new system is received well after we compare old vs new tax regimes in the upcoming financial year, will say a lot about the tax laws that may get implemented in the future. 

With the changes in the new tax regime, an individual with INR 9 lakh annual income will pay INR 33,800 tax which is 3.75% of the salary, a reduction of INR 15,000 from the present INR 27,200 under the earlier slabs under the new tax regime. And, an individual with INR 15 lakh annual income will have to pay a tax of INR 1.3 lakh which will be down from INR 1.87 lakh. 

However, in case the individual is eligible to claim for deductions/ exemptions under the old tax regime towards HRA, LTA, PPF, etc, the same may be more beneficial. 

Since the eligible deductions, sources and quantum of income differs for every individual, one rule cannot be applied to all. Taxpayers will need to evaluate and compare the tax liability under both regimes and then decide on which to opt for.

In case a taxpayer has investments in tax-saving instruments, pays premiums on life or a medical insurance policy, children’s school fee, home loan principal repayment, etc., and avails the benefit of the deduction for HRA, LTA, etc. it may be more beneficial to opt for old tax regime since the benefit of deduction/exemption can be availed in the old tax regime.