Which Tax Regime to Choose?

These rates are applicable for individuals under the age of 60 years and HUFs (Hindu Undivided Family).

Senior citizens having the question, “Which tax regime should I choose?” may be glad to know that the tax rates are different for them under the old tax regime. For individuals over the age of 60 years but below the age of 80 years, the basic exemption limit is up to ₹3 lakhs. Senior citizens with an annual income in the range of ₹3 lakhs to ₹5 lakhs may be liable to pay tax at the rate of 5%. The tax rates may be similar to those in the above table for people in income ranges higher than ₹5 lakhs.

For super senior citizens (those over 80 years of age), ₹5 lakhs is the basic exemption limit. Other income tax slab rates remain the same.

 

Understanding the New Tax Regime

With amendments being introduced in the new tax regime in Budget 2023 and Budget 2025, let’s take a brief look at the tax slabs under it so that you may decide which regime to choose.

Furthermore, the new tax regime offers tax rebates on income up to ₹12 lakh. Thus, if your taxable income is below ₹12 lakh, you may not have to pay tax under the new tax regime.¹

These tax rates apply to individuals of all age groups. Thus, senior citizens and super senior citizens do not have an increased basic exemption limit to reduce their taxability.

 

Comparing the Old and New Tax Regimes

To decide which tax regime to choose, it is advisable to conduct a comparative analysis and evaluation of both tax regimes and then select the one that offers a lower tax outgo. The old tax regimes offer several deductions and exemptions, whereas the new tax regime provides lower tax rates but disallows most deductions.

 

Deductions and exemptions allowed under the old tax regime:

1. Standard deduction on salary
2. House Rent Allowance (HRA)
3. Leave Travel Allowance (LTA)
4. Relocation Allowance
5. Children’s education allowance
6. Miscellaneous allowances as specified in Section 10 (14)
7. Conveyance allowance
8. Deductions allowed under Section 80C, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80E, 80EEA, 80EEB, 80G, 80GG, and much more {with the exclusion of Section 80CCD (2)}²

Section 80C, specifically, may provide substantial tax benefits to persons looking to reduce their tax liability. Section 80C allows deductions of up to ₹1.5 lakhs against a variety of contributions and investments made towards different financial products. For instance, one can claim this deduction against the premium they may pay for their life insurance policy³ among other investment avenues available under sec 80C of the Act. Moreover, you may get an additional deduction of up to ₹25,000 under Section 80D if you have opted for a critical illness insurance rider with your life insurance policy⁴.

One may use an income tax calculator to get an estimate of their tax liability, keeping in mind the various deductions and exemptions available.

 

Tax exemptions retained under the new tax regime:

1. Standard Deduction is of ₹75,000 for employees paying tax under the new tax regime for the assessment year 2025-26. This standard deduction is available only to salaried individuals or those with pension income.²
2. Eligible for tax deduction up to 10% of salary (Basic + DA) (14% if such contribution is made by Central Government) contributed by employer under Section 80CCD(2) over the limit of ₹1.50 lakh provided under section 80 CCE⁵.
3. Section 80JJAA of the Income Tax Act, 1961, offers a deduction of 30% of the additional employee cost for three consecutive assessment years.³
4. Section 80CCH(2) for contributions made to the Agniveer Corpus Fund.⁴

Taxpayers under the new tax regime may not be able to claim Section 80C deductions against their various investments or financial contributions (including life insurance premiums). However, they can claim exemption of maturity benefit under Section 10 (10D) under the new tax regime as it allows for the same².

It is important to note that to claim any tax benefits, whether under the old tax regime or the new one, one must meet the various terms and conditions specified in the relevant sections of the Act. One must also keep in line with the latest amendments in tax laws as tax benefits are subject to change in tax laws.

 

Which Tax Regime Should You Choose?

As mentioned earlier, there are many considerations one must keep in mind to choose the right regime.

The old tax regime may be helpful to those who tend to make multiple investments, have insurance policies, live in rented accommodation, or have taken loans, since the old tax regime may provide tax benefits against the payments made for these purposes.

Individuals who may have low investments or may have purchased fewer products that may help save tax may find it preferable to opt for the new tax regime. Individuals with a taxable income of under ₹15 lakhs may also find the new tax regime to be beneficial since the tax rates are comparatively lesser in the category¹⁵.

However, one must not only look at their present income but also their future considerations before deciding which tax regime to choose.

 

Examples:

1. 25-year-old Rishi earns an annual income of ₹12 lakhs. However, as of now, he has not made any major investments in tax-saving schemes and was wondering which tax regime to choose. He has a term insurance policy  for which he pays a premium of ₹7000 every month. He used an income tax calculator to compute his taxable income. Despite the term insurance tax benefits and HRA exemption, he found that his tax liability was higher under the old tax regime since he incurred an overall higher tax rate on his income under the old tax regime.
2. On the other hand, 30-year-old Disha, who earns ₹10 lakhs a year, found the old tax regime to be a better option for her because she had made investments in several tax-saving schemes & she is also claiming HRA deduction of ₹120,000 for year. She had a life insurance policy for herself and her parents with a premium of ₹100,000 and a critical illness rider with an additional premium of ₹10,000. So, she chose the old tax regime since it gave her multiple tax deductions despite incurring a higher tax rate.

 

Key Takeaways

1. The Union Budget 2025 introduced revised income tax slabs under the new tax regime, increasing the basic exemption limit to ₹4 lakh.
2. The standard deduction under the old tax regime is ₹50,000, and under the new tax regime is ₹75,000.
3. The choice between the old tax regime and the new tax regime depends on your income and which regime gives you the most benefits.

 

Conclusion

Ultimately, there is no objective answer on how to decide which tax regime is better, because each regime may be beneficial to you over the other depending on various factors. You may want to put forth your queries and doubts to a tax professional to help you get better guidance on which tax regime you should choose.

 

FAQs

 

1. Can I switch between the old and new tax regimes?

Only an individual with non-business or salaried income can switch between tax regimes. Those with business or professional income have only one chance to switch to the new tax regime, unless they cease to have business income.

 

2. Which tax regime is more beneficial for mid-income earners?

The new regime may offer lower rates, but the old regime can offer higher tax savings if you have made eligible investments and can claim substantial deductions. Compare your tax liability under each regime and then choose the one that provides the lower tax outgo.

 

3. What deductions are available under the new tax regime?

The new tax regime allows for only a few deductions, including the standard deduction, the employer’s contribution to the NPS, Section 80JJA, and Section 80CCH (2).

 

4. Which ITR form should be filed to opt for the old tax regime?

To opt for the old tax regime, file Form 10IEA as a declaration for choosing the ‘Opting Out of New Tax Regime’ if you have business or profession income, and if you do not have income from business or profession, you can simply select the “Opting out of new regime” in the ITR form without the need to file Form 10-IEA.

 

5. Which tax regime is more suitable for high-income earners?

The choice depends on analyzing the income, eligible investments and deductions. You can calculate your tax liability under both regimes and choose one that offers the lowest tax outgo.

 

Reference:

1. https://cleartax.in/s/old-tax-regime-vs-new-tax-regime#h0
2. https://incometaxindia.gov.in/Pages/faqs.aspx?k=FAQs+on+Salary+Income
3. https://cleartax.in/s/section-80jja-income-tax-act
4. https://cleartax.in/s/income-tax-savings
5. https://www.angelone.in/knowledge-center/income-tax/section-80ccd