New vs Old Tax Regime: The Honest Comparison for FY 2025-26
The new tax regime is the default from FY 2023-24. But defaulting is not the same as optimal. Here is a precise comparison of slabs, deductions, and break-even points to help you decide correctly for AY 2026-27.
Harun Raaj
Chartered Accountant · Harun Raaj & Associates
The new tax regime became the default from FY 2023-24 under Section 115BAC. If you do not actively choose the old regime while filing, you are taxed under the new one automatically.
Defaulting is not the same as optimal. For many salaried individuals, the old regime still produces a lower tax outflow — if they actually use the deductions available. For others, the new regime is genuinely better. The answer depends entirely on your specific numbers.
New regime slabs for FY 2025-26 (AY 2026-27)
Section 87A rebate: Up to ₹25,000 tax rebate if total income does not exceed ₹7 lakh. Effectively zero tax up to ₹7 lakh under the new regime.
Standard deduction: ₹75,000 for salaried individuals under the new regime (enhanced in Budget 2024).
What the old regime offers in return
The old regime has higher effective tax rates but allows deductions that reduce taxable income before tax is applied:
Section 80C (up to ₹1.5 lakh): PPF, ELSS, EPF, life insurance premium, home loan principal repayment, children's tuition fees.
Section 80D (up to ₹25,000–₹75,000): Health insurance premiums for self, spouse, children, and parents. Senior citizen parents attract a higher limit of ₹50,000.
HRA exemption under Section 10(13A): If you pay rent and receive HRA, the exemption can be significant — especially in metros where rent is high relative to income.
Section 24(b): Interest on home loan for self-occupied property — up to ₹2 lakh deduction.
NPS — Section 80CCD(2): Employer contribution to NPS is deductible up to 10% of basic salary. Importantly, this deduction is available under both the old and new regime.
The break-even: when does the old regime win?
For a salaried individual earning ₹12 lakh with these deductions:
- 80C: ₹1.5 lakh (ELSS + PPF)
- 80D: ₹25,000 (health insurance)
- HRA exemption: ₹1.2 lakh
- Home loan interest (Section 24b): ₹1.5 lakh
Total deductions: ₹4.45 lakh. Taxable income under old regime: ₹12L – ₹50,000 standard deduction – ₹4.45L = ₹7.05 lakh.
Under new regime with ₹75,000 standard deduction: taxable income ₹11.25 lakh.
The old regime wins significantly for this taxpayer.
For the same ₹12 lakh income with no HRA, no home loan, and minimal 80C: the new regime is almost certainly better.
The one rule that resolves most cases
- Deductions above ₹3.5–4 lakh → old regime likely better
- Deductions below ₹2 lakh → new regime almost certainly better
- Between ₹2–3.5 lakh → requires an exact calculation
Switching between regimes
Salaried individuals can switch between regimes every year at ITR filing. Business income taxpayers can switch out of the new regime only once.
The choice is made at filing — though informing your employer of your preferred regime affects monthly TDS deduction throughout the year.
What HRA does for every ITR client
We compute your liability under both regimes as a standard part of the filing process — presenting you with the exact difference in tax before filing, so you choose with complete information, not guesswork.
File your ITR with HRA for AY 2026-27. Due date: 31 July 2026.
Frequently Asked Questions
Is the new tax regime mandatory from FY 2025-26?
No, but it is the default. Under Section 115BAC (as amended by Finance Act, 2023), the new regime applies automatically unless you actively opt for the old regime. Salaried individuals opt out via Form 10-IEA submitted before the ITR due date. Business/profession taxpayers must opt out before the return filing deadline, and the choice is locked for subsequent years unless revoked.
Which deductions are still available under the new tax regime?
The new regime allows: standard deduction of ₹75,000 (from FY 2024-25), employer's NPS contribution under Section 80CCD(2) up to 14% of salary, family pension deduction of ₹15,000, and deduction for disability under Section 80U. Most other deductions — 80C, 80D, HRA, LTA, home loan interest — are not available.
At what income level does the old regime save more tax?
If your total deductions and exemptions (80C, 80D, HRA, home loan interest under Section 24(b), etc.) exceed approximately ₹3.75–4.25 lakh per year, the old regime typically produces lower tax. The exact breakeven depends on your slab, employer benefits, and actual deduction mix.
Can I switch between regimes every year?
Salaried individuals without business income can switch between regimes every year at the time of filing. Those with business or professional income under Sections 44AD/44ADA/44AE can switch only once — from new to old — and the choice is then permanent for business income.
Does the new regime offer any rebate?
Yes. Under Section 87A, individuals with taxable income up to ₹12 lakh (₹12.75 lakh for salaried after standard deduction) pay zero tax under the new regime from FY 2025-26. This is a full rebate, not an exemption — income above ₹12 lakh is taxed at normal slab rates with marginal relief.
I'm CA Harun Raaj, Visakhapatnam. If any of this affects you or your business, reach out — I'd be glad to help.
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See Also
Frequently Asked Questions
What is the default tax regime for salaried employees in FY 2025-26 if I don't choose?+
The new tax regime is the default under Section 115BAC from FY 2023-24. If you do not actively choose the old regime while filing, you are taxed under the new regime automatically.
How much standard deduction can salaried individuals claim under new tax regime?+
Salaried individuals can claim a standard deduction of ₹75,000 under the new regime, as enhanced in Budget 2024.
What is the maximum deduction available under Section 80C for old tax regime?+
Section 80C allows a deduction up to ₹1.5 lakh covering PPF, ELSS, EPF, life insurance premium, home loan principal repayment, and children's tuition fees.
What health insurance premium deduction limit applies to senior citizen parents under old regime?+
Under Section 80D, senior citizen parents attract a deduction limit of ₹50,000, while the general limit for health insurance premiums is ₹25,000–₹75,000.
Is NPS employer contribution deductible under both old and new tax regimes?+
Yes, NPS employer contribution is deductible under both regimes. Under Section 80CCD(2), it is deductible up to 10% of basic salary in the old regime and is also available in the new regime.
What is the maximum home loan interest deduction available in old tax regime?+
Under Section 24(b), a deduction of up to ₹2 lakh is available for interest paid on home loan for self-occupied property in the old regime.
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