With the Union Budget 2025 approaching, taxpayers are once again evaluating whether to opt for the new tax regime introduced in April 2020 or continue with the old tax regime, which offers a range of deductions and exemptions. The Indian income tax system underwent a significant overhaul in the 2020-21 fiscal year, giving taxpayers the flexibility to choose between the two systems based on their financial situation.
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The new tax regime, introduced under Section 115BAC of the Income Tax Act, 1961, was designed to simplify taxation with reduced tax rates. However, it comes at the cost of fewer exemptions and deductions, making it a better option for taxpayers who do not invest heavily in tax-saving schemes.
In Budget 2023, the government made key changes to encourage more people to shift to the new system.
Key Changes in the 2023 Budget
- Higher Tax Rebate Limit: The rebate under Section 87A was raised from Rs 5 lakh to Rs 7 lakh, making individuals earning up to Rs 7 lakh tax-free.
Updated Tax Slabs: The tax exemption limit was increased to Rs 3 lakh, and the new slabs for FY 2024-25 are as follows:
Annual Income RangeTax Rate (FY 2024-25)Up to Rs 3 lakhNilRs 3 lakh – Rs 7 lakh5%Rs 7 lakh – Rs 10 lakh10%Rs 10 lakh – Rs 12 lakh15%Rs 12 lakh – Rs 15 lakh20%Above Rs 15 lakh30%
These adjustments were aimed at simplifying tax calculations while ensuring relief for middle and lower-income groups.
The Old Tax Regime: More Deductions, Higher Savings
Unlike the new tax regime, the old system offers several exemptions and deductions, allowing taxpayers to reduce their taxable income.
Key features include:
- Over 70 exemptions and deductions
- House Rent Allowance (HRA) and Leave Travel Allowance (LTA)
- Section 80C deductions up to Rs 1.5 lakh (for PPF, life insurance, EPF, etc.)
- Home loan interest deductions under Section 24B
For individuals with significant investments in tax-saving schemes, the old tax regime remains beneficial.
Which Tax Regime is Right for You?
Choosing between the new and old tax regimes depends on income level and tax-saving strategies.
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