Old vs New Tax Regime: Which One Is Better

For the 2024 budget, Finance Minister Nirmala Sitharaman suggested two significant changes to the tax system to make it more appealing. Now, the standard deduction limit has been set to ₹75,000 which earlier used to be ₹50,000. Additionally, the income tax slab rules have undergone changes between ₹3 lakh to ₹10 lakh yearly income. 

Nonetheless, if you are quite particular about taking your tax savings to the next level, you must compare both the new and old tax systems side by side. To help you with this, we have discussed the topic of old vs new tax regime in detail here. 

Old Tax Regime: Key Highlights

Many taxpayers talk highly in favour of the old tax regime as it offers a wide range of tax exemptions and deductions. It enables an individual to legally reduce their tax burden by opting for deductions that are allocated for various expenses and investments. 

Some contributions that allow you to save tax under the old regime include:

• Paying your child’s tuition fee
• Settling life insurance premiums
• Meeting outstanding home loan EMIs
• Investing in schemes such as PPF or ELSS, etc. 

These features have managed to maintain the old tax regime’s attractiveness, as it contains many tax-saving investment opportunities with very simple eligibility requirements. Here, you can see other key aspects:

• Basic Exemption Limit

Under this head, if your income is less than ₹2.5 lakh per annum, you do not need to pay any income tax. 

• Tax Rebate

It is another major benefit that allows you to save tax amounts worth ₹12,500 given your yearly income is below ₹5 lakh. 

• Deductions/Exemptions

You can verify all the eligible tax exemptions/deductions under the old tax regime by exploring sections like Section 80C, 80U, 80EE, 80E, 80TTA, etc. 

New Tax Regime: Key Highlights

In 2020, the Government introduced a new tax structure to reduce the tax liabilities of all registered taxpayers. Not only did it lower tax liabilities, but it also eliminated many deductions previously available under Sections 80C, 80G, 80D and 80U.

The new tax regime does not provide tax exemptions or deductions. Instead, it has put forward many simple regulations with a lower number of tax-deductible investments. Here, we have discussed a few major changes:

• Standard Deduction

Budget 2024 now allows an individual to enjoy a maximum standard deduction of ₹75,000 under the new regime.

• Basic Exemption Limit

Compared to the earlier ₹2.5 lakh benchmark, now the basic tax exemption income limit has been set as ₹3 lakh. Thus, the citizens can enjoy a higher tax-free income threshold.

• Tax Rebate 

Earlier, if your annual income was below ₹5 lakh, you could be eligible for a tax rebate. Now, you may even qualify for zero tax by utilising rebate benefits, as long as your yearly income is below ₹7 lakh.

• Reduced Tax Slabs

Unlike the old tax regime, the new tax structure offers reduced slab rates.

Comparison Between Old and New Tax Regime

To understand the major difference between the old and new tax regime, you can analyse the effective tax rates after the budget discussion:

After the Budget 2024, you can notice the standard deduction amount has been increased. Moreover, now, the family pension deductions total to ₹25,000, up from ₹15,000. As a result of these reforms, a regular taxpayer can save up to ₹17,500 if they decide to switch to the new tax system. 

Old vs New Tax Regime: Which One Is Better for Your Finances in 2025?

No single answer can conclusively resolve this query. While comparing the key differences between old and new tax regimes, the particulars may appear to be complicated in the beginning. However, a systematic comparison can eventually help figure out what is more likely to work best for you. 

You have to mainly follow these two steps:

Step 1: Calculate the Exemptions

If you are a salaried individual who lives on rent, you can claim HRA, which used to be one of the most significant exemptions in the old tax system. Additionally, the old regime accommodated other tax-free aspects like phone bills, food bills and LTA. 

Upon shifting to the new tax system, the above-mentioned transactions will be taxable. However, you will be able to claim a standard deduction of ₹75,000, which was ₹50,000 in the old regime.

Step 2: Consider the Deductions

Apart from home loan EMIs, several other tax-deductible expenses under Section 80C continue to prevail in the old tax regime. If you decide to shift to the new system, these benefits will be lost. 

After executing these two steps, you must add the deductions and exemptions together and then subtract them from your annual income to determine post-tax income. By following this, you can decide which tax regime will serve your interests the best. 

Final Word:
Grasping the nuances of old vs new tax regimes can empower a person to select the optimal tax system. This understanding further assists in deterring unnecessary investments and expenses, thereby accelerating your financial progress.

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