Old vs. New Tax Regime in India: A Detailed Comparison with Example (FY 2024-25)

India’s income tax landscape for individual taxpayers presents a choice between two parallel tax structures: the traditional Old Tax Regime and the reformed New Tax Regime (Section 115BAC). While the New Regime, introduced with simplified lower rates, has become the default option from Assessment Year 2024-25 (Financial Year 2023-24) onwards, taxpayers retain the crucial option to select the Old Regime if it proves more tax-efficient for them.

Navigating the differences between these two regimes is essential for accurate tax planning and filing. This detailed article delves into the specifics of each regime for the Financial Year 2024-25 (Assessment Year 2025-26), highlights their key distinctions, and includes a practical example to illustrate how your tax liability might differ under each.

The Old Tax Regime: Leveraging Deductions and Exemptions

The Old Tax Regime is characterized by its multi-slab structure and, more significantly, the extensive range of deductions and exemptions it permits. This regime encourages taxpayers to invest in specified instruments (like PPF, ELSS, NSC), spend on health insurance, education, and housing by allowing these expenses to be reduced from the total income, thereby lowering the taxable base.

This regime is often beneficial for individuals who make substantial tax-saving investments and incur eligible expenses.

The New Tax Regime (Section 115BAC): Simplified Rates, Limited Benefits

The New Tax Regime, applicable under Section 115BAC of the Income Tax Act, offers a simplified tax structure with a higher number of income slabs but with concessional tax rates compared to the Old Regime. The core principle here is to offer lower rates in exchange for foregoing most of the deductions and exemptions available in the Old Regime.

From AY 2024-25, the New Tax Regime is the default. If a taxpayer does not explicitly choose the Old Regime while filing their ITR, they will be taxed under the New Regime.

Detailed Comparison: Old vs. New Tax Regime (FY 2024-25 / AY 2025-26)

Here’s a comparative look at the two tax regimes based on crucial parameters for the current financial year:

(Note: A 4% Health and Education Cess is applied to the total tax liability (after surcharge and rebate, if any) under both regimes.)

Example Calculation: Old vs. New Regime (FY 2024-25)

Let’s calculate the tax liability for a hypothetical salaried individual (below 60 years of age) for FY 2024-25 under both regimes.

Hypothetical Scenario:

• Gross Salary: ₹15,00,000
• Salary Breakup: Basic Salary: ₹7,50,000, HRA: ₹3,00,000, LTA: ₹30,000, Special Allowance: ₹4,20,000
• Rent Paid: ₹3,60,000 per annum (₹30,000 per month)
• Investments/Expenses:
  • Section 80C (PPF, EPF, etc.): ₹1,50,000 (Maximum limit)
  • Section 80D (Health Insurance Premium): ₹25,000 (Self/Family below 60)
  • Interest on Housing Loan (Self-occupied): ₹2,00,000 (Maximum deduction u/s 24b)
  • Professional Tax: ₹2,400

Calculation under Old Tax Regime:

1. Gross Salary: ₹15,00,000
2. Less: Exemptions & Deductions from Salary:
   • Standard Deduction: ₹50,000
   • HRA Exemption: Calculate as lowest of (Actual HRA (₹3,00,000), Rent Paid minus 10% of Basic (₹3,60,000 – 10% of ₹7,50,000 = ₹2,85,000), 50% of Basic (₹3,75,000)). Lowest is ₹2,85,000.
   • LTA Exemption: ₹30,000 (Assuming conditions met)
   • Professional Tax: ₹2,400
   • Total Salary Adjustments: ₹50,000 + ₹2,85,000 + ₹30,000 + ₹2,400 = ₹3,67,400
3. Income from Salary (after adjustments): ₹15,00,000 – ₹3,67,400 = ₹11,32,600
4. Less: Deduction under Section 24b (Housing Loan Interest): ₹2,00,000
5. Gross Total Income: ₹11,32,600 – ₹2,00,000 = ₹9,32,600
6. Less: Deductions under Chapter VI-A:
   • Section 80C: ₹1,50,000
   • Section 80D: ₹25,000
   • Total Chapter VI-A Deductions: ₹1,50,000 + ₹25,000 = ₹1,75,000
7. Net Taxable Income (Old Regime): ₹9,32,600 – ₹1,75,000 = ₹7,57,600
8. Tax on ₹7,57,600 (Old Regime Slabs):
   • Up to ₹2.5L: ₹0
   • ₹2.5L to ₹5L: 5% of ₹2.5L = ₹12,500
   • ₹5L to ₹7,57,600: 20% of (₹7,57,600 – ₹5,00,000) = 20% of ₹2,57,600 = ₹51,520
   • Total Income Tax: ₹12,500 + ₹51,520 = ₹64,020
9. Rebate u/s 87A: Not applicable as income > ₹5 Lakhs.
10. Surcharge: Not applicable as income < ₹50 Lakhs.
11. Tax Liability before Cess: ₹64,020
12. Add: Cess (4%): 4% of ₹64,020 = ₹2,561
13. Total Tax Payable (Old Regime): ₹64,020 + ₹2,561 = ₹66,581

Calculation under New Tax Regime (FY 2024-25):

1. Gross Salary: ₹15,00,000
2. Less: Allowed Deductions:
   • Standard Deduction: ₹75,000
   • (Assuming no 80CCD(2) or 80CCH in this example)
   • Total Allowed Deductions: ₹75,000
3. Net Taxable Income (New Regime): ₹15,00,000 – ₹75,000 = ₹14,25,000
4. Tax on ₹14,25,000 (New Regime Slabs for FY 2024-25):
   • Up to ₹3L: ₹0
   • ₹3L to ₹6L: 5% of ₹3L = ₹15,000
   • ₹6L to ₹9L: 10% of ₹3L = ₹30,000
   • ₹9L to ₹12L: 15% of ₹3L = ₹45,000
   • ₹12L to ₹14,25,000: 20% of (₹14,25,000 – ₹12,00,000) = 20% of ₹2,25,000 = ₹45,000
   • Total Income Tax: ₹15,000 + ₹30,000 + ₹45,000 + ₹45,000 = ₹1,35,000
5. Rebate u/s 87A: Not applicable as income > ₹7 Lakhs.
6. Surcharge: Not applicable as income < ₹50 Lakhs.
7. Tax Liability before Cess: ₹1,35,000
8. Add: Cess (4%): 4% of ₹1,35,000 = ₹5,400
9. Total Tax Payable (New Regime): ₹1,35,000 + ₹5,400 = ₹1,40,400

Comparison of Tax Payable:

• Old Regime: ₹66,581
• New Regime: ₹1,40,400

In this specific example, even with the higher ₹75,000 standard deduction in the New Regime, the Old Tax Regime results in a significantly lower tax liability because the individual was able to claim substantial deductions (under 80C, 80D, and 24b) and exemptions (HRA, LTA) which are mostly disallowed in the New Regime.

(Note: This is a simplified example for illustrative purposes for FY 2024-25. Actual tax calculation can involve more income heads, deductions, and complexities. It’s advisable to use an official income tax calculator or consult a tax professional for your specific situation.)

Who Should Choose Which Regime? (Refined Guidance)

Based on the comparison and example:

• Choose the Old Regime: If your eligible deductions and exemptions (especially under Chapter VI-A, HRA, LTA, and Section 24b for home loan interest) are substantial enough to significantly reduce your taxable income. As demonstrated in the example, the benefit of these deductions can outweigh the lower tax rates and higher standard deduction of the New Regime, particularly for higher income levels with significant tax-saving commitments.
• Choose the New Regime: If you have minimal investments or expenses that qualify for deductions in the Old Regime. The lower tax rates, the higher ₹75,000 standard deduction (for salary/pension), and the higher rebate limit (up to ₹7 Lakhs taxable income effectively tax-free) make it advantageous for those with simpler financial affairs or lower tax-saving habits, especially at lower to middle-income levels.

Taxpayers should perform a comparative calculation using their actual income and potential deductions for FY 2024-25 to determine the most beneficial regime.

Choosing Your Regime for Filing

For taxpayers without business income, while you may declare your preferred regime to your employer for TDS purposes during the year, your final and binding choice is made when filing your Income Tax Return for FY 2024-25.

Taxpayers with business income who wish to opt out of the default New Regime must file Form 10-IEA on the Income Tax e-filing portal on or before the due date of filing your Income Tax Return under Section 139(1) for FY 2024-25. This option is generally a one-time choice to move to the Old Regime, with only one subsequent opportunity to switch back to the New Regime in their lifetime by filing Form 10-IEA again to withdraw their option.

Conclusion

The coexistence of the Old and New Tax Regimes provides Indian taxpayers with flexibility, but also necessitates careful consideration. The New Regime offers lower tax rates and greater simplicity with a higher standard deduction for salary/pension but restricts most other benefits. The Old Regime allows numerous deductions that can drastically reduce taxable income despite higher rates. The most effective approach for FY 2024-25 (AY 2025-26) is to calculate your tax liability under both scenarios based on your specific income and potential deductions/exemptions to determine the regime that results in the lower tax payable. Given the New Regime is the default, those preferring the Old Regime must consciously opt for it during the tax filing process.