Old Tax Regime vs New Tax Regime: How to Choose

For financial year 2025–26, corresponding to assessment year 2026–27, a resident individual computes tax under one of two regimes. The new regime is the default. The older regime remains available if the option is exercised in the manner prescribed. The new regime uses a wider set of lower slab rates and a rebate that can reduce tax on ordinary income to nil up to a stated threshold. It does not permit most of the deductions that made the older regime attractive to households with house-rent allowance, specified investments and housing-loan interest on a self-occupied property. This article sets out the structure of each regime and then compares two profiles. The figures are illustrations. They are not a computation of any reader’s liability. Surcharge and health and education cess apply as prescribed. Special-rate income such as specified capital gains does not receive the rebate under section 87A.

The Default New Regime, Financial Year 2025–26

Under the slabs applicable for the year, income up to ₹4 lakh is charged at nil. Subsequent bands are charged at 5 per cent, 10 per cent, 15 per cent, 20 per cent, 25 per cent and 30 per cent as income rises through ₹8 lakh, ₹12 lakh, ₹16 lakh, ₹20 lakh and ₹24 lakh. A resident individual whose taxable income, computed under this regime, does not exceed ₹12 lakh is entitled to a rebate under section 87A of up to ₹60,000, which cancels the tax on that ordinary income. A salaried individual or pensioner is also allowed a standard deduction of ₹75,000. In consequence, salary up to ₹12.75 lakh, with no other taxable income and no special-rate gains, can produce a nil liability after the standard deduction and the rebate. Marginal relief is provided where income exceeds ₹12 lakh by a small amount.

Most deductions under chapter VI-A — including section 80C for provident fund, life-insurance premia and repayment of housing-loan principal — are not available. House-rent allowance exemption and the deduction for interest on a loan for a self-occupied house are generally not available. Employer’s contribution to the National Pension System under section 80CCD(2) remains an exception within the statutory percentage.

The Older Regime

The older slabs remain those long familiar to resident individuals below sixty years: a basic exemption of ₹2.5 lakh, then 5 per cent, 20 per cent and 30 per cent. The standard deduction is ₹50,000. House-rent allowance may be exempt to the extent computed under the rules. Interest on a housing loan for a self-occupied property may be deducted up to ₹2 lakh, subject to conditions including the time allowed for completion of construction. Chapter VI-A deductions, including section 80C up to ₹1.5 lakh and section 80D for health-insurance premia, are available. The rebate under section 87A is far more limited than under the new regime. Households whose deductions are large relative to income may still pay less under this regime. Households whose deductions are small generally will not.

Profile A — Salary, Rent, Limited Deductions

Assume a resident individual below sixty, with gross salary of ₹14 lakh, paying rent, claiming house-rent allowance of ₹2.4 lakh of which the exempt portion under the old rules would be ₹1.8 lakh, contributing ₹1.5 lakh to provident fund and insurance, and with no housing loan. Under the new regime the standard deduction of ₹75,000 reduces taxable salary to ₹13.25 lakh. Tax is computed on the slabs and the rebate under section 87A is not available because taxable income exceeds ₹12 lakh. Under the old regime, after the standard deduction of ₹50,000, house-rent exemption of ₹1.8 lakh and section 80C of ₹1.5 lakh, taxable income is substantially lower, but it is charged at the older, steeper bands. In a large number of similar cases the new regime still produces a lower liability because the rebate threshold and the lower bands outweigh the deductions that have been given up. The arithmetic must be run for the year. It cannot be assumed from this paragraph.

Profile B — Salary, Self-Occupied House, Housing-Loan Interest

Assume gross salary of ₹18 lakh, interest of ₹2 lakh on a loan for a self-occupied house, section 80C investments of ₹1.5 lakh, and health-insurance premia eligible under section 80D of ₹25,000. There is no house-rent allowance of consequence. Under the new regime the housing-loan interest on the self-occupied property is not deducted, nor are the chapter VI-A items. Taxable income remains close to salary after the ₹75,000 standard deduction. Under the old regime the interest, the section 80C amount and section 80D all reduce total income, and the older slabs are applied to a much smaller figure. In many such cases the old regime produces the lower tax. Again, the comparison must be computed. The purpose of the profile is to show that a housing loan on a self-occupied property is often the fact that reverses the conclusion reached in Profile A.

A Checklist Before the Option Is Exercised

• Is house-rent allowance received, and is rent actually paid?
• Is interest payable on a loan for a self-occupied house, and is the property completed within the time the statute requires?
• What is the aggregate of section 80C, section 80D and any other chapter VI-A deduction that would be lost under the new regime?
• Is there income chargeable at special rates, such as specified capital gains, which will not be sheltered by the section 87A rebate?
• Has the comparison been run for this financial year, not copied from the previous year?

Business and professional taxpayers face an additional constraint: once the old regime is left in specified circumstances, the option to return to it may be restricted. That point is taken up in the articles on business income.