Old vs New Tax Regime: Which One Should You Choose in 2025-26?

Every year, your employer asks you to declare which tax regime you want: the old one with deductions, or the new one with lower rates. The right answer is different for a person earning Rs 5 lakh with no investments, and a person earning Rs 15 lakh with a home loan, PPF, and health insurance. Here is a practical decision framework with real numbers, using the current FY 2025-26 slabs. This is for informational purposes only and is not tax advice. Consult a tax professional for your specific situation.

What is actually different between the two regimes

The new tax regime offers lower tax rates across most slabs. For income up to Rs 4 lakh, the tax is nil. Between Rs 4 lakh and Rs 8 lakh, the rate is 5% instead of the old regime's 20% for the Rs 5–10 lakh bracket. The trade‑off: the new regime removes nearly all deductions and exemptions. You cannot claim Section 80C (PPF, ELSS, LIC, tuition fees), Section 80D (health insurance premium), HRA exemption, or home loan interest deduction under Section 24(b). The old regime keeps all those deductions, but the slab rates are higher.

The standard deduction of Rs 75,000 for salaried individuals is available in both regimes. The new regime also has a rebate under Section 87A that makes tax nil for taxable income up to Rs 12 lakh, which is a significant benefit for those in that income range.

Real examples at different income levels

These examples assume the individual is salaried, has opted for the standard deduction of Rs 75,000, and lives in a non‑metro city. Use the old vs new tax regime calculator to run your own exact numbers. The calculator works offline in your browser; your salary details never leave your device.

Example 1: Rs 5 lakh salary, no deductions

Under the new regime, after the standard deduction of Rs 75,000, taxable income is Rs 4.25 lakh. Tax on Rs 4.25 lakh is Rs 1,250 (5% on the Rs 25,000 above Rs 4 lakh). With the Section 87A rebate, tax becomes nil. Under the old regime, taxable income after standard deduction is also Rs 4.25 lakh, but the first Rs 2.5 lakh is nil and the remaining Rs 1.75 lakh is taxed at 5%, giving Rs 8,750. After Section 87A rebate (up to Rs 12,500), tax is nil too. Both give zero tax. No difference at this income level.

Example 2: Rs 10 lakh salary, with Section 80C of Rs 1.5 lakh and health insurance of Rs 25,000

Old regime: Gross salary Rs 10 lakh. Less standard deduction Rs 75,000, less Section 80C Rs 1,50,000, less Section 80D Rs 25,000. Taxable income = Rs 7,50,000. Tax: first Rs 2.5 lakh nil, next Rs 2.5 lakh at 5% = Rs 12,500, remaining Rs 2.5 lakh at 20% = Rs 50,000. Total tax Rs 62,500 plus 4% cess = Rs 65,000.

New regime: Gross salary Rs 10 lakh. Less standard deduction Rs 75,000. Taxable income = Rs 9,25,000. Tax: 0–4 lakh nil, 4–8 lakh at 5% = Rs 20,000, 8–9.25 lakh at 10% = Rs 12,500. Total tax Rs 32,500 plus 4% cess = Rs 33,800.

The new regime wins by about Rs 31,200. The lower rates in the new regime outweigh the lost deductions at this income level with these specific deduction amounts. If the person also had HRA and home loan interest, the old regime might catch up or pull ahead. Run your exact numbers on the calculator.

Example 3: Rs 15 lakh salary, HRA of Rs 1.8 lakh, Section 80C of Rs 1.5 lakh, 80D of Rs 25,000, home loan interest of Rs 2 lakh

Old regime: Gross salary Rs 15 lakh. Less standard deduction Rs 75,000, less HRA (assumed full Rs 1,80,000 eligible), less 80C Rs 1,50,000, less 80D Rs 25,000, less home loan interest Rs 2,00,000. Taxable income = Rs 8,70,000. Tax: 0–2.5 lakh nil, 2.5–5 lakh at 5% = Rs 12,500, 5–8.7 lakh at 20% = Rs 74,000. Total tax Rs 86,500 plus cess = Rs 89,960.

New regime: Gross salary Rs 15 lakh. Less standard deduction Rs 75,000. Taxable income = Rs 14,25,000. Tax: 0–4 lakh nil, 4–8 lakh at 5% = Rs 20,000, 8–12 lakh at 10% = Rs 40,000, 12–14.25 lakh at 15% = Rs 33,750. Total tax Rs 93,750 plus cess = Rs 97,500.

The old regime wins by about Rs 7,540. With substantial deductions, the old regime pulls ahead at this income level.

Example 4: Rs 25 lakh salary, same deductions as Example 3

Old regime: Taxable income roughly Rs 18.7 lakh. Tax under slab rates: Rs 3,15,000 plus cess = Rs 3,27,600. New regime: Taxable income Rs 24.25 lakh. Tax under slab rates: Rs 3,75,000 plus cess = Rs 3,90,000. The old regime wins by about Rs 62,400. The higher your income and the more deductions you have, the more the old regime tends to benefit.

A simple decision framework

If you do not invest in PPF, ELSS, or insurance solely for tax saving, and you do not have a home loan, the new regime is very likely to save you tax. It is simpler and requires no proof of investments. If you have significant deductions, especially a home loan, HRA in a high‑rent city, and full Section 80C contributions, run the numbers on the calculator for both regimes. At incomes below about Rs 7–8 lakh with no deductions, the new regime almost always wins. At incomes above Rs 15 lakh with heavy deductions, the old regime often wins. The crossover point depends entirely on your specific deduction amounts.

One more thing: the new regime is now the default

Since FY 2023-24, the new tax regime is the default regime. If you do not explicitly opt for the old regime when filing your return, your tax will be computed under the new regime. Tell your employer which regime you want at the start of the financial year so that TDS is deducted correctly. Changing the regime later at the time of filing is allowed for most salaried individuals, but it means your TDS through the year may not match your final tax liability.

FAQ

Can I claim NPS employer contribution in the new regime?

Yes, a limited deduction is available. Under Section 80CCD(2), the employer's contribution to your NPS account (up to 10% of salary for salaried individuals) is deductible in the new tax regime as well. The employee's own contribution under Section 80CCD(1B) is not available in the new regime. Check the latest Income Tax Department circulars for the exact limits.

Does the old regime benefit senior citizens more?

Senior citizens have a higher basic exemption limit under the old regime: Rs 3 lakh for those aged 60–80, and Rs 5 lakh for those above 80. The old regime also allows deductions for medical insurance premiums and medical expenditure, which are more relevant for seniors. For most senior citizens with investments and health insurance, the old regime is worth running through the calculator. The new regime does not offer a higher exemption for seniors.

Can I switch regimes mid‑year if my situation changes?

You inform your employer of your regime choice at the start of the year for TDS purposes. If your situation changes, you take a home loan mid‑year, for example, you can ask your employer to recalculate TDS, though not all employers accommodate mid‑year changes. You can always file your return under the different regime at the end of the year and claim a refund if excess TDS was deducted. The final choice is made at the time of filing the ITR.