Old Tax Regime vs New Tax Regime: Which One Should You Pick in FY 2025-26?
March. HR sends that email. ‘Please declare your tax regime by Friday.’ Two options, a tight deadline, and absolutely no time to think.
Most people pick the same regime they picked last year. Some switch because a friend said the new one is better. A few just leave it blank and let the default kick in.
I did exactly that for four years. In FY 2023-24, I switched to the new tax regime because my manager said it made sense. It didn’t — not for my situation. I ended up paying about ₹18,000 more in tax than I needed to. Eighteen thousand rupees. Gone. Because I didn’t take 30 minutes to actually compare both options.
This article is those 30 minutes. Let’s sort it out properly, with real numbers and no jargon.
What this article covers
Old regime vs new regime: what’s actually different?
The old tax regime has been around for decades. Higher tax rates, but you can reduce your taxable income by claiming deductions — Section 80C investments, HRA, home loan interest, health insurance premiums, NPS, and more. The idea: the government gives you lower taxes in exchange for investing or spending in certain approved ways.
The new tax regime, introduced in 2020 and made the default from FY 2024-25, flips the deal. Lower slab rates, but almost no deductions allowed. The government’s pitch: simpler taxes, lower rates — and from FY 2025-26, zero tax for most people earning up to ₹12.75 lakh a year.
Neither is universally better. The winner for you depends entirely on how much you can claim as deductions under the old regime versus how much the lower slab rates of the new regime save you.
The tax slabs for FY 2025-26 — both regimes side by side
Budget 2025 revised the new regime slabs significantly. Budget 2026 made no changes — so these numbers apply for both FY 2025-26 (for which you’ll file by July 31, 2026) and FY 2026-27.
| Income Range | Old Regime Rate | New Regime Rate | Notes |
| Up to ₹2.5 lakh | Nil | — | Old regime basic exemption |
| Up to ₹4 lakh | — | Nil | New regime basic exemption |
| ₹2.5L – ₹5L | 5% (87A rebate = nil) | — | Effectively zero in old regime too |
| ₹4L – ₹8L | 20% | 5% | New regime far lower here |
| ₹8L – ₹10L | 20% | 10% | New regime lower here too |
| ₹10L – ₹12L | 30% | 10% | Big gap — before deductions |
| ₹12L – ₹16L | 30% | 15% | |
| ₹16L – ₹20L | 30% | 20% | |
| ₹20L – ₹24L | 30% | 25% | |
| Above ₹24L | 30% | 30% | Same rate at top end |
Two more things that differ between the regimes:
- Standard deduction: ₹75,000 under the new regime, ₹50,000 under the old regime
- Section 87A rebate: Up to ₹60,000 under the new regime for taxable income up to ₹12 lakh — effectively making income up to ₹12 lakh tax-free. Under the old regime, the rebate is ₹12,500 for taxable income up to ₹5 lakh.
So if your gross salary is ₹12.75 lakh or below — after subtracting the ₹75,000 standard deduction your taxable income is ₹12 lakh — you pay zero tax under the new regime. Nothing. That’s the single biggest advantage of the new regime for most junior and mid-level employees.
What deductions can you actually claim under the old regime?
This is where the old regime earns its keep. The deductions below are what you can stack against your gross income before tax is calculated. None of them exist in the new regime (except the standard deduction and employer NPS contribution).
| Deduction | Maximum Limit | What counts |
| Section 80C | ₹1,50,000 | EPF, PPF, ELSS, life insurance, home loan principal, NSC, children’s tuition |
| Section 80D | ₹25,000 (self/family) + ₹50,000 if parents are senior citizens | Health insurance premiums |
| HRA exemption | Actual HRA received, rent paid minus 10% of basic, or 50%/40% of basic — whichever is lowest | If you pay rent and your employer pays HRA |
| Section 24(b) | ₹2,00,000 | Home loan interest on self-occupied property |
| Section 80CCD(1B) | ₹50,000 (over and above 80C) | Your own NPS contribution |
| LTA | Actual travel cost (twice in 4-year block) | Domestic travel for self and family |
| Standard deduction | ₹50,000 | Automatic — no proof required |
If you can max out 80C, contribute to NPS, pay rent, and pay health insurance premiums for yourself and senior citizen parents, your total deductions can easily reach ₹4.5 to ₹5.5 lakh. That’s a large reduction in taxable income — which is what makes the old regime worth it for the right person.
Real examples: Priya, Rohit, and Vikram — same salary, three different answers
Priya — ₹15 lakh salary, maximum deductions
Priya works in Pune, pays rent of ₹20,000 per month, maxes out 80C through EPF and ELSS, has health insurance for herself and her senior citizen parents, and puts ₹50,000 into NPS annually.
Her deductions under old regime: Standard deduction ₹50,000 + 80C ₹1,50,000 + 80D ₹75,000 + HRA approximately ₹1,40,000 + NPS 80CCD(1B) ₹50,000 = roughly ₹4,65,000 total.
Taxable income under old regime: ₹15,00,000 – ₹4,65,000 = ₹10,35,000. Tax (with 4% cess): approximately ₹1,18,000.
Taxable income under new regime: ₹15,00,000 – ₹75,000 = ₹14,25,000. Tax (with 4% cess): approximately ₹1,63,000.
Old regime saves Priya roughly ₹45,000. Old regime wins — clearly.
Rohit — ₹15 lakh salary, minimal deductions
Rohit lives with his parents in Hyderabad, has no home loan, has basic health insurance for himself only, and hasn’t got around to maxing out 80C yet.
His deductions under old regime: Standard deduction ₹50,000 + some 80C ₹70,000 + 80D ₹15,000 = roughly ₹1,35,000 total.
Taxable income under old regime: ₹15,00,000 – ₹1,35,000 = ₹13,65,000. Tax (with 4% cess): approximately ₹2,14,000.
Taxable income under new regime: ₹14,25,000. Tax (with 4% cess): approximately ₹1,63,000.
New regime saves Rohit roughly ₹51,000. Same salary as Priya. Completely opposite answer.
Vikram — ₹25 lakh salary, full deductions
Vikram earns ₹25 lakh, maxes out everything — 80C, NPS, home loan interest, health insurance, HRA. His total deductions come to about ₹6,00,000.
Taxable income under old regime: ₹25,00,000 – ₹6,00,000 = ₹19,00,000. Tax (with 4% cess): approximately ₹3,90,000.
Taxable income under new regime: ₹25,00,000 – ₹75,000 = ₹24,25,000. Tax (with 4% cess): approximately ₹4,56,000.
Old regime saves Vikram about ₹66,000 even at ₹25 lakh — because he’s stacking every available deduction. At this income level, the new regime’s lower slab rates are not enough to outweigh ₹6 lakh in deductions.
The HRA rule change from April 2026 — important for Pune, Bengaluru, Hyderabad, Ahmedabad
This is new and most people haven’t heard about it yet.
Under the Income Tax Rules 2026 (effective April 1, 2026), four more cities have been added to the ‘metro’ category for HRA purposes: Bengaluru, Pune, Hyderabad, and Ahmedabad. Earlier, only Delhi, Mumbai, Kolkata, and Chennai got the higher HRA exemption of 50% of basic salary.
From April 2026, if you live and work in any of these eight cities and pay rent, you can now claim HRA exemption at 50% of basic salary — up from 40% previously for the four newly added cities.
Why does this matter? Because a higher HRA exemption means more deductions, which means the old regime becomes more attractive for residents of Bengaluru, Pune, Hyderabad, and Ahmedabad than it was before April 2026.
Example: If your basic salary is ₹60,000/month and you pay ₹25,000 rent, your HRA exemption just went from 40% of basic (₹24,000/month) to 50% of basic (₹30,000/month). That’s an extra ₹72,000 in annual deductions under the old regime. Worth factoring in when you calculate.
The break-even guide: when does old regime make sense?
Here’s the practical question: how much do your deductions need to be for the old regime to win?
The answer shifts with your income level. Higher income = higher marginal rate under old regime = deductions save more. But the new regime’s lower rates also save more at higher incomes. Here’s a rough guide:
| Annual Gross Salary | Approx. deductions needed for old regime to win | Otherwise go new regime |
| Up to ₹12.75 lakh | Almost impossible — new regime wins at zero tax | New regime wins clearly |
| ₹13L – ₹18L | ₹3.5 lakh or more in deductions | New regime wins below this |
| ₹18L – ₹25L | ₹4.5 lakh or more in deductions | New regime wins below this |
| Above ₹25L | ₹5.5 lakh or more in deductions | Always calculate both — it’s close |
These are approximate — the only accurate way is to calculate both side by side for your specific numbers. The Income Tax Department’s own portal (incometax.gov.in) and ClearTax both let you compare regimes before filing. Use that tool. Don’t rely on rough rules.
Can you switch regimes every year?
Yes — if you are a pure salaried employee with no business income. You can switch between old and new tax regime every year at the time of filing your ITR.
Your employer will ask you to declare your regime at the start of the year for TDS purposes. If you declare incorrectly, don’t panic — you can correct it when you file your actual return. The ITR filing deadline for FY 2025-26 is July 31, 2026 for salaried individuals.
One exception: if you have business or professional income, switching back from new to old regime involves a one-time election and comes with conditions. For pure salaried employees, it’s fully flexible year to year.
Practical tip: Keep your salary slips and investment proofs ready before you decide. The calculation is only as good as the data you put in. If you have a CA, ask them to run both scenarios for your specific numbers — most CAs do this as part of tax filing anyway.
What about the new Income Tax Act 2025?
You may have seen headlines about the ‘new Income Tax Act 2025‘ coming into effect from April 1, 2026. Here’s what actually changes for salaried people — and what doesn’t.
What doesn’t change: Tax slab rates, deduction limits, and rebates are exactly the same. Both old and new regimes continue exactly as they were. Budget 2026 confirmed no changes to slabs.
What does change: The old Income Tax Act 1961 is replaced by a simplified, restructured law. Provisions are reorganised into 23 chapters. Language is cleaner. Section numbers have changed (your CA will know). The ‘Tax Year’ concept replaces the Previous Year / Assessment Year terminology — so FY 2026-27 becomes Tax Year 2026-27 going forward.
For your FY 2025-26 ITR (filed by July 31, 2026): No impact. You continue under the old framework. The new Act applies from Tax Year 2026-27 onwards.
In short: same tax math, new plumbing. Don’t let the headlines confuse you into thinking slab rates changed — they didn’t.
What to do before July 31, 2026
- Dig out your Form 16 from your employer. This shows your actual salary components, TDS deducted, and which regime your employer used for TDS.
- List all deductions you can genuinely claim: EPF contributions (check your salary slip — see our guide to reading your salary slip), PPF deposits, ELSS investments, health insurance premiums, rent paid, NPS contributions.
- Go to incometax.gov.in — use the tax calculator under ‘Quick Links’ to calculate your exact tax under both regimes. Takes 10 minutes.
- If your deductions total less than ₹3.5 lakh (₹13L–₹18L salary) or ₹4.5 lakh (₹18L–₹25L salary), the new regime likely wins. If you’ve maxed everything out — pick old.
- File your ITR by July 31, 2026. If you’re filing yourself, check our guide on how to file your ITR without a CA. Missing the deadline means a late fee of up to ₹5,000 and loss of some deductions.
One last thing. Don’t make this decision based on what your colleague picked. Don’t make it based on what HR recommended. Run your own numbers. The best tax regime is the one that keeps more money in your account — and that answer is different for every person.
Related reading on The Salary Investor
- Section 80C: The Complete Tax-Saving Guide for Salaried Indians
- ELSS vs PPF: Which Tax-Saving Investment Should You Pick?
- NPS vs PPF: Which Is Better for Your Retirement?
- HRA Exemption Guide for Salaried Employees in India
- How to File Your ITR Yourself: A Step-by-Step Guide for Salaried Indians
Disclaimer: Tax slab rates, deduction limits, and rebate figures in this article are based on Budget 2025 and are applicable for FY 2025-26 (AY 2026-27). Budget 2026 made no changes to these slabs. The Income Tax Act 2025 came into effect from April 1, 2026 but does not change tax slab rates. Tax calculation examples used in this article are illustrative only — your actual liability will depend on your specific income components, eligible deductions, surcharge, and cess. The HRA expansion to Pune, Bengaluru, Hyderabad, and Ahmedabad is effective under the Income Tax Rules 2026 from April 1, 2026. This article is for general educational purposes only and does not constitute tax advice. Please consult a qualified Chartered Accountant or SEBI-registered financial advisor before making decisions about your tax regime.
Sources:Income Tax Slabs FY 2025-26 (ClearTax, May 2026) · Union Budget 2025 Tax Highlights (Income Tax Department) · Income Tax Changes from April 2026 (ClearTax, April 2026) · ITR Filing Due Date FY 2025-26 (BusinessToday, April 2026) · Income Tax Slab Rates FY 2025-26 (HDFC Life, 2026) · Income Tax Act 2025: New Law from April 2026 (Zoho Payroll, 2026)
He figured out most of what he knows about personal finance not from courses or advisors, but from years of reading, making mistakes, and fixing them. The Salary Investor is his attempt to save other salaried Indians the same time and money.
He is not a CA or a SEBI-registered advisor. He writes as a fellow salaried person who has been in the trenches — navigating EPF, ITR, 80C, salary slips, and market volatility.