Choosing between the old and new tax regimes has become one of the most important tax decisions for salaried employees. While the new tax regime offers enhanced Section 87A tax rebate and is now the default option, the old tax regime still allows several deductions and exemptions that can significantly reduce taxable income and thus the net tax outgo.
So, if you earn Rs 15 lakh, Rs 20 lakh or Rs 25 lakh annually, which system will help you earn more on taxes? The answer really hinges on the deductions and exemptions you are eligible to claim. Here's a comparison.
How much income tax will you pay under the old and new tax regimes for FY 2025-26?
To compare both regimes fairly, the tax calculations are based on a common set of assumptions. According to Akhil Chandna, Partner & Global People Solutions Leader, Grant Thornton Bharat, the following deductions and exemptions have been considered under the old tax regime:
- Standard deduction: Rs 50,000
- Section 80C: Rs 1,50,000
- Section 80CCD(1B) (additional NPS): Rs 50,000
- Section 80D: Rs 25,000
- HRA exemption: Rs 2,00,000
Total deductions/exemptions assumed under old regime: Rs 4,75,000
Under the new regime, only the standard deduction of Rs 75,000 is considered. Deductions under Sections 80C, 80D, HRA exemption, and Section 80CCD(1B) are generally not available. Employer contribution to NPS under Section 80CCD(2) continues to be available subject to prescribed limits.
|
Particulars
|
Salary Rs 15 lakhs
|
Salary Rs 20 lakhs
|
Salary Rs lakhs
|
|||
|
Old Tax Regime
|
New Tax Regime
|
Old Tax Regime
|
New Tax Regime
|
Old Tax Regime
|
New Tax Regime | |
| Gross Salary | 15,00,000 | 15,00,000 | 20,00,000 | 20,00,000 | 25,00,000 | 25,00,000 |
| Less: Deductions | 4,75,000 | 75,000 | 4,75,000 | 75,000 | 4,75,000 | 75,000 |
| Taxable Income | 10,25,000 | 14,25,000 | 15,25,000 | 19,25,000 | 20,25,000 | 24,25,000 |
| Income Tax (Including HEC @ 4%) | 1,24,800 | 97,500 | 2,80,800 | 1,92,400 | 4,36,800 | 3,19,800 |
Which tax regime helps you save more tax?
Based on the above assumptions, the new tax regime results in a lower tax liability across all three salary levels.
|
Annual Salary
|
Tax under Old Regime (Rs)
|
Tax under New Regime (Rs)
|
Potential Tax Savings
|
Beneficial Tax Regime
|
| Rs 15 lakhs | 1,24,800 | 97,500 | 27,300 | New Regime |
| Rs 20 lakhs | 2,80,800 | 1,92,400 | 88,400 | New Regime |
| Rs 25 lakhs | 4,36,800 | 3,19,800 | 1,17,000 | New Regime |
According to the above calculations, the new tax regime results in lower tax liability across all three salary levels. The tax advantage also widens as income increases because the lower slab rates reduce the overall effective tax liability.
“In the above illustration, a salaried employee earning Rs 25 lakh who claims standard deductions, Section 80C investments, Section 80D, additional NPS deduction and moderate HRA exemption would still pay approximately Rs 1.17 lakh less tax under the new tax regime,” says Chandna.
Why your tax calculations may differ
The above comparison should be treated only as an illustration. Your actual tax liability may differ depending on your salary structure, deductions, exemptions and employer-provided benefits.
For example, your actual HRA exemption may be much higher than Rs 2 lakh. Similarly, you may be claiming interest on a home loan, making higher NPS contributions through your employer under Section 80CCD(2), or receiving tax-efficient salary components.
Also read: Zero income tax in Form 16? You may still have to file an ITR in these cases
As Chandna explains, taxpayers should not choose a tax regime merely by comparing slab rates. Instead, they should calculate their tax under both regimes after considering their actual deductions, exemptions and employer-provided benefits before making a decision.
When can the old tax regime be a better option?
Although the new tax regime works better in the above illustration, the old tax regime can still prove beneficial for taxpayers who can claim substantial deductions and exemptions.
According to Chandna, the old regime may be preferable in situations where a taxpayer:
- Lives in rented accommodation and claims a significant HRA exemption under Section 10(13A).
- Contributes the entire Rs 1.5 lakh under Section 80C through EPF, PPF, ELSS or life insurance etc.
- Invests an additional Rs 50,000 in NPS under Section 80CCD(1B).
- Pays health insurance premiums qualifying under Section 80D.
- Claims interest deduction of up to Rs 2 lakh on a self-occupied housing loan under Section 24(b).
- Has substantial tax-free allowances and exemptions available through salary structuring.
Many middle- and senior-level salaried employees who combine HRA exemption, housing loan interest, NPS and Section 80C benefits can accumulate deductions exceeding Rs 5 lakh to Rs 7 lakh annually. In such cases, the old regime may either match or outperform the new regime despite higher slab rates, he explains.
How much deduction is required for the old tax regime to become more tax-efficient?
A common misconception is that the new tax regime is always better because of its lower tax rates. However, the deciding factor is not the tax slab alone but the total deductions available under the old regime.
According to Neeraj Agarwala, Senior Partner, Nangia & Co LLP, at an annual salary of Rs 15 lakh, the old tax regime becomes marginally more tax-efficient when the taxpayer is able to claim:
- Rs 2 lakh of deductions under Chapter VI-A; and
- Around Rs 3.5 lakh of additional deductions or exemptions, such as House Rent Allowance (HRA) or deductions under Section 80G for eligible donations.
In this scenario, the tax liability under the old regime is slightly lower than under the new regime. However, as income increases, the level of deductions required to make the old tax regime competitive also rises, he explains.
Therefore, taxpayers with high eligible deductions and exemptions should evaluate both regimes before filing their return, while those with limited deductions are likely to benefit more from the new tax regime.
