With the implementation of a Default Income Tax Structure, it is no longer only an issue of selecting between how to choose between new and old tax regime. Rather, it is an essential aspect of strategic Financial and Tax Strategies for Taxpayers to consider when making long-term decisions regarding employment and their personal tax obligations. Consequently, Taxpayers must evaluate their income structure, exemptions, and deductions when making an investment in tax-saving plans (and tax returns) to reduce their overall tax liability (i.e., get the most tax benefits from the maximum amount of tax paid).
Why Regime Choice Matters More Now?
Tax reforms in India (primarily the New Tax Structure for FY 2025-26) have changed the significance of traditional deductions and exemptions (House Rent Allowance (HRA), Section 80C benefits, etc.) for the vast majority of Taxpayers. Based on the new structure, many Taxpayers may find that even without extensive tax planning or investing for tax-saving purposes, simply by paying taxes under the new structure, they will reduce their overall tax liability, which may appear to be a lower tax bill.
This is a critical difference from the old structure, as choosing the wrong tax structure can result in significant increases (in excess of lakhs of rupees) to a Taxpayer's taxable income due to not optimally planning the benefits of deductions and exemptions.
Also Read: A Practical Guide To Motor Vehicle Taxation & Compliance
What Are The Key Differences Between New And Old Tax Regimes?
The New Tax regime has increased the Standard Deduction to ₹75,000 for salaried employees. The New Tax regime has also increased the Rebate Threshold in Section 87A, allowing for an effective tax-free income of over ₹12.75 Lakh to be generated without needing to claim any exemption.
On the other hand, the Old Tax Regime has generally had higher base rate taxes than the New Tax regime; however, the Old Tax Regime does allow for the deduction of allowable expenses and the exemption of qualifying expenses when appropriately claimed and claimed to the maximum.
Comparison Of Tax Rate/Slable
The following is a clear example of how different tax rates apply based on the Tax Regime the taxpayer falls under in the Financial Year (F/Y) 2025-26 (Tax Year 2026-27):-
| Feature | Old Tax Regime | New Tax Regime |
|---|
| Tax Slab Structure | Higher base rates | Lower and more granular slabs |
| Deductions & Exemptions | Available (80C, HRA, 80D, etc.) | Largely unavailable |
| Standard Deduction | ₹50,000 | ₹75,000 (increased) |
| Effective Tax-Free Income | Lower | Up to ₹12.75 lakh (with standard deduction & rebate) |
| Filing Complexity | Higher | Lower |
| Best For | High deductions/exemptions | Low deductions/compliance simplicity |
This table clearly explains the new tax regime vs the old tax regime, which is better depends on individual income and deduction levels, not on slab rates alone.
The HRA Factor: Two Scenarios That Decide Your Choice
HRA plays a decisive role when evaluating the new tax regime vs the old tax regime calculation. Since HRA exemptions are not allowed under the new regime, taxpayers must assess their rent-to-income ratio carefully.
Scenario 1: High HRA with High Rent
In this situation, taxpayers with a large HRA and very high rent payments may see a greater tax benefit when filing using the old tax option because their HRA exemptions will greatly lower their taxable income. In such cases, the old tax regime exemptions list can outweigh the lower slab rates of the new regime.
Scenario 2: High HRA with Low Rent
In this case, HRA exemptions will provide a lower deduction amount, so the lower rates and simplicity of the new tax law will likely yield a better tax outcome for taxpayers who have minimal deductions.
The main point is that there is no “one size fits all.” You need to do the maths and determine what will work best for you before making any investment or tax-planning decisions.
Also Read: Vehicle Tax Payment Online: Step-by-Step Process & Requirements
Where Can Claim Deductions Under Each Tax Regime?
You should be aware of the deductions available to you for the new tax system and what was available to you before the introduction of the new tax system.
Deductions Available Under the New Tax System
Although the new tax system eliminates most of the available tax credits or deductions, some deductions, such as the Standard Deduction (for example, ₹75000 for salaried individuals) and certain contributions made by the employer, continue to exist under the new tax system, thereby simplifying the tax filing and reducing documentation requirements.
This structure suits those prioritising simplicity over optimisation and highlights both new tax regime benefits and drawbacks.
Deductions Available Under the Old Tax System
The old tax system offered several deductions, including the following:
-
Section 80C provides deductions of up to ₹1,50,000 for investments in the PPF, ELSS, EPF, life insurance, and other similar investments.
-
Section 80D provides deductions for medical insurance premiums paid by an individual directly.
-
House Rent Allowance (HRA) is a tax-exempt income.
-
The deductible interest on a home loan for a home purchased under Section 24(b)
-
Leave Travel Allowance (LTA) is a tax-exempt income.
For taxpayers who fully utilise the old tax regime exemptions list, taxable income can drop significantly.
Case Templates: Illustrative Tax Outcomes
To emphasise the planning importance, here are simplified tax outcomes from reliable estimates:
| Annual Income Level | Tax Under the New Tax Regime | Tax Under the Old Tax Regime | Key Insight |
|---|
| ₹12.75 lakh | ₹0 tax after standard deduction and Section 87A rebate | Tax payable unless substantial deductions (HRA, 80C, etc.) are claimed | The new regime is more beneficial for salaried taxpayers with limited deductions |
| ₹15.75 lakh | Around ₹1.05 lakh | Can go up to ₹2.7 lakh if deductions are not maximised | The new regime generally results in lower tax unless the old-regime deductions are very high |
| ₹25.75 lakh | Significantly lower due to flatter slab rates | Much higher tax liability because of higher effective slabs | The new regime is usually more tax-efficient at higher income levels |
These examples underline the importance of tax planning before investing rather than relying on slab appeal.
Who Yet Should Still Think of the Old Tax Regime?
Although the new regime is a simple one, the old regime might be in favour of taxpayers who:
For such individuals, the new tax regime vs the old tax regime, which is better often tilts in favour of the old structure.
Where the majority of taxpayers Erred last Assessment Year.
Lack of this increased the tax liabilities of many taxpayers since they failed to:
-
Assessment of both regimes before filing.
-
Properly record allowable deductions and exemptions.
-
Employ systematized comparative strategies like break-even analysis across regimes.
-
Improper planning or incomplete reporting of deductions usually led to unpleasant surprises: a very expensive error in financial planning.
Experts now strongly recommend running new tax regime vs old tax regime calculation using official tools or consulting professionals before filing.
Also Read: Learn How To Claim Section 54F Exemption For Tax Benefits
Documentation and compliance: What you should know.
The key to good tax planning, in any regime, is good documentation and compliance discipline. This includes:
-
Having evidence of deductions (investment receipts, insurance premium receipts, rent receipts in the HRA and so on).
-
Filling out forms and claims on time.
-
Having your cumulative deductions outlined correctly in your Income Tax Return (ITR).
The inability to document adequately may nullify deductions, with the result of an increased tax outgo, even though an older regime would otherwise be preferable.
Conclusion
Taxpayers used to only have to choose between filing using either the new or the old tax regime, but now this has evolved into an important planning decision because of the associated financial implications created by the changes made to the income tax slabs, an increase in the amount that can be claimed as a rebate, and the establishment of the new regime as the default tax regime.
To achieve maximum benefit from the options available under this new tax system, all individuals need to understand the implications of their individual situation as it relates to their income and deductions and what their long-term financial goals are before they begin making any investment or selecting a regime. In today’s system, those who invest after tax planning consistently achieve better outcomes than those who don’t.
An organised, pro-active approach, first plan, then invest, will result in minimising tax liabilities, avoiding errors in filing, and making certain your tax strategy effectively contributes to your overall financial goals.
Get the latest updates on government schemes and policies with Jaagruk Bharat. Join India's biggest Jaagruk Bharat community. Share your thoughts, questions, and favourite topics with us.
