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Old vs new tax regime

Part of Income tax. 7 min read. Free lesson with a short video, quiz and practice.

India has two income tax systems, called regimes. Each year you can be taxed under the new regime or the old regime. The new regime is the default: if you do nothing, it applies.

The new regime: lower rates, few deductions

The new regime has lower slab rates and a big rebate, so income up to ₹12 lakh is effectively tax-free (₹12.75 lakh for salaried people, after the standard deduction). In return, most deductions are not allowed. What you still get:

  • Standard deduction of ₹75,000 on salary or pension.
  • Your employer's contribution to NPS (up to 14% of salary).

The old regime: higher rates, many deductions

The old regime taxes income above ₹2.5 lakh (higher limits for seniors) at 5%, 20% and 30%. But it allows many deductions, such as:

  • Standard deduction of ₹50,000 on salary.
  • Up to ₹1.5 lakh under 80C (EPF, PPF, ELSS, life insurance and more).
  • Health insurance premium under 80D.
  • Extra ₹50,000 for your own NPS contribution.
  • HRA exemption for rent, and home loan interest up to ₹2 lakh.

A worked example

Arjun earns ₹15,00,000. He has these old-regime deductions: standard deduction ₹50,000, 80C ₹1,50,000, health insurance ₹25,000, own NPS ₹50,000 and HRA exemption ₹1,20,000. Total: ₹3,95,000.

  • Old regime: taxable income ₹11,05,000. Tax: ₹12,500 + ₹1,00,000 + ₹31,500 = ₹1,44,000, plus cess = ₹1,49,760.
  • New regime: taxable income ₹14,25,000 (only the ₹75,000 standard deduction). Tax with cess = ₹97,500.

Even with almost ₹4 lakh of deductions, the new regime costs Arjun about ₹52,000 less. The old regime usually wins only when deductions are very large, for example a big home loan interest bill plus full 80C, 80D, NPS and HRA.

Switching between regimes

  • Salaried people with no business income can pick either regime every year when filing the return. Tell your employer your choice at the start of the year so it deducts the right TDS.
  • People with business income (including F&O traders) cannot switch back and forth every year; the choice is restricted.

Work out your tax both ways each year. The income-tax portal has a free calculator that compares them.

Key takeaways

  • The new regime is the default; it has lower rates but few deductions.
  • Under the new regime, income up to ₹12 lakh (₹12.75 lakh for salaried) is effectively tax-free.
  • The old regime allows 80C, 80D, HRA, home loan interest and other deductions.
  • Compare both every year: the old regime usually wins only with very large deductions.
  • Salaried people can choose each year; people with business income have limited switching.

Quick quiz

  1. Which regime applies if you don't choose one?

    Answer: New regime. The new regime is the default.

  2. Which deduction is allowed in the new regime?

    Answer: Standard deduction of ₹75,000. The new regime allows the ₹75,000 standard deduction but not 80C, HRA or home loan interest on a self-occupied house.

  3. When does the old regime usually work out cheaper?

    Answer: When deductions are very large. Only large deductions can make up for the old regime's higher rates.

  4. Who can freely switch regimes every year?

    Answer: Salaried people with no business income. Salaried people without business income can choose each year when filing.