Old vs New Tax Regime 2025 | Which Saves More Tax in FY 2025-26?

The Dawn of the Dual Tax Regimes: A Personal Reflection

In February 2020, amidst global concerns over the COVID-19 pandemic, I found myself, like many others, eagerly anticipating India's Union Budget. As a software developer, the weight of income tax, GST, and other levies often felt burdensome. The middle-class salaried community hoped for relief, and the introduction of the new tax regime seemed promising. However, the initial excitement waned upon realizing that this regime offered reduced tax rates but eliminated popular deductions and exemptions. The absence of benefits like Section 80C deductions, House Rent Allowance (HRA), and others made the new regime less appealing to those who had structured their finances around these exemptions.

Key Deductions and Exemptions Under the Old Tax Regime

The old tax regime provided various avenues to reduce taxable income:

• Section 80C: Deductions up to ₹1.5 lakh for eligible investments/savings: PPF (15-year, government-backed), EPF/VPF (retirement corpus), ELSS mutual funds (3-year lock-in, market-linked), tax-saving FDs (5-year lock-in), NSC, life insurance premiums, and certain tuition fees. Choose instruments based on goals—not just for deduction chasing.
• Section 80D: Health insurance premiums for self, spouse, dependent children + parents. Base limit ₹25,000 (self/family) + additional ₹25,000 for non-senior parents or ₹50,000 if parents are senior citizens (i.e. potential total ₹75,000). Includes preventive health check-up (within sub-limits).
• House Rent Allowance (HRA): Exemption for those paying rent, subject to conditions.
• Standard Deduction: A flat deduction of ₹50,000 from salary income.
• Interest on Home Loan (Section 24(b)): Deduction up to ₹2 lakh per financial year on interest for a self-occupied property (conditions: completion certificate, loan purpose = acquisition/construction). Interest beyond this cap still reduces income if the property is let out (different rules apply).

Evolution of the New Tax Regime: 2021 to 2025

The new tax regime, introduced in 2020, underwent several modifications to make it more attractive:

• 2021: No significant changes were made, likely due to the economic impact of the pandemic.
• 2022: The regime remained largely unchanged, with the government focusing on economic recovery.
• 2023-24: A pivotal year where the standard deduction of ₹50,000 was extended to the new tax regime. Additionally, employer contributions to the National Pension System (NPS) became exempt, making the regime more appealing.
• 2024-25: The standard deduction was increased to ₹75,000, and tax slabs were adjusted to reduce liabilities for middle-income earners.

Tax Slabs for FY 2024-25

The Landmark Shift: FY 2025-26

The Union Budget of 2025 marked a significant shift in India's taxation landscape:

• Basic Exemption Limit: Increased from ₹3 lakh to ₹4 lakh.
• Standard Deduction: Enhanced to ₹75,000.
• Tax Rebate (Section 87A): Raised to ₹60,000, effectively making income up to ₹12 lakh tax-free.
• Introduction of a 25% Tax Slab: For income between ₹20 lakh to ₹24 lakh.

Tax Slabs for FY 2025-26

A Comparative Analysis: Old vs. New Tax Regime

Consider a hypothetical individual with an annual income of ₹25 lakh in FY 2025-26:

Under the Old Tax Regime

Under the New Tax Regime (FY 2025-26)

Tax Calculation (As per new tax slabs)

• ₹4,00,000 - 0% = ₹0
• ₹4,00,001 - ₹8,00,000 (5%) = ₹20,000
• ₹8,00,001 - ₹12,00,000 (10%) = ₹40,000
• ₹12,00,001 - ₹16,00,000 (15%) = ₹60,000
• ₹16,00,001 - ₹20,00,000 (20%) = ₹80,000
• ₹20,00,001 - ₹24,00,000 (25%) = ₹1,00,000
• ₹24,00,001 - ₹25,00,000 (30%) = ₹30,000

Total Tax Liability = ₹3,30,000 (excluding cess)

Comparing the Two

Clearly, the new tax regime offers better savings for this individual, and this trend holds true for many salaried professionals in the ₹12-25 lakh range.

Which Tax Regime is Better for Different Income Brackets?

The best tax regime depends on income level and available deductions. Below is a general guideline:

Old vs New Regime for Freelancers & Business Owners (FY 2025-26)

If you are a freelancer, consultant, or small business owner, your tax optimization lens differs from a pure salaried professional. Two widely discussed salary-centric benefits—Standard Deduction and House Rent Allowance (HRA)—apply only to salary income. If you do not draw a formal salary (or only a small one), these levers matter less in the New Regime and do not offset lost Chapter VI-A deductions (like 80C, 80D) under it.

Core business expenses (depreciation, software subscriptions, office/studio rent, professional fees, domain & hosting, travel directly tied to client work, marketing, payment gateway charges) remain deductible in computing business income under both regimes. What the New Regime largely removes are personal / savings oriented deductions (e.g. 80C investments, 80D medical insurance, 80E education loan interest, HRA, LTA) that can stack meaningfully in the Old Regime when you also have salary or mixed income.

Therefore, freelancers & proprietors with high genuine business expense ratios (30–60% of gross) but minimal personal tax-saving investments often see only a small difference between regimes—making the New Regime attractive for simplicity. Conversely, those who: (a) also take a structured salary from their entity, (b) pay significant medical insurance, and (c) invest in 80C instruments or NPS, may still find the Old Regime superior once aggregated deductions cross the ~₹5–6L threshold.

Quick Freelancer Decision Grid:

• Pure professional receipts, low 80C/80D usage: New Regime usually simpler & comparable tax.
• Mixed salary + business + rent + home loan interest: Model both; Old can win if deductions stack past ~₹5L.
• High profit with low expenses and few investments: New Regime (lower slab effect + minimal forgone deductions).
• Planning large retirement/NPS + insurance allocations this year: Test Old—compounding deductions may tip the scales.

Always run numbers with a calculator that lets you enter both business expenses and personal deductions, or consult a tax professional—especially if you expect income volatility or are considering incorporation (LLP / Pvt Ltd) where salary structuring reintroduces more Old Regime levers.

How the Government Phased Out the Old Tax Regime

The shift from the old to the new tax regime was a gradual but clear move.

• No major changes in the old tax regime post-2020.
• Incremental enhancements to the new regime (e.g., Standard Deduction inclusion, higher rebate limits, and better slabs).
• Reduced paperwork and compliance requirements in the new tax regime.
• The final blow came in Budget 2025, with ₹12L income tax-free, simplified slabs, and reduced tax burden for middle-class professionals. The old tax regime, though still available, is fading into irrelevance.

Could the Old Tax Regime Have Been Improved Instead?

One major criticism of the government’s approach was its reluctance to update the old tax regime with inflation-adjusted slabs and exemptions. For instance:

• Section 80C (₹1.5 lakh limit) remained unchanged for over a decade while living costs skyrocketed.
• Home loan interest deduction (₹2 lakh) wasn’t updated despite housing prices increasing significantly.
• Standard deduction was stagnant at ₹50,000 until the new regime changes.

Had the government updated these benefits in line with inflation, there wouldn’t have been a need for a new tax regime. Instead, they pushed a "clean slate" approach, making tax calculations simpler while reducing tax savings from deductions.

Will the Old Tax Regime Survive?

With each passing budget, it’s evident that the government wants more taxpayers under the new tax regime.

• Fewer people are opting for it each year.
• The new tax regime now offers tax-free income up to ₹12 lakhs, removing the incentive for most individuals to claim deductions.
• It’s likely that in the next 2-3 years, the old tax regime may be discontinued completely.

Final Thoughts & Tips for Choosing the Right Regime

• If you have significant deductions (home loan, EPF, insurance, HRA, etc.), the old tax regime still works for you.
• If you prefer a hassle-free tax process with minimal paperwork, the new tax regime is better.
• If your income is below ₹12 lakh, the new tax regime is the clear winner.
• If you earn above ₹30 lakh and have multiple investments, evaluate carefully. You might still benefit from the old tax regime.

Conclusion: Is the Old Tax Regime Still Relevant in 2025?

The short answer? Barely.

For most salaried individuals, the new tax regime now offers greater tax savings, fewer compliance hassles, and a clearer tax structure. With ₹12 lakh income now tax-free, even the biggest supporters of the old regime (like me) have switched to the new tax system.

Unless the government revives the old tax regime with inflation-linked deductions, it's only a matter of time before it becomes a thing of the past.

The future of taxation is simpler, and for once, that’s a good thing.