Old Vs New Tax Regime: A Complete Guide to Benefits, Exemptions and Tax Planning

In India, there are currently two ways in which individuals can pay their income tax: the Old Tax Regime and the New Tax Regime. The Old Tax Regime allows taxpayers to reduce their taxable income by claiming various deductions and exemptions. On the other hand, the New Tax Regime offers lower tax rates but does not allow most deductions and exemptions. It is simpler and more straightforward. Taxpayers can choose the regime that best suits their income, expenses, and financial planning goals.

What do you understand by the old tax regime?

The old tax regime allows taxpayers to reduce their taxable income by claiming various deductions, exemptions, and rebates, such as those for savings, insurance, house rent, and home loans. Because of these benefits, people can lower the amount of tax they have to pay. However, the tax rates under this system are higher compared to the new tax regime.

The tax slab rates for the assessment year 2026-27 are as under.

• Income up to Rs 2,50,000 is exempt from tax for resident super senior citizens (above the age of 80), resident senior citizens (60 to 79 years), and all other individual taxpayers.
• Income between Rs 2,50,001 and Rs 3,00,000 is exempt from tax for resident super senior citizens and resident senior citizens. For all other individuals, it is taxable at 5%.
• Income between Rs 3,00,001 and Rs 5,00,000 is exempt from tax for resident super senior citizens, while it is taxed at the rate of 5% for resident senior citizens as well as for all other individuals.
• Income between Rs 5,00,001 and Rs 10,00,000 is taxed at a rate of 20% for resident super senior citizens, resident senior citizens, and all other individuals.
• For resident super senior citizens, resident senior citizens, and all other individuals, income above Rs 10,00,000 is taxed at the rate of 30%.

Deduction, Exemptions, and Rebate Available:

1. Taxpayers can reduce the amount of tax they have to pay by claiming deductions under Section 80C investments and expenses like PPF, ELSS, NSC, EPF, children’s school tuition fees, and repayment of home loan principal. Section 80D allows deduction for health insurance premiums paid for yourself and family. If you live in a rented house, you can claim House Rent Allowance (HRA) under Section 10(13A). If you have taken a home loan, the interest paid on it can be claimed under Section 24(b). Under Section 80E, interest paid on education loans can be deducted. Donations made to approved charities are allowed under Section 80G. Savings account interest can be claimed under Section 80TTA, and senior citizens can use 80TTB for higher limits. Lastly, Leave Travel Concession (LTC) under Section 10(5) helps you save tax on travel expenses during leave.

2. If you are a salaried person or a pensioner, the government allows you to deduct Rs 50,000 from your income before calculating tax.

3. The rebate under Section 87A allows individuals with a taxable income of up to Rs 5 lakh to get a tax relief of up to Rs 12,500. A surcharge is applied based on income levels. After calculating the income tax and any applicable surcharge, a health and education cess of 4% is added.

What do you understand by the new tax regime?

The new tax regime is a simplified, default system for income tax in India that offers lower tax rates but requires individuals to give up most common tax deductions and exemptions.

1. The tax slab rates for the assessment year 2026-27 are as under:

• The basic exemption limit under the new tax regime is Rs 4,00,000.
• A tax rate of 5% is applicable on income between Rs 4,00,001 to Rs 8,00,000.
• A tax rate of 10% is applicable on income between Rs 8,00,001 to Rs 12,00,000.
• A tax rate of 15% is applicable on income between Rs 12,00,001 to Rs 16,00,000.
• A tax rate of 20% is applicable on income between Rs 16,00,001 to Rs 20,00,000.
• A tax rate of 25% is applicable on income between Rs 20,00,001 to Rs 24,00,000.
• A tax rate of 30% is applicable on income above Rs 24,00,000.

2. If you are a salaried person or a pensioner, the government allows you to deduct Rs 75,000 from your income before calculating tax.

3. If your yearly income is up to Rs 12 lakh, you don’t have to pay any income tax because you get a full rebate under Section 87A. If your income is just above Rs 12 lakh, you may get marginal relief. If you earn more, a surcharge may be added depending on how high your income is. Apart from this, the government also charges a 4% health and education cess.

How can you identify which regime is more beneficial for you?

You can select between the regimes based on your financial situation, including income, deduction, and exemption eligibility and overall tax planning goals.

The old tax regime is better for:

1. People who invest in tax-saving options like PPF, ELSS, LIC, etc.
2. Those who claim many deductions, such as Home loan interest, Medical insurance (80D), Children’s education fees etc.
3. People who like to plan and save taxes through different schemes.

The new tax regime is better for:

1. People who do not invest much in tax-saving schemes.
2. Freshers, or new employees, who want simple tax rules.
3. Those who prefer lower tax rates and less paperwork.

How to choose the tax regime each financial year?

Although the new tax regime is the default, taxpayers can choose between the old and new regimes based on their preference. Salaried individuals can switch between the two regimes every financial year when filing their tax returns. Individuals with business income can opt for the old tax regime only once, and if they do, they must file Form 10-IEA on or before the due date of filing their income tax return.

Exemptions/deductions

The following are exemptions/deductions available under the old and new tax regimes as per section 115BAC:

Standard deduction (Section 16(ia)), leave travel concession (Section 10(5)), house rent allowance (Section 10(13A)), official and personal allowances (other than those as may be prescribed) (Section 10(14)), allowances to MPs/MLAs (Section 10(17)), entertainment allowance (Section 16(ii)), professional tax (Section 16(iii)), interest on housing loan for self-occupied house property (Section 24(b)), Deduction under Sections 80C to 80U other than specified under Section 80CCD(2) and Section 80CCH(2), Set-off of any loss under the head “Income from house property” with any other head of income and Exemptions or deductions for allowances or perquisites provided under any other law for the time being in force are available under the old tax regime. However, except for the standard deduction (Section 16(ia)), the above-mentioned exemptions/deductions are not available under the new tax regime.

Apart from this, the income level for rebate eligibility is Rs 5 lakh under the old regime and Rs 12 lakh under the new regime, the standard deduction is Rs 50,000 under the old regime and Rs 75,000 under the new regime, and the rebate under section 87A is Rs 12,500 under the old regime and Rs 60,000 under the new regime.

Tax benefits/advantages available to senior citizens under the New Tax Regime

Under the New Tax Regime, senior citizens do not get any special tax benefit based on age. Unlike the old tax regime, there are no separate higher exemption limits for senior or super senior citizens. But the basic exemption limit extended to Rs 4,00,000 from Rs 3,00,000 (assessment year 2026-27).

What should an employee keep in mind before choosing any regime?

Usually, employers ask employees to choose their tax regime at the beginning of the financial year so they can calculate and deduct the correct TDS from salary. However, this choice is not final. Employees can still change their selected tax regime later while filing their income tax return, based on what is more beneficial for them.

How is capital gain taxed in the two regimes?

Capital gains are taxed in the same way under both the old and new tax regimes. This means that whether a person chooses the old regime or the new regime, the rules for taxing short-term and long-term capital gains remain the same. The tax rates, holding periods, and exemptions related to capital gains do not change with the regime.

Income tax department’s tool to help taxpayers

The Income Tax Department’s website provides a comparison tool to help taxpayers make informed decisions. The Income Tax website, www.incometaxindia.gov.in, offers this tool to enable taxpayers to compare different options easily and choose the most suitable one.