Old Tax Regime vs. New Regime: Which to Choose for Financial Year 2025-26? With Automatic Income Tax Preparation Software in Excel for the F.Y.2025-26 as per Budget 2025

[Pranab Bandyopadhyay]

Old Tax Regime Vs. New Tax Regime, which one to choose for Financial Year 2025-26, i.e. Assessment Year 2026-27? 

Summary: The decision between the old and new tax regimes for the Assessment Year 2026-27 largely depends on an individual’s income structure and eligibility for various exemptions and deductions.

The old tax regime allows a wide range of deductions, such as standard deductions, HRA, and 80C benefits, making it beneficial for those who invest in tax-saving instruments and claim exemptions. In contrast, the new tax regime offers reduced tax rates, a higher basic exemption limit, and a simplified filing process but limits deductions and exemptions, making it suitable for individuals who prefer fewer calculations and do not claim many deductions.

While the old regime remains favourable for those with significant tax-saving opportunities, the new regime may be more advantageous for those seeking simplicity and lower tax burdens with minimal deductions. Ultimately, individuals must evaluate their specific tax liabilities and decide based on which regime aligns better with their financial situation and goals.

Introduction

After the announcement of significant changes in the income tax slabs by the Honourable Finance Minister of India, Smt. Nirmala Sitharaman, on 1st February 2025, many salaried individuals are wondering: Which tax regime—old or new—is more beneficial for them for the Assessment Year 2026–27?

For salaried taxpayers, choosing the right tax regime is especially important, as it directly affects take-home salary and annual tax savings.

In this article, we will explore both tax regimes, compare the available exemptions and deductions, and help you make an informed decision based on your income structure and eligible benefits.

Old Tax Regime The old tax regime offers more deductions and exemptions compared to the new tax regime, making it a preferred choice for individuals who can take advantage of these benefits. Additionally, the Budget 2025 introduced changes in tax slab rates. The applicable tax slabs under the old regime are as follows:

TAX SLAB                                                  TAX RATE (in %)

Upto Rs. 2,50,000.                                                   0

From Rs. 2,50,001 to Rs. 5,00,000                          5

From Rs. 5,00,001 to Rs. 10,00,000                        20

Above Rs. 10,00,000.                                              30

Under the old tax regime, individuals with a total income of up to Rs. 5,00,000 (excluding income taxable at special rates) can claim a rebate of Rs. 12,500 under Section 87A of the Income Tax Act, 1961. This effectively reduces their tax liability to zero.

Dedications and Exemptions

One of the biggest advantages of the old tax regime is the availability of various deductions that help salaried individuals reduce their taxable income. The most commonly used deduction is the standard deduction of Rs. 50,000.

Deductions allowed under the head Salaries are as follows:-

Section & Name of Deductions	Amount of Deduction allowed	Conditions
Standard deduction	Rs. 50,000/-	Available to all salaried individuals.

Employment Tax Rs. 2,500/- per month It is allowed only if the employee pays it. If the employer is paid employment tax on behalf of the employee, then the employee didn’t claim a deduction for the same.

Dedications under Chapter VI-A

In addition to salary-related deductions, several other deductions under Chapter VI-A help taxpayers lower their tax liability under the old regime. These include:

Section 80C – Deductions for investments in PPF, EPF, Life Insurance, ELSS, NSC, etc. (up to Rs.1,50,000).

Section 80D – Deductions for health insurance premiums paid for self and family.

Section 80E – Deduction for interest paid on an education loan.

Section 80TTB – Deduction for interest income earned by senior citizens.

Exemptions in the Old Tax Regime

House Rent Allowance (HRA) – Exemption available if the employee pays rent and meets the eligibility conditions.

Leave Travel Allowance (LTA) – Exemption available for travel expenses incurred on eligible journeys.

With over 70 deductions and exemptions available, salaried individuals can significantly reduce their tax liability under the old tax regime. However, it is essential to evaluate whether claiming deductions makes the old regime more beneficial than the new one

New Tax Regime

The new tax regime introduces wider income slabs and reduced tax rates, offering potential tax relief to salaried individuals, especially those who do not claim many deductions. The updated tax slabs, as announced in Budget 2025, are as follows:

TAX SLAB                                                   TAX RATE (in %)

Upto Rs. 4,00,000.                                                       0

From  Rs. 4,00,001 to Rs. 8,00,000                              5

From  Rs. 8,00,001 to Rs. 12,00,000                          10

From  Rs. 12,00,001 to Rs. 16,00,000                        15

From  Rs. 16,00,001 to Rs. 20,00,000                         20

From  Rs. 20,00,001 to Rs. 24,00,000                         25

Above Rs. 24,00,000.                                                   30

Under the new tax regime, individuals with a total income of up to Rs. 12,00,000 (excluding income taxable at special rates) can claim a rebate of Rs. 25,000 under Section 87A of the Income Tax Act, 1961. This effectively reduces their tax liability to zero.

Dedications and Exemptions

Unlike the old regime, the new tax regime allows limited deductions and exemptions. However, a few key benefits are still available to salaried individuals and employers, as outlined below:

Standard Deduction:- Rs. 75,000/- is available to all salaried individuals (as per Budget 2025 amendments).

Employer’s contribution to NPS [80CCD(2)]:- Deduction is allowed up to 20% of salary to the employer, if contributed by the him to the National Pension Scheme (NPS).

Note:- Under the new tax regime, most of the exemptions available in the old regime are not allowed. Key exemptions like House Rent Allowance (HRA) and Leave Travel Allowance (LTA)—which significantly benefit salaried individuals—are not available if one opts for the new regime.

However, the government has allowed a few specific allowances to continue under the new regime, primarily to reimburse actual expenses incurred in the course of employment. These four allowances are permitted under the new regime:

1. Daily Allowance – Granted to meet daily expenses while on duty.
2. Conveyance Allowance – For expenses incurred while performing official duties.
3. Travelling Allowance – To cover travel expenses for official tours or transfers.
4. Transport Allowance – Allowed only to specially-abled employees for commuting between residence and place of duty.

These are allowed to the extent of actual expenditure or specified limits and must be specifically provided by the employer.