Understanding the New Tax Regime for AY 2025-26: A Comparative Analysis with the Old Scheme

As the financial year progresses, taxpayers in India are gearing up for the changes in tax regimes for the Assessment Year (AY) 2025-26. The new tax regime, introduced with the intention of simplifying the tax system and providing relief to taxpayers, presents a departure from the traditional tax scheme. Here’s a detailed look at how the new tax regime works and how it compares to the old scheme.

New Tax Regime for AY 2025-26

The new tax regime, effective from AY 2023-24, offers lower tax rates across various income slabs but with fewer exemptions and deductions. The key highlights of the new regime include:

1. Revised Tax Slabs: The new regime features reduced tax rates for different income brackets. For AY 2025-26, the tax slabs are as follows:
   • Income up to ₹3 lakh: Nil
   • Income from ₹3 lakh to ₹6 lakh: 5%
   • Income from ₹6 lakh to ₹9 lakh: 10%
   • Income from ₹9 lakh to ₹12 lakh: 15%
   • Income from ₹12 lakh to ₹15 lakh: 20%
   • Income above ₹15 lakh: 30%
2. Fewer Deductions and Exemptions: To avail of the lower tax rates, taxpayers under the new regime cannot claim various exemptions and deductions, such as those on insurance premiums, home loan interest, and contributions to provident funds.
3. Standard Deduction: The new regime does not offer a standard deduction, unlike the old scheme.

Old Tax Regime

Under the old tax regime, taxpayers could benefit from a range of exemptions and deductions, leading to varied effective tax rates based on individual circumstances. The key features of the old scheme included:

1. Higher Tax Slabs: Tax rates under the old regime were generally higher, but taxpayers had the opportunity to reduce their taxable income through various deductions and exemptions.
2. Exemptions and Deductions: Taxpayers could claim deductions under sections like 80C (for investments in PF, insurance), 24(b) (for home loan interest), and exemptions on HRA (House Rent Allowance), among others.
3. Standard Deduction: A standard deduction of ₹50,000 was available, which reduced taxable income.

Comparison and Impact

• Tax Savings: While the new tax regime offers lower tax rates, the lack of exemptions and deductions can lead to higher taxable income for those who previously benefited from multiple deductions under the old scheme. For taxpayers with significant deductions, the old regime might still be more beneficial.
• Simplicity vs. Customization: The new regime simplifies tax filing by removing the need to track various deductions and exemptions. However, the old scheme allows for greater customization and potential tax savings through careful planning.
• Choice: Taxpayers now have the flexibility to choose between the new and old tax regimes based on their financial situation and preferences. This choice enables individuals to select the regime that offers the best tax benefits for their specific circumstances.

Conclusion

The new tax regime for AY 2025-26 simplifies the tax structure with lower rates but fewer exemptions. In contrast, the old scheme provides more opportunities for tax deductions and exemptions but comes with higher tax rates and greater complexity. Taxpayers should assess their financial situation and calculate their tax liabilities under both regimes to make an informed decision. Consulting with a tax advisor can also help in optimizing tax savings and choosing the most beneficial regime.