Introduction to India's Dual Tax Regime

Since the Union Budget 2020, Indian taxpayers have had the option to choose between two income tax regimes: the traditional regime with higher tax rates but numerous deductions and exemptions, and the new regime with lower tax rates but fewer deductions. The 2025-26 budget has further refined the new regime, making it the default choice for most taxpayers.

Overview of Both Tax Regimes for FY 2025-26

New Tax Regime (Default from FY 2025-26)

The new tax regime offers the following tax slabs:

• Income up to ₹3.5 lakh: Nil
• ₹3.5 lakh to ₹7 lakh: 5%
• ₹7 lakh to ₹10 lakh: 10%
• ₹10 lakh to ₹12.5 lakh: 15%
• ₹12.5 lakh to ₹15 lakh: 20%
• Above ₹15 lakh: 30%

Key features:

• Standard deduction increased to ₹75,000 for salaried individuals
• Family pension deduction remains available
• Rebate under Section 87A increased to ₹30,000 for income up to ₹7.5 lakh
• No deductions for investments (except NPS Tier-I up to ₹50,000)

Old Tax Regime

The old tax regime retains the following tax slabs:

• Income up to ₹2.5 lakh: Nil
• ₹2.5 lakh to ₹5 lakh: 5%
• ₹5 lakh to ₹10 lakh: 20%
• Above ₹10 lakh: 30%

Key features:

• Deductions under Section 80C (up to ₹1.5 lakh), 80D (health insurance), HRA, etc.
• Standard deduction of ₹50,000 for salaried employees
• Rebate under Section 87A remains at ₹12,500 for income up to ₹5 lakh
• Home loan interest deduction (up to ₹2 lakh) available

Comparing Tax Liability: Case Studies (2025-26)

Case 1: Annual Income of ₹9 Lakh with Minimal Deductions

Old Regime: Tax liability of approximately ₹92,500

New Regime: Tax liability of approximately ₹52,500 (after standard deduction)

Verdict: New regime saves ₹40,000

Case 2: Annual Income of ₹15 Lakh with Maximum Deductions

Old Regime: Tax liability of approximately ₹1,80,000 (after deductions of ₹4 lakh)

New Regime: Tax liability of approximately ₹2,10,000

Verdict: Old regime saves ₹30,000

Case 3: Annual Income of ₹7.5 Lakh (Eligible for Full Rebate)

Old Regime: Tax liability of approximately ₹25,000

New Regime: Tax liability of ₹0 (due to enhanced Section 87A rebate)

Verdict: New regime is better

Key Changes in 2025-26 Budget

• New regime's basic exemption limit increased to ₹3.5 lakh
• Standard deduction raised to ₹75,000 under new regime
• Section 87A rebate ceiling increased to ₹7.5 lakh income
• No changes to old regime slabs or deductions

Factors to Consider When Choosing a Tax Regime

Choose the New Regime if:

• Your income is below ₹7.5 lakh (potentially tax-free)
• You have minimal deductions (less than ₹2 lakh)
• You prefer hassle-free tax filing

Choose the Old Regime if:

• You have home loan interest deductions
• Your total eligible deductions exceed ₹2.5 lakh
• You have significant HRA or medical insurance claims

How to Switch Between Regimes

Salaried employees must declare their preferred regime to employers at the start of FY 2025-26. For others, the choice can be made while filing ITR. Note: Business income earners can switch regimes only once.

Conclusion

The 2025-26 budget makes the new regime attractive for most taxpayers earning under ₹10 lakh, especially those with fewer deductions. However, the old regime remains beneficial for those with substantial home loans or investments. Use an updated tax calculator to determine your optimal choice.