Old Tax Regime or New? What Works Best in FY 2025–26

The much-publicised Rs 12 lakh tax-free benefit is real—but only for taxpayers with limited deductions.

With FY 2025–26 underway, taxpayers across India are once again faced with a crucial decision—whether to continue with the traditional old tax regime or shift to the new regime under section 115BAC. The debate has gained fresh momentum this year, driven largely by the widely discussed claim that individuals can pay zero tax up to Rs 12 lakh under the new regime. While this headline has drawn significant attention, a closer look shows that the choice between the two regimes is far more nuanced and depends heavily on individual financial profiles.

Under the new tax regime, the government has enhanced the rebate under Section 87A to Rs 60,000, effectively making incomes up to Rs 12 lakh tax-free, subject to conditions. Additionally, the standard deduction has been increased to Rs 75,000, providing further relief to salaried individuals and pensioners. For instance, a salaried individual earning Rs 12.5 lakh annually may, after claiming the standard deduction, bring taxable income below Rs 12 lakh and end up paying no tax. This has made the new regime particularly appealing to those who do not actively invest in tax-saving instruments or claim multiple deductions.

However, the “Rs 12 lakh tax-free” narrative does not apply universally to all taxpayers. From a chartered accountant’s perspective, the actual benefit depends on whether an individual is already availing deductions under the old regime. Taxpayers with structured financial commitments—such as provident fund contributions, life insurance premiums, health insurance payments, house rent allowance, and most importantly, housing loans—may still find the old regime more beneficial despite its higher slab rates.

The home loan versus lower tax rate dilemma often becomes a decisive factor in this comparison. Under the old regime, a taxpayer can claim up to Rs 2 lakh as a deduction on housing loan interest for a self-occupied property, along with principal repayment benefits under Section 80C. These deductions significantly reduce taxable income and, in many cases, outweigh the benefit of the lower tax rates offered by the new regime. For example, an individual earning Rs 15 lakh, with home loan interest of Rs 2 lakh and additional deductions of Rs 1.5 lakh, can reduce taxable income to around Rs 11.5 lakh under the old regime, resulting in a lower effective tax outgo. In contrast, under the new regime, the same taxpayer would lose these deductions entirely and may end up paying higher tax despite the reduced slab rates. Therefore, for homeowners—especially in the early years of a loan, when interest outgo is higher—the old regime often remains more tax-efficient.

On the other hand, the new tax regime offers simplicity and flexibility. It eliminates the need to maintain documentation for multiple deductions, allowing taxpayers to retain liquidity instead of locking funds into long-term investments. Young professionals, first-time earners, and individuals without housing loans or significant deductions often find this regime more convenient and tax-efficient. For example, a young salaried employee earning Rs 10 lakh annually, with no major deductions, may end up paying substantially lower tax under the new regime due to reduced slab rates and the standard deduction.

Another important factor is the treatment of high-income individuals. The government has capped the surcharge at 25 per cent under the new regime, compared with 37 per cent under the old regime for incomes exceeding Rs 5 crore. This structural change makes the new regime more attractive for ultra-high-income taxpayers, resulting in notable tax savings at the top end.

Despite these changes, one of the most common mistakes taxpayers make is comparing only the slab rates rather than the final tax liability. Lower tax rates do not necessarily translate into lower taxes if substantial deductions are available under the old regime. Therefore, a detailed computation under both regimes remains essential before making a decision.

From a professional advisory standpoint, the choice of tax regime should not be driven by trends or general assumptions. Instead, it should be based on a careful evaluation of income structure, deductions, financial commitments, and long-term goals. Salaried individuals have the flexibility to choose between the two regimes each year, making it important to review the decision annually in light of changing financial circumstances.

In conclusion, while the new tax regime reflects the government’s push towards a simplified and compliance-friendly system, the old regime continues to hold its ground for taxpayers with structured investments and housing loans.

The much-publicised Rs 12 lakh tax-free benefit is indeed real, but only for those with limited deductions. As chartered accountants emphasise, there is no one-size-fits-all answer—the right choice ultimately lies in understanding one’s financial position and making an informed decision.

(The writer is a Chartered Accountant based in Thane. Views personal.)