Old vs New Tax Regime: How Salaried Employees Can Make the Smartest Choice (2025–26)

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Comparison of Old vs New Tax Regime for Salaried Employees in India for FY 2025–26

Navigating India’s evolving tax system is no longer a once-a-year job — it demands smart decisions well in advance.

Following the latest Budget 2025 announcements, salaried individuals must make an important choice:
Continue with the traditional Old Tax Regime or shift to the simpler New Tax Regime?

Your selection could either maximize your savings or lead to silent financial leakage over time.
In this detailed guide, we’ll walk you through everything — slab rates, real salary calculations, marginal relief concepts, and what happens if your income crosses ₹12 lakh by even a single rupee.

Let’s understand it step-by-step.

📚 What is the Fundamental Difference Between Old and New Tax Regimes?

Here’s the simple version:

  • Old Tax Regime:
    You get to claim multiple deductions and exemptions like:
    • ₹1.5 lakh investment under Section 80C
    • Medical insurance premium under Section 80D
    • House Rent Allowance (HRA) exemption
    • Interest paid on home loans (Section 24b)
    • Leave Travel Allowance (LTA)
    In short: higher slabs, but more ways to save tax through paperwork and planning.
  • New Tax Regime:
    Offers lower tax rates, but with minimal deductions. Only the standard deduction (₹75,000) and some employer-side contributions like NPS/EPF are allowed.

✅ The focus is on simplicity — no investment proofs, no complex documentation.

📈 New Tax Slabs for FY 2025–26 (Applicable under New Regime)

Income SlabTax Rate
Up to ₹4 lakhNil
₹4,00,001–₹8,00,0005%
₹8,00,001–₹12,00,00010%
₹12,00,001–₹16,00,00015%
₹16,00,001–₹20,00,00020%
₹20,00,001–₹24,00,00025%
Above ₹24,00,00030%

Source: Official Income Tax Slabs and Notifications Source.

🎯 What New Benefits Were Introduced in Budget 2025?

Two major changes have made the New Regime extremely attractive:

ParticularsAmount (FY 2025–26)
Standard Deduction₹75,000
Section 87A Rebate₹60,000

✅ If your net taxable income (after ₹75,000 standard deduction) stays within ₹12 lakh, you qualify for a ₹60,000 rebate — effectively reducing your final tax payable to zero.

🧮 Real-Life Example 1: Salary of ₹12.75 lakh

Suppose your gross salary is ₹12,75,000.

Step-by-step:

  • Gross Salary = ₹12,75,000
  • (–) Standard Deduction = ₹75,000
  • ➡️ Net Taxable Income = ₹12,00,000

Tax Calculation:

Taxable SlabRateTax Amount
0–₹4 lakh0%₹0
₹4–8 lakh5%₹20,000
₹8–12 lakh10%₹40,000
  • Basic Tax = ₹60,000
  • 87A Rebate = ₹60,000
  • Final Tax = ₹0

✅ Congratulations — you pay zero tax if your salary after standard deduction fits within ₹12 lakh!

⚠️ Real-Life Example 2: Salary of ₹13 lakh

Now imagine your gross salary is ₹13,00,000.

Step-by-step:

  • Gross Salary = ₹13,00,000
  • (–) Standard Deduction = ₹75,000
  • ➡️ Net Taxable Income = ₹12,25,000

Tax Calculation:

Taxable SlabRateTax Amount
0–₹4 lakh0%₹0
₹4–8 lakh5%₹20,000
₹8–12 lakh10%₹40,000
₹12–12.25 lakh15%₹3,750
  • Basic Tax = ₹63,750
  • Cess @4% = ₹2,550
  • Total Tax = ₹66,300

🛡️ How Marginal Relief Saves You

Here’s the trap many employees fall into:
By earning just ₹25,000 extra, they lose the entire ₹60,000 rebate and suddenly face ₹66,300 tax!

Luckily, Marginal Relief is designed to protect you.

Let’s see:

  • Extra Income above ₹12 lakh = ₹25,000
  • Extra Tax without relief = ₹66,300

Since extra tax > extra income, Marginal Relief applies.

Thus:

  • Your final tax payable becomes just ₹25,000 (equal to the extra income earned).

✅ Marginal relief ensures you don’t get unfairly penalized for marginal increases in salary!

📋 Salary vs Tax Payable (Including Marginal Relief)

Gross SalaryNet Taxable IncomeMarginal Relief Applicable?Final Tax Payable
₹12.75 lakh₹12 lakhYes (87A rebate)₹0
₹13 lakh₹12.25 lakhYes (Marginal Relief)₹25,000
₹13.5 lakh₹12.75 lakhNo₹38,400 (approx.)

🏡 When Does the Old Regime Still Make Sense?

If you’re claiming multiple deductions such as:

  • ₹1.5 lakh under Section 80C
  • ₹25k–₹75k under Section 80D (health insurance)
  • HRA exemptions for rented accommodation
  • Interest on home loans under Section 24(b)

then the Old Tax Regime could still offer better savings despite higher tax rates.

📝 Pro Tip:
Always total up your available deductions before deciding.

📢 Important Warning: Salary Above ₹12 Lakh?

If your taxable salary crosses ₹12 lakh by even ₹1 after standard deduction:

  • You lose the ₹60,000 rebate immediately.
  • Your tax liability increases steeply.
  • You must depend on Marginal Relief if eligible.

✅ Always calculate net taxable income, not just gross salary, while doing tax planning.

🙋 Frequently Asked Questions (FAQs)

1. Can salaried individuals switch between tax regimes every year?

✅ Yes! You can opt for a different tax regime every financial year if you are a salaried taxpayer.

2. Is Standard Deduction available under both regimes?

✅ Absolutely. ₹50,000 under the Old Regime and ₹75,000 under the New Regime (from FY 2025–26).

3. What deductions are allowed under the New Regime?

✅ Only a few:

  • Standard Deduction (₹75,000)
  • Employer’s NPS/EPF contributions
  • Agniveer Corpus Fund contribution

4. Should I still invest even if I choose the New Regime?

✅ Yes! Smart investments build wealth over the long term — not just for tax savings.

🎯 Conclusion: Choose Smartly, Choose Wisely

The New Tax Regime is a great fit for those who prefer simplicity and don’t rely much on deductions.
If your taxable salary remains within ₹12 lakh after deductions, it could mean zero tax payable.

However, if you are actively investing or have heavy deductions lined up, the Old Regime could still offer better overall savings.

✅ Run side-by-side calculations.
✅ Consult a financial advisor if needed.
✅ Keep an eye on the ₹12 lakh slab!

Today’s smart choice will compound into tomorrow’s financial freedom.

Read other popular article: Trump Tariffs 2025: Temporary Relief for India Amid Global Trade Tensions

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