Old vs New Tax Regime for FY 2025 26: How exemptions and deductions work for taxpayers under both systems

As taxpayers prepare for income tax filing for FY 2025-26 (AY 2026-27), one of the biggest decisions they face is choosing between the old and new tax regimes. While the new tax regime offers lower slab rates and a higher rebate, the old regime continues to attract taxpayers who claim multiple exemptions and deductions.

The choice ultimately depends on income levels, investments, housing status and the amount of tax-saving deductions available to an individual.

New Tax Regime

The new tax regime has become the default system and offers a higher basic exemption limit of ₹4 lakh compared with ₹2.5 lakh under the old regime. It also provides a larger standard deduction of ₹75,000 for salaried employees, versus ₹50,000 under the old regime.

Under the new regime, incomes up to ₹12 lakh effectively become tax-free due to the Section 87A rebate of up to ₹60,000. In contrast, the old regime provides a rebate of up to ₹12,500, making incomes up to ₹5 lakh tax-free.

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The maximum 30% tax rate applies to incomes above ₹24 lakh under the new regime, compared with incomes above ₹10 lakh under the old regime.

Income Tax Slabs

Under the new regime, income up to ₹4 lakh is exempt from tax, followed by slab rates of 5%, 10%, 15%, 20%, 25% and 30%.

The old regime follows the traditional structure of:

Up to ₹2.5 lakh: Nil
₹2.5 lakh-₹5 lakh: 5%
₹5 lakh-₹10 lakh: 20%
Above ₹10 lakh: 30%

Senior citizens aged 60-80 years enjoy a basic exemption limit of ₹3 lakh under the old regime, while super senior citizens above 80 years have an exemption limit of ₹5 lakh.

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Old Regime = More Deductions

The biggest difference between the two systems lies in deductions and exemptions.

The old tax regime allows popular deductions such as:

House Rent Allowance (HRA)
Section 80C investments up to ₹1.5 lakh
Medical insurance premiums under Section 80D
Education loan interest under Section 80E
Donations under Sections 80G and 80GGC
Leave Travel Allowance (LTA)
Professional tax and entertainment allowance
Home loan interest deduction up to ₹2 lakh for self-occupied properties

Most of these deductions are unavailable under the new tax regime.

Benefits for both

Despite fewer deductions, the new regime retains several benefits.

Employer contributions to the National Pension System under Section 80CCD(2) are available under both regimes, with the deduction capped at 14% of basic salary under the new regime and 10% under the old regime.

Exemptions on gratuity, voluntary retirement benefits and leave encashment also remain available under both systems.

Similarly, deductions for contributions to the Agniveer Corpus Fund, family pension income, certain allowances and gifts up to ₹50,000 continue to be available.

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Home loan and HRA benefits

Taxpayers living in rented accommodation can claim HRA and deduction under Section 80GG only under the old regime.

Similarly, homeowners with self-occupied properties can claim a deduction of up to ₹2 lakh on home loan interest under the old regime. This benefit is not available under the new regime.

Which is better?

For salaried individuals with limited deductions and investments, the new regime’s lower tax rates and higher rebate may result in greater savings.

However, taxpayers who claim substantial deductions through HRA, Section 80C investments, health insurance premiums and home loan interest may find the old regime more beneficial.

Tax experts advise comparing tax liability under both systems before filing returns, as the most suitable regime varies from one taxpayer to another.