All taxpayers should opt for the New Tax Regime except the Old Tax Regime for F.Y.2025-26

For the financial year (F.Y.) 2025-26, it is not correct to state that all taxpayers should opt for the New Tax Regime except the Old Tax Regime. Your choice depends on your specific financial situation, including your income level and eligible deductions. The government has made the New Tax Regime the default option, but you can still choose the Old Tax Regime if it benefits you more. 

Key changes for FY 2025-26

The Union Budget for 2025-26 introduced several changes to the tax system: 

• New regime as default: All taxpayers will be automatically placed in the New Tax Regime unless they specifically opt for the Old Regime.
• Higher tax-free income limit (New Regime): For salaried individuals, the tax-free income limit has been effectively raised to ₹12.75 lakh, thanks to an increased standard deduction and an enhanced rebate under Section 87A.
• Higher standard deduction (New Regime): Salaried individuals can now claim a standard deduction of ₹75,000, up from ₹50,000 in the previous year.
• No change to Old Regime: The tax slabs and rules for the Old Tax Regime remain unchanged. 

Who should choose the New Tax Regime?

The New Tax Regime is often more beneficial for taxpayers who: 

• Have limited investments: If you do not actively invest in tax-saving instruments like PPF, ELSS, or life insurance, the New Regime’s lower slab rates can result in lower tax outgo.
• Want simplicity: With fewer deductions to track and no need to provide investment proofs, the New Regime offers a simpler tax-filing process.
• Have an income below ₹12.75 lakh: For salaried individuals with an annual income up to ₹12.75 lakh, the combination of the standard deduction and the Section 87A rebate makes your tax liability zero under the New
• Regime. 

Who should choose the Old Tax Regime?

The Old Tax Regime can provide more tax benefits for those who: 

• Make significant tax-saving investments: If you invest heavily in instruments under Section 80C (up to ₹1.5 lakh), Section 80D (health insurance), or pay interest on a home loan, the total deductions can significantly lower your taxable income.
• Claim specific exemptions: Taxpayers who receive and can claim exemptions for House Rent Allowance (HRA) and Leave Travel Allowance (LTA) will find these benefits available only under the Old Regime.
• Are high-income earners with high deductions: For individuals with substantial deductions, particularly home loan interest, the Old Regime may lead to a lower tax liability despite having higher slab rates. 

How to decide for F.Y. 2025-26

To make the best choice, it is recommended to follow these steps:

1. Calculate your tax under both regimes. Determine your total eligible deductions and exemptions under the Old Regime and calculate your tax liability. Then, calculate your tax under the New Regime using the new, lower slab rates.
2. Use a tax calculator. Reputable websites www.caclubindia.com or www.pranabbanerjee.com, or www.itaxsoftware.net often provide tools that allow you to compare your tax liability under both options side-by-side.
3. Inform your employer. If you are a salaried individual and want to opt out of the default New Regime, you must inform your employer at the beginning of the financial year. Otherwise, TDS will be deducted based on the new rules. You can still change your choice when filing your final tax return.
4. Special rules for business income. If you have income from a business or profession, you must file Form 10-IEA to switch to the Old Regime. You can only switch back to the New Regime once in your lifetime.