In order to help middle-class taxpayers, the Union Budget 2025 included some significant adjustments to the new income tax system. Finance Minister Nirmala Sitharaman suggested raising the income threshold for a Section 87A refund to Rs 12 lakh and raising the minimum exemption limit to Rs 4 lakh.
As a result, individuals who receive a salary of Rs 12 lakh will not be required to pay any taxes. In actuality, individuals earning Rs 12.75 lakh a year will not be required to pay taxes due to a basic deduction of Rs 75,000. For millions of taxpayers earning less than Rs 12.75 lakh, this has simplified the decision. But what if you earn more than Rs 12.75 lakh? Should you still opt for the sweetened new income tax regime or the deduction-heavy old income tax regime?
The following taxpayers benefit greatly from the new tax regime:
1) Earn at least Rs 12 lakh, as they are eligible for a full refund under Section 87A.
2) Are not eligible for deductions under Section 80D (medical insurance premium) or Section 80C (provident fund, PPF, life insurance, or principal repayment of housing loans).
3) Prefer a straightforward tax filing procedure with few obligations for compliance.
The new tax regime may be advantageous if you do not take large deductions and prefer a simple tax filing process because it offers reduced tax rates without requiring much documentation.
The old tax regime is more suitable for individuals who can claim high deductions, including:
1) Section 80C: Principal repayment for house loans, life insurance premiums, PF and PPF contributions, etc.
2) Section 80D: Family and individual health insurance premiums.
3) The Leave Travel Allowance (LTA) and the House Rent Allowance (HRA).
4) Interest deductions for home loans.
If they maximize these deductions, individuals under the previous tax regime can drastically lower their taxable income. However, the total deductions must exceed the break-even point for their income level in order for it to be more advantageous than the new tax regime.
The new tax system is the clear decision if your total taxable income is Rs 12 lakh or less because there is no tax due to the refund. The previous tax system is better if your deductions above the minimum break-even amount for your income slab (as indicated in the table’s final column). Choosing the new tax regime will reduce your tax liability and make filing easier if you have few deductions.
High deduction claimants should continue using the previous tax system, particularly those with deductions exceeding Rs 8.5 lakh. Individuals with lower deductions should switch to the new tax regime to benefit from lower tax rates and reduced paperwork. The standard deduction of Rs 75,000, which is only available under the new tax regime, should also be taken into consideration by salaried individuals.
Last but not least, individual financial circumstances and tax-saving techniques should ideally guide the decision between the existing and new tax regimes. A tax advisor or certified public accountant can assist in determining the best course of action depending on your income, deductions, and financial objectives.
