It’s Budget time once again, and as taxpayers it is natural to expect some positive tweaks to the direct tax regime. That, however, appears unlikely this year, given the massive hike in income tax exemptions in the last Budget, along with the much-delayed correction in GST rates.
This column, therefore, is not about what more tax cuts to expect in the February 1 Budget, but about which tax regime to choose in the next fiscal. While the old tax regime offers a slew of deductions, the new regime offers none. The new regime is now the default option and, once chosen, becomes irreversible in certain cases.
Though the new regime has made slabs more attractive and compliance simpler by removing exemptions and deductions, why do nearly a third of taxpayers still opt for the old regime? The answer is simple: plain maths. Taxpayers should choose the framework that results in a lower tax liability.
If you are salaried with an annual income of Rs 25 lakh and have deductions and exemptions of around Rs 8.5 lakh—through home and education loans, HRA, and Section 80C and 80D deductions—you should stick with the old tax regime and ignore the new one. Despite the paperwork, the old regime delivers significantly higher savings in such cases, while the new regime primarily benefits those with lower incomes.
According to tax experts, around 30% of taxpayers continue under the old regime, willing to deal with tedious paperwork. The government’s claim of making tax filing simpler each year has not yet made any material difference for this segment, as they continue to find greater tax savings under the old framework.
Experts point out that the break-even point—the level of deductions at which tax liability under both regimes becomes equal—rises sharply with income. For a gross salary of Rs 24.75 lakh, the break-even point is roughly ₹8.5 lakh. Beyond this, the old regime delivers tangible savings. However, at lower income levels, the new regime is more attractive, especially since annual income up to ₹12 lakh attracts no tax liability.
Put differently, the biggest advantage of the old regime lies in deductions, while the biggest drawback of the new regime is the removal of all of them—HRA, Sections 80C and 80D, and interest on home and education loans under Section 24. For taxpayers who actively use these provisions, the old regime still results in a lower tax outgo.
Among all deductions, education loan interest under Section 80E is a particularly strong incentive to stay with the old regime. Unlike most other deductions, there is no cap on the interest that can be claimed. This stands in contrast to home loan interest, which is capped at Rs 2 lakh. Under Section 80E, the entire interest paid on a higher education loan taken for self, spouse, or children can be claimed for eight consecutive years starting from the year repayment begins. This makes it especially valuable for high-ticket professional or overseas education loans, where interest outgo is substantial and long-term.
Similarly, there is no cap on HRA deductions, allowing those paying high rents to significantly reduce their tax liability. Beyond these, the old regime also allows deductions for savings and protection-oriented insurance products.
To simplify, if you earn around Rs 25 lakh and your total deductions and exemptions exceed Rs 8.5 lakh, the old regime is more beneficial. If you earn over Rs 30 lakh, the old regime works better if total deductions exceed Rs 3.75 lakh. If deductions are below Rs 3.75 lakh, the new regime is the better option.
In conclusion, the choice of tax regime should be based on a clear calculation of total income and available deductions. High earners with minimal deductions are better off under the new regime, while those with substantial deductions will continue to benefit from the old regime.