Union Budget 2025-26: Analytical Comparison of Old Tax Regime Against New Tax Regime

Introduction

The Union Budget 2025-26, along with the vision of Viksit Bharat 2047, represents a crucial advancement in promoting economic growth, improving taxpayer compliance, and streamlining the direct tax system. As India progresses towards a mature economy, the government has prioritised a fiscal strategy that harmonises growth with stability, ensuring that taxpayers—both individuals and enterprises—benefit from a streamlined tax framework. The budget prominently emphasises the new tax regime, designated as the default framework for personal income tax. The government seeks to promote a transition to the new tax regime by enhancing its appeal, simplifying return filing, and abolishing the necessity for several exclusions and deductions. A comparative examination with the previous tax regime is essential for comprehending the financial ramifications for various income categories.

The new tax regime was initially presented as a means to simplify taxation by diminishing reliance on deductions and providing lower tax rates. However, the previous tax regime, characterised by substantial deductions under sections like 80C, 80D, and 24(b), remains attractive to individuals who strategically allocate resources to tax-saving mechanisms. The Union Budget 2025-26 further delineates the advantages and disadvantages of these two regimes. An exhaustive analytical comparison evaluates whether the new regime is genuinely more advantageous for taxpayers or if the previous system retains value for persons pursuing long-term savings and investment-related tax benefits.

A major highlight of this budget is its role in shaping India’s financial ecosystem through reforms in tax slabs, incentives for digital transactions, and revised provisions for Tax Deducted at Source (TDS) and Tax Collected at Source (TCS). The government has emphasized broadening the tax base while ensuring ease of compliance, particularly for salaried individuals and small businesses. By refining TDS and TCS policies, the budget seeks to streamline tax collections, prevent tax evasion, and improve cash flow management in the economy. These changes impact not just businesses but also individuals involved in high-value transactions, foreign remittances, and investments.

The concept of Viksit Bharat 2047 envisions India as a globally competitive economy with an efficient taxation system that fosters entrepreneurship, innovation, and economic inclusivity. The 2025-26 budget aligns with this goal by promoting a transparent and technology-driven tax ecosystem. The new tax regime, which offers lower tax rates but eliminates the majority of exemptions, is designed to reduce the administrative burden on taxpayers while enhancing revenue collection for the government. However, taxpayers must weigh the benefits of a simplified structure against the potential loss of deductions that could significantly lower taxable income under the old regime.

For salaried individuals, professionals, and business owners, the choice between the two regimes depends on income levels, investment patterns, and financial planning strategies. Those with substantial investments in tax-saving instruments such as Provident Fund (PF), National Pension System (NPS), insurance policies, and home loans may find the old tax regime more rewarding. Conversely, individuals who prefer a hassle-free taxation system with lower rates but fewer deductions may find the new tax regime more suitable. The government’s push for the new system, through budgetary adjustments and incentives, indicates a long-term vision to make taxation more straightforward and compliance-friendly.

Another critical area of discussion in this budget is the restructuring of TDS and TCS provisions. The government has introduced modifications to ensure better tracking of transactions, reduce tax evasion, and increase revenue efficiency. Sectors such as e-commerce, foreign remittances, and high-value financial transactions are expected to witness changes in withholding tax rates and compliance procedures. These measures aim to create a robust tax administration framework, ensuring transparency in financial transactions while reducing loopholes that lead to revenue losses.

As India transitions into a developed economy, its taxation policies play a pivotal role in shaping economic growth and financial discipline. The Union Budget 2025-26 has reinforced the government’s intent to make taxation simpler and more efficient while providing taxpayers with flexible options. While the old tax regime continues to attract those who maximize deductions, the new tax regime is being positioned as a forward-looking, easy-to-comply system that aligns with global best practices.

This article delves deeper into the structural differences between the two regimes, evaluating their impact on different income groups, financial planning strategies, and overall economic implications. Through a detailed analytical comparison, we aim to provide clarity on which system stands as the better choice for taxpayers in 2025-26 and beyond.

Income Tax Structure (Old Regime vs New Regime)

In India, income tax should be imposed on two different structures: the Old Regime Tax Structure and the New Regime Tax Structure. Under the old tax structure, taxpayers have the option to utilise several exemptions (as provided under Section 10 of the Income Tax Act 1961) and deductions (Sections 80C to 80U). The new tax regime provides reduced tax rates while abolishing the majority of exemptions and deductions. Taxpayers must systematically assess their financial circumstances to ascertain which regime is more advantageous for them.

Old Tax Regime

The Old Tax Regime under the Income Tax Act of 1961 refers to the traditional taxation framework in India, permitting both individuals and businesses to claim several exemptions, deductions, and rebates to reduce their taxable income. This system has existed for decades and offers taxpayers various options for tax savings through provisions such as 80C, 80D, HRA (House Rent Allowance), LTA (Leave Travel Allowance), and basic deductions.

Exemption vs Deduction under Old Tax Regime

Income tax exemptions apply to specific sources of income rather than to total income. This may also signify that money generated from that source is exempt from taxation. Agricultural revenue is exempt from taxation. Additionally, long-term capital gains from property sales may be reinvested in real estate or certain bonds within a stipulated period to achieve tax exemption. Employees are granted housing rent allowance (HRA) as a component of their compensation. This component may be employed to claim tax exemption under specific circumstances.

Conversely, income tax deductions may be claimed against the gross total income. Specific approved investments and expenditures are eligible for deduction claims. Contributions to specified mutual funds, interest repayments on student loans, and premium expenditures for health insurance qualify for deductions. Salaried taxpayers are eligible to take a standard deduction of Rs. 50,000 from their gross income. This reduces their total taxable income, thereby decreasing the tax obligation.

List of Deduction available under Old Tax Regime to reduce Tax Liabilities are:

1. Standard Deduction for Salaried Person: Under Section 16 of Income Tax Act 1961, salaried person can claim a standard deduction upto Rs. 50,000/-
2. Investment under Section 80C: Contributions to investment like Employees Provident Fund (EPF), Public Provident Fund (PPF), Equity Linked Saving Scheme (ELSS), National Saving Certificate (NSC), Tax Saving Fixed Deposit (5 Years Fixed Deposit with 6.5% to 8% interest saving) and Life Insurance Premium qualify for a deduction of upto Rs. 1,50,000/-
3. Deduction under NPS: Under Section 80CCD(1B), Salaries Person can claim additional deduction of Rs. 50,000/- is available under National Pension System, over and above the Section 80C limit. Employer Contributions to NPS under Section 80CCD are also deductible, upto 10% of salary and government employee get 4% additional deduction under Employers Contribution to NPS.
4. House Rent Allowance (HRA): Taxpayers living in rented accommodation can claim HRA deductions under Section 10(13A). The deductible amount is the least of: Actual HRA Received, 50% of Salary (for Metro Cities) or 40% (for non-metro cities), rent paid minus 10% of salary.
5. Home Loan Interest: Taxpayer can claim deduction upto Rs. 2,00,000/- under the Home Loan Interest deduction under Section 24(b) paid on self occupied property.
6. Education Loan Interest: Under Section 80E, Interest on education loan for higher studies is fully deductible without an upper limit, but only for eight years from start of repayment.
7. Donations to Charities (Section 80G): Donations to specified funds and institutions are eligible for a 50% or 100% deduction, subject to conditions. For example, contributions to the PM CARES Fund and the National Defence Fund qualify for a 100% deduction without a limit.
8. Medical Insurance (Section 80D) & Savings Interest (Sections 80TTA & 80TTB):

• Up to Rs 25,000 for self, spouse, and children
• An additional Rs 50,000 for senior citizen parents
• Maximum deduction: Rs 1,00,000

• Rs 10,000 deduction for savings account interest (for non-senior citizens).
• Rs. 50,000 deduction for senior citizens (includes fixed deposit interest).

Tax Rebate and Tax Deduction at Source

Income tax rebates are to be deducted from the overall tax liability. A tax rebate of Rs.12,500 is offered for taxpayers with an annual income of up to Rs.5 lakh, valid for the financial year 2023-24 and subsequent years for those who choose the previous tax system.

Under the new tax regime, the rebate limit is Rs.25,000 for taxpayers having an annual income of up to Rs.7 lakh for the fiscal year 2023-24 and beyond.

TDS denotes tax deducted at source. According to the Income Tax Act, every entity or individual disbursing a payment must withhold tax at source if the amount over specified threshold limits. TDS must be withheld at the rates established by the tax authority.

Tax Slab under Old Tax Regime

As per the Income Act 1961, Tax Slab for Financial Year 2024-25 under the old tax regime apply to the both Individuals and Non-Individuals entities like HUFs, AOPs, and BOIs.

Annual Taxable Income Slab Income Tax Slab Rates

For Tax Payer aged less than 60 Years

Upto Rs. 2,50,000 :- Nil

Between Rs. 2,50,001 to Rs. 5,00,000 :- 5% on taxable income exceeding Rs. 2,50,000

Between Rs. 5,00,001 to Rs. 10,00,000 :- 20% on taxable income exceeding Rs. 5,00,000

Above Rs. 10,00,000 :- 30% on taxable income exceeding Rs. 10,00,000

Annual Taxable Income Slab Income Tax Slab Rates

For Tax Payer aged less than 60 Years to 80 Years

Upto Rs. 3,00,000 :- Nil

Between Rs. 3,50,001 to Rs. 5,00,000 :- 5% on taxable income exceeding Rs. 2,50,000

Between Rs. 5,00,001 to Rs. 10,00,000 :- 20% on taxable income exceeding Rs. 5,00,000

Above Rs. 10,00,000 :- 30% on taxable income exceeding Rs. 10,00,000

Annual Taxable Income Slab Income Tax Slab Rates

For Tax Payer aged Above 80 Years

Upto Rs. 5,00,000 :- Nil

Between Rs. 5,00,001 to Rs. 10,00,000 :- 20% on taxable income exceeding Rs. 5,00,000

Above Rs. 10,00,000 :- 30% on taxable income exceeding Rs. 10,00,000

Surcharge and Health and Education Cess.

Income Tax Slab (Old Tax Regime) Surcharge

Rs. 10,00,000 to Rs. 50,00,000 :- Nil

Rs. 50,00,001 to Rs. 1,00,00,000 :- 10%

Rs. 1,00,00,001 to Rs. 2,00,00,000 :- 15%

Rs. 2,00,00,001 to Rs. 5,00,00,000 :- 25%

Above Rs. 5,00,00,000 :- 37%

Health & Education Cess :- 4% is applicable on Taxable Amount.

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What is Section 115BAC – The New Tax Regime?

Section 115BAC - the new tax regime system came into force from FY 2020-21 (AY 2021-22). The new tax regime introduced concessional tax rates with reduced deductions and exemptions. Section 115BAC was amended in the Budget 2023, and the new regime was made the default regime from FY 2023-24. This Section was further amended with revised tax rates in?Budget 2024. If an individual or HUF wants to opt for the old tax regime, then he must file Form?10-IEA?before the due date of filing ITR.?

Finance Minister announced the new tax slab rates in the union budget 2025-26 for individual and the corporate entities. After revising the tax slab rate, finance minister promise to strength the financial position of middle-class family who earn the salaries or profit from business profession or Rental Income upto 12 Lakhs. Modi government periodically decreasing the tax burden from middle class family. Right After 2014, the ‘Nil Tax Slab’ was raised from 2.5 Lakh to 5 Lakh in 2019, and to 7 Lakhs in 2023. Now govt increase upto 12 lakhs. This limit will be 12.75 Lakhs for Salaries tax payers, due to standard deduction of Rs.75,000/-.

In the Union Budget, finance minister said “Democracy, Demography, and Demand are the key support pillars in our journey towards Viksit Bharat”. Viksit Bharat stands for Developed India. Viksit Bharat Misson 2047 is the government vision to transform the country into a self-reliant and prosperous economy by 2047. Economic Growth, Technological Growth and Upgradation, Infrastructure Development, Social Empowerment, and Sustainable Growth are the main criteria of this programme.

Current Tax Slab for FY-2024-25 Tax Rate

Upto Rs. 3,00,000 :- Nil

From Rs. 3,00,001 to Rs. 7,00,000 :- 5%

From Rs. 7,00,001 to Rs. 10,00,000 :- 10%

From Rs. 10,00,001 to Rs. 12,00,000 :- 15%

From Rs. 12,00,001 to Rs. 15,00,000 :- 20%

Above Rs. 15,00,000 :- 30%

Proposed Tax Slab 2025-26 Tax Rate

Upto 4 Lakhs :- Nil

From 4,00,001 to 8,00,000 :- 5%

From Rs. 8,00,001 to 12,00,000 :- 10%

From Rs. 12,00,001 to Rs. 16,00,000 :- 15%

From Rs. 16,00,001 to Rs. 20,00,000 :- 20%

From Rs. 20,00,001 to Rs. 24,00,000 :- 25%

Above Rs. 24,00,000 :- 30%

Exemptions and Deductions Not Claimable under the New Tax Regime

The following are some of the major deductions and exemptions you cannot claim under the new tax regime:

• The deduction under Section?80TTA/80TTB?
• Professional tax and entertainment allowance on salaries
• Leave Travel Allowance (LTA)
• House Rent Allowance (HRA)
• Allowances to MPs/MLAs?
• Minor child income allowance
• Helper allowance
• Children's education allowance
• Other special allowances [Section 10(14)]
• Additional depreciation under section 32(1)(iia)
• Deductions under section 32AD, 33AB, 33ABA
• Various deductions for donations for or expenditures on scientific research contained in section 35(2AA) or 35(1)(ii) or (iia) or (iii)
• Deduction under section 35AD or section 35CCC
• Interest on housing loans on the self-occupied property or vacant property (Section 24)
• Chapter VI-A deduction (Section 80C, 80D, 80E, and so on, except Section 80CCD(2) and Section 80JJAA)
• Exemption or deduction for any other perquisites or allowances, including a food allowance of Rs 50/meal, subject to 2 meals a day.
• Employee's (own) contribution to NPS
• Donation to political party/trust, etc.

Under the new regime, what are the available deductions and exemptions?

• Transport allowances in case of a specially-abled person.
• Conveyance allowance received to meet the conveyance expenditure incurred as part of the employment.
• Any compensation received to meet the cost of travel on tour or transfer.
• Daily allowance received to meet the ordinary regular charges or expenditure you incur on account of absence from his regular place of duty.
• Perquisites for official purposes
• Exemption on voluntary retirement 10(10C), gratuity u/s 10(10) and leave encashment u/s 10(10AA)
• Interest on Home Loan on Let-out Property (Section 24)
• Gifts up to Rs 50,000
• Deduction for employer’s contribution to NPS account [Section 80CCD(2)]
• Deduction for additional employee cost (Section 80JJA)
• Budget 2023 introduced a standard deduction of Rs 50,000 under the New Tax Regime applicable from FY 2023-24. This has been increased to Rs.75,000 in Budget 2024, applicable from FY 2024-25.?
• Budget 2023 also introduced a deduction under Section 57(iia) of family pension income.
• Budget 2023 further introduced a deduction of the amount paid or deposited in the Agniveer Corpus Fund under Section 80CCH(2).
• In Budget 2024, the limit of the maximum deduction under the family pension has been increased from Rs. 15,000 to Rs. 25,000.?
• The deduction on employers contribution to pension Scheme as per Section 80CCD (2) has been increased from 10% of salary to the 14% of salary in Budget 2024.

Let us use a comparative example to examine an old tax regime, a new tax regime, and a proposed tax regime under the union budget 2025-26.

Example 1: Arun is an executive engineer at Tata Motors Company and earns a salary of Rs. 12 lakhs per annum. Arun claims a deduction of Rs. 1,50,000 under section 80C, health insurance of Rs. 15,000, and a standard deduction of Rs. 50,000. Calculation under the old tax regime: After claiming all the deductions, Arun's taxable income comes to Rs. 9,85,000. According to the old tax regime, he falls under the 20% tax bracket, so his tax liability would be Rs. 1,09,500. After adding cess at 4%, Arun's total tax liability would amount to Rs. 1,13,880.

Example 2: Arun is an executive engineer at Tata Motors Company and earns a salary of Rs. 12 lakhs per annum. Arun claims a deduction of Rs. 1,50,000 under section 80C, health insurance of Rs. 15,000, and a standard deduction of Rs. 75,000. Calculation under the new tax regime under Section 115 BAC. After claiming all his deductions, Arun's taxable income comes out to be Rs. 11,25,000. Under the new tax regime, he falls under the 10% tax bracket, resulting in a tax liability of Rs. 67,500 after add 4% health and education cess. Arun's total tax liability would amount to Rs. 70,200. With the new tax regime, Arun will save more on taxes compared to the old regime, making it a more beneficial option for him. Additionally, under the new tax regime, Arun will not be able to avail himself of certain exemptions and deductions that were available under the old regime, such as those for house rent allowance, leave travel concession, and deductions for investments like PPF, NSC, etc. However, despite these limitations, Arun's overall tax liability is significantly reduced under the new regime, making it a more attractive option for him in terms of tax savings. Overall, Arun's decision to opt for the new tax regime under Section 115 BAC seems to be a wise one, as he is able to save more on taxes and simplify his tax filing process.

Example 3: Arun is an executive engineer at Tata Motors Company and earns a salary of Rs. 12 lakhs per annum. Arun claims a deduction of Rs. 1,50,000 under section 80C, health insurance of Rs. 15,000, and a standard deduction of Rs. 75,000. Calculation under the new tax regime which is proposed under Union Budget 2025-26 under Section 115 BAC. Subsequent to applying standard deductions, Arun's taxable income amounts to Rs. 11,25,000. The proposed new tax structure under Section 115 BAC in the Union Budget 2025-26. The finance minister has declared that income tax will be exempt for incomes up to 12 lakh. Therefore, Arun falls under the category of zero income tax liability as his taxable income is Rs. 11,25,000, which is below the threshold of Rs. 12 lakh. This means that Arun will not have to pay any income tax for the financial year as per the new tax regime proposed under Union Budget 2025-26. This is great news for Arun as he will be able to save a significant amount of money that would have otherwise gone towards income tax.

Conclusion for comparative example to examine an old tax regime, a new tax regime, and a proposed tax regime under the union budget 2025-26.

Overall, the comparison of the old tax regime, the new tax regime, and the proposed tax regime under the Union Budget 2025-26 clearly showcases the benefits of the latest tax reforms. Individuals like Arun, who fall under the category of zero income tax liability, stand to benefit the most from these changes. It is evident that the proposed tax regime aims to provide relief to taxpayers by reducing the tax burden and enabling them to save more money for their financial goals. This demonstrates the government's commitment to creating a more taxpayer-friendly environment and promoting financial stability and growth in the country.

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