Old vs new tax regime: higher
Why did the new tax system become popular?
According to tax experts, the biggest factor behind the appeal of the new tax regime was the introduction of 100 per cent exemption for income up to ₹12.5 lakh, which effectively took a large section of taxpayers out of the tax net. “With low tax rates, minimal documentation and no need for last-minute tax-saving investments, it has become an easy option, especially for those who do not have significant deductions to claim,” says Vishwas Panjiyar, managing partner, SVAS Business Advisors.
More relaxations revive old system
High limits have brought the old system back into consideration after years. Since allowances remain tax-free up to specified limits, any increase directly reduces taxable income and overall tax expenditure. Previously, these limits were so old that they provided no real benefit.
Education and hostel allowances have seen a sharp jump – from ₹100 and ₹300 per month per child to ₹3,000 and ₹9,000 respectively – making them far more relevant after decades of stagnation. “The House Rent Allowance (HRA) framework has also been expanded, with the 50 per cent rebate now extended beyond metros like Delhi, Mumbai, Chennai and Kolkata to cities like Bengaluru, Hyderabad, Pune and Ahmedabad, reflecting the current rental realities. The limit on food coupons has also been increased from ₹50 to ₹200, restoring their practical value for salaried employees. With these factors in mind, there is a need to take a closer look at the old system this year, as it may result in lower tax expenditure,” says Panjiyar.
It’s a numbers game, not a strategy call. List all the eligible deductions – Section 80C, health insurance, home loan interest and principal, HRA, life insurance premium, National Pension System (NPS) contributions, health insurance and allowances – and compare your tax liability under both the regimes. A system with lower tax liability is a better option.
“Use the comparison tool of the e-filing portal to decide,” says Panjiyar.
The old tax system becomes attractive only when exemptions and deductions exceed a certain break-even point. It does not automatically get better at higher income levels.
“While the new regime offers zero tax on taxable income up to ₹12 lakh, the old regime generally works better when the total deductions and exemptions are around ₹5 lakh or more,” says Deepashree Shetty, partner, global mobility services, tax and regulatory services, BDO India.
The exact break-even point varies according to income slab and must be evaluated each year.
Who should reconsider governance?
Taxpayers whose income levels or spending patterns have changed should reconsider their choice of arrangement. The new tax regime offers simplicity, but if the total deduction exceeds about ₹5 lakh, the old regime may yield better results. Recent increases in children’s education and hostel allowances, food benefits and location-based HRA limits have improved its appeal for salaried individuals.
Can the salary structure be changed?
Pay structures are largely standardized, but some customization may be possible in components such as HRA, NPS and other eligible perks. “In the light of recent tax and labor reforms, salaried employees should review their salary structure and align it with their expected expenses at the beginning of the year,” says Shetty.
mistakes taxpayers make
A common mistake is to fail to evaluate tax liability under both regimes every year. Since the new regime is the default tax regime, taxpayers should actively choose the old regime if it is more beneficial.
Remember, not all taxpayers are bound by any tax regime. They can change the arrangements every year based on changes in income, investments or deductions. “While salaried individuals can switch every year, those with business or professional income generally have only a one-time option to choose from,” says Rupali Singhania, founder, Arete Consultants.
What to avoid under the old regime?
Taxpayers who choose the old system should not lose sight of overall financial efficiency or their long-term goals. “Investments should be chosen based on objectives, time horizon and risk profile rather than just tax savings,” says Singhania.
It is also important to compare the actual tax saved with the financial cost of those investments before committing funds.
Compliance under the old system
Under the old system, taxpayers must maintain proper documentation to support all the deductions and exemptions claimed by them. Employers verify investment proofs during payroll processing, and benefits like HRA require documents like rent agreements, rent receipts and Permanent Account Number (PAN) details of the landlord. “In some cases, employers may also need to justify deductions to the tax authorities, making it necessary to keep accurate records,” says Singhania.
The author is a Delhi-based freelance journalist.
