A detailed analysis of the new vs old income tax regime for individuals and HUFs, covering slab rates, deduction eligibility, and break-even analysis.
Understanding the New Tax Regime — Slabs and Structure
The new income tax regime, made the default regime from FY 2023-24, has been further enhanced in the Union Budget 2026 with an increased basic exemption limit of Rs 3.5 lakh and revised slab rates. Income up to Rs 7 lakh remains fully exempt from tax due to the rebate under Section 87A, making the new regime attractive for middle-income earners without large investment portfolios. The standard deduction of Rs 75,000 (increased from Rs 50,000) is now available under the new regime, narrowing one of the key advantages the old regime held for salaried individuals.
The new regime does not permit deductions under Chapter VI-A (80C, 80D, 80CCD, 80G etc.), HRA exemption under Section 10(13A), LTA exemption, professional tax deduction, or interest deduction on self-occupied property loan under Section 24. This makes it less beneficial for taxpayers who have substantial eligible investments, home loan interest, or HRA claims. However, for those who do not have these deductions or who live in rented accommodation without a formal HRA structure, the lower slab rates under the new regime may result in significantly lower tax.
Break-Even Analysis — When to Switch
The decision to switch regimes depends on the total quantum of deductions available to the individual. A simplified break-even analysis shows that for a person earning Rs 15 lakh per annum, the new regime becomes beneficial if total eligible deductions under the old regime are less than approximately Rs 3.75 lakh. For someone earning Rs 25 lakh, the break-even deduction threshold rises to approximately Rs 5.5 lakh. Taxpayers with significant 80C investments (Rs 1.5 lakh), health insurance premiums (Rs 25,000), home loan interest (Rs 2 lakh on self-occupied property), and NPS contributions (Rs 50,000) are likely still better off in the old regime at most income levels above Rs 20 lakh.
The switch-back flexibility is an important consideration. Salaried individuals can choose between the two regimes every year when filing their income tax return. However, individuals with business income (who opt for the new regime) can switch back to the old regime only once in their lifetime. This asymmetry means that business owners and professionals with fluctuating income should model the long-term impact carefully before opting into the new regime.
Practical Steps for FY 2025-26 Filing
Before choosing a regime for FY 2025-26, taxpayers should compile a complete list of all eligible deductions under the old regime. This includes Section 80C contributions (PPF, ELSS, LIC premium, home loan principal, tuition fees), Section 80D health insurance premiums, Section 80E education loan interest, Section 80G charitable donations, Section 80TTA/80TTB interest income deductions, and any other eligible items. The total should be compared against the tax differential between the two regimes at the relevant income level.
Employers are required to seek a declaration from employees at the start of each financial year regarding their preferred tax regime for TDS purposes. Employees who do not submit a declaration will have TDS computed under the new regime (the default). Employees who have decided to remain in the old regime must proactively declare this to their employer before April 15 of the relevant financial year, and submit projected investment declarations for Chapter VI-A deductions to ensure appropriate TDS is deducted across the year.
