Budget tax break: New Regime overhauled - Rs 12.75 lakh salary zero tax; key deductions, exemptions  

New Tax Regime vs Old Tax Regime: In a major relief for India's middle class, Finance Minister Nirmala Sitharaman unveiled sweeping changes to the new income tax regime during the Union Budget 2025 presentation. Effective from April 1, 2025 (FY 2025-26, AY 2026-27), the regime remains the default for all taxpayers, with widened slabs, lower rates, and a boosted rebate designed to put more money in people's pockets.

The headline change? The tax rebate was hiked to Rs 60,000, wiping out liability for resident individuals earning up to Rs 12 lakh in taxable income. Salaried workers and pensioners get an enhanced standard deduction of Rs 75,000, pushing the effective tax-free gross salary threshold to Rs 12.75 lakh. This progressive tweak targets urban millennials and families squeezed by inflation, potentially boosting disposable income and consumption.

No alterations touch the old tax regime, preserving choices for those with deductions like housing loans or investments.

Tax advisory platform Tax Buddy recently shared the updated slab structure under the new regime, applying uniformly to all individuals (including seniors):

Annual Income (₹)    Tax Rate

Up to 4,00,000    Nil

4,00,001 – 8,00,000    5%

8,00,001 – 12,00,000    10%

12,00,001 – 16,00,000    15%

16,00,001 – 20,00,000    20%

20,00,001 – 24,00,000    25%

Above 24,00,000    30%

Key deductions and exemptions

Tax Buddy outlined the key deductions and exemptions available under New Tax Regime for FY 2025–26, while also clearly flagging what is not permitted.

Under the allowed deductions, salaried employees and regular pensioners can claim a standard deduction of Rs 75,000, which remains one of the biggest reliefs in the new regime. In addition, employer contributions to the National Pension System (NPS) under Section 80CCD(2) are permitted, up to 14% of basic salary plus DA, making it a valuable tax-saving tool for salaried individuals.

For those receiving family pension, a deduction is available equal to the lower of Rs 25,000 or one-third of the pension received. While most housing loan benefits are restricted, interest on a let-out property can still be adjusted, but only against house property income, not salary or other income.

Several employer-provided benefits continue to enjoy tax-free status. These include gratuity up to Rs 20 lakh, leave encashment up to Rs 25 lakh, VRS compensation up to Rs 5 lakh, and reimbursements for mobile, internet, uniform, and official travel when used strictly for work purposes. Additionally, capital gains exemptions under Sections 54, 54EC, and 54F remain available, along with special tax rates under Sections 111A and 112A.

It also highlighted what is not allowed under the new regime. Popular deductions such as Section 80C investments (PF, PPF, ELSS, LIC, Sukanya), health insurance under 80D, education loan interest (80E), HRA, LTA, donations (80G), savings interest (80TTA/80TTB), food coupons, and employees’ own NPS contribution (80CCD(1)) are excluded.

Overall, the new tax regime will simplify compliance with fewer deductions, while retaining select, high-impact exemptions—especially for salaried taxpayers relying on employer benefits.

Old Tax Regime slabs in Budget 2025

While the new tax regime grabs headlines with Rs 12.75 lakh tax-free salary (Rs 75,000 standard deduction + Rs 60,000 rebate for up to Rs 12 lakh taxable income), the old regime remains untouched. It shines for deduction-heavy taxpayers like homeowners or investors, despite narrower exemptions.

Old Regime Slabs (FY 2025-26)

Individuals

Income (₹)    Rate Up to 2.5 lakh    Nil 2.5-5 lakh    5% 5-10 lakh    20% Above 10 lakh    30%

Seniors (60-80 Years) Income (₹)    Rate Up to 3 lakh    Nil 3-5 lakh    5% 5-10 lakh    20% Above 10 lakh    30%

Super Seniors (>80 Years) Income (₹)    Rate Up to 5 lakh    Nil 5-10 lakh    20% Above 10 lakh    30%

Key Perks: Claim 80C (₹1.5L investments), 80D (health insurance), HRA, LTA, home loan interest (Sec 24), 80E (education loans). Effective tax-free up to ₹5 lakh (with ₹12,500 rebate u/s 87A).