Higher exemption, lower rates: Is the New Tax Regime phasing out the Old Tax Regime?

The personal income tax landscape has seen a decisive shift, with the New Tax Regime steadily emerging as the government’s preferred framework for individual taxpayers. Introduced in the Union Budget 2020 as an option to the age-old tax system built around exemptions and deductions, the regime has been consistently sweetened through successive budgets, signalling a clear policy intent to move taxpayers away from the deductions-heavy old system towards a simpler, lower-rate structure.

Under the old tax regime, individuals could reduce their taxable income through a wide range of exemptions and deductions, including house rent allowance (HRA), leave travel allowance (LTA), home loan interest and popular Section 80C investments. While these benefits offered scope for tax planning, they also required detailed documentation, long-term financial commitments and constant compliance. The New Tax Regime removed most of these deductions but compensated with lower slab rates and a cleaner tax structure.

The push towards the New Tax Regime gathered momentum in the Union Budget 2025. The Finance Minister proposed raising the tax-free income threshold under the New Tax Regime to Rs 12 lakh for individuals. For salaried taxpayers, the effective zero-tax limit goes up to Rs 12.75 lakh after factoring in the enhanced standard deduction of ₹75,000. This represents a sharp jump from the earlier rebate-linked threshold of Rs 7 lakh, significantly expanding the pool of taxpayers who may pay no tax at all.

Earlier, Budget 2024 had already delivered relief to high-income earners by cutting the surcharge on incomes above Rs 5 crore to 25%, from 37%, under the New Tax Regime. Together, these changes make the regime attractive not just for the middle class, but also for high-net-worth individuals.

Comparison of tax outgo

A comparison of tax outgo under both regimes underscores the shift. Even after accounting for common deductions such as the standard deduction, Section 80C investments, health insurance premiums, National Pension System contributions and housing loan interest, the old tax regime increasingly results in a higher tax liability across income levels. For a salaried individual earning ₹12 lakh, the New Tax Regime eliminates tax entirely, while the old regime still attracts a liability. The gap persists and widens at higher income slabs, despite the availability of deductions.

Beyond the numbers, compliance simplicity is a major advantage. The New Tax Regime removes the need to track investment proofs, rental receipts or travel bills. It also avoids lock-in-heavy tax-saving instruments, giving taxpayers greater flexibility over their cash flows and investment choices.

That said, the old tax regime may still make sense for individuals with substantial existing commitments—such as high home loan interest, large rent payments or long-term tax-saving investments already in place. Experts advise such taxpayers to compare both regimes carefully each year before opting in.

For most new and younger taxpayers, however, the message from recent budgets is clear. With higher exemption limits, lower rates and fewer conditions, the New Tax Regime is fast becoming the default choice—marking what appears to be a gradual but deliberate sunset for the old system.

Current tax slabs

The Union Budget 2025 significantly revamped the New Tax Regime, raising exemption limits and simplifying slab structures for FY 2025–26 (AY 2026–27). Under the revised framework, the basic exemption limit has been increased to ₹4 lakh, while income above ₹24 lakh is taxed at the highest rate of 30%.

The new regime slabs are structured progressively: income up to ₹4 lakh is tax-free; ₹4–8 lakh is taxed at 5%; ₹8–12 lakh at 10%; ₹12–16 lakh at 15%; ₹16–20 lakh at 20%; ₹20–24 lakh at 25%; and income above ₹24 lakh at 30%. This restructured slab system lowers the marginal tax burden across income levels, particularly for middle-income taxpayers.

Budget 2025 also enhanced key deductions under the new regime. The standard deduction for salaried individuals has been increased to ₹75,000, up from ₹50,000 earlier, while the family pension deduction has risen from ₹15,000 to ₹25,000. Together, these changes can deliver tax savings of up to ₹17,500 for eligible taxpayers.

In contrast, the old tax regime remains unchanged. For individuals below 60 years and non-residents, income up to ₹2.5 lakh is exempt, followed by slabs of 5% up to ₹5 lakh, 20% up to ₹10 lakh, and 30% beyond. Senior citizens aged 60–80 enjoy a higher exemption of ₹3 lakh, while super senior citizens above 80 years have a ₹5 lakh exemption limit.

A key difference between the two regimes lies in deductions. The old regime allows a wide range of exemptions, including House Rent Allowance (HRA), deductions under Section 80C, and home loan interest benefits. The new regime largely removes these, except for interest on let-out property.

Ultimately, the choice between regimes depends on an individual’s income structure, deductions, and preference for simplicity versus tax-planning flexibility.

Income Slab                         Old Tax Regime              New Tax Regime (FY 2025–26)
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Up to Rs 2.5 lakh                   Nil                          -

Up to Rs 3 lakh (Senior Citizens)   Nil                          -

Up to Rs 4 lakh                     -                            Nil

Rs 2.5 lakh – Rs 5 lakh             5%                           -

Rs 4 lakh – Rs 8 lakh               -                            5%

Rs 5 lakh – Rs 10 lakh              20%                          -

Rs 8 lakh – Rs 12 lakh              -                            10%

Rs 10 lakh – Rs 12 lakh             30%                          -

Rs 12 lakh – Rs 16 lakh             -                            15%

Rs 16 lakh – Rs 20 lakh             -                            20%

Rs 20 lakh – Rs 24 lakh             -                            25%

Above Rs 10 lakh                    30%                          -

Above Rs 24 lakh                    -                            30%

Since FY 2023–24, the new tax regime has been the default option for individuals and HUFs, though taxpayers can still opt for the old regime if it suits them better. With Budget 2026 nearing, attention is focused on whether the government will fine-tune the system further -- either by easing compliance, lowering tax burdens, or offering targeted relief to select income groups, especially senior citizens.