Tax planning 2025–26: What taxpayers need to know before picking the perfect regime

With the start of the new financial year, most offices ask their employees to share their financial roadmap for that year. Herein, salaried employees face an important question from their employers: Which tax regime do they want to choose - the old tax regime or new - for the purpose of TDS from salary.

The changes announced during the Budget 2025 presentation on February 1, 2025, including the exemption of income tax for earnings up to Rs 12 lakh, have come into effect on April 1, 2025. The choice for the financial year 2025-26, however, will be easier for many salaried employees. This is because there is no tax payable if an individual's net taxable income does not exceed Rs 12 lakh.

Salaried employees with a gross taxable income not exceeding Rs 12.75 lakh can use the standard deduction of Rs 75,000 to pay zero tax. Further, they can use the employer's contribution to the National Pension System (NPS) account to reduce their net taxable income and thereby pay zero or a lower tax.

However, for salaried individuals with taxable income ranging between Rs 12 lakh and Rs 24 lakh, it is important to determine which tax regime suits them better to ensure that the lower tax is deducted from their salary income during the fiscal year.

Changes from FY 2025-26 (AY 2026-27)

The income earned up-to Rs.12 Lakhs under new regime will ultimately have Nil tax liability. Here's how!

The modified slab rates for new tax regime applicable for FY 2025-2026 are as follows:

Up to Rs 4L – Nil

Rs 4L – Rs 8L 5%

Rs 8L – Rs 12L 10%’

Rs 12L – Rs 16L 15%

Rs 16L – Rs 20L 20%

Rs 20L – Rs 24L 25%

Above Rs 24L 30%

The rebate allowed under section 87A has now been increased to Rs.60,000 for new regime from Rs.25,000. Since the rebate allowed has been increased, tax incidence for income up-to Rs.12,00,000 will be zero. 
Rebate is not allowed for income taxable at special rates. For example, capital gain u/s 112A.
Marginal relief on rebate is still applicable.

Deductions in the new tax regime
 
Section 24(b): Deduction for interest on housing loan for rental property
 
Section 80CCD (2): Deduction for employer’s contribution to the national pension scheme (NPS), limited to 14 per cent of salary
 
Tax slabs under the old tax regime:
 
Income up to Rs 250,000: Nil
 
Income from Rs 250,001 to Rs 5,00,000: 5 per cent
 
Income from Rs 5,00,001 to Rs 10,00,000: 20 per cent
 
Income above Rs 10,00,000: 30 per cent

Deductions under Old Tax Regime
 
The old tax regime has various deductions, including:
 
Section 80C: Deductions up to Rs 150,000 for investments in PPF, ELSS, and LIC premiums.
 
Section 80D: Deductions for health insurance premiums.
 
Section 24(b): Deductions for home loan interest up to Rs 200,000.
 
Additional exemptions like HRA and LTA.

What taxpayers should weigh before choosing in FY 2025–26

"Choosing between the old and new tax regimes is a crucial decision for taxpayers. The choice generally depends on the taxpayer's income, deductions, and financial goals," said CA Ruchika Bhagat, MD, Neeraj Bhagat & Co.
 
Here is a quick guide to help determine the threshold for selecting the most beneficial regime:

1. Income Level and Tax Slabs

• Old Regime: Has higher tax rates but allows multiple deductions and exemptions under sections like 80C, 80D, HRA, LTA, and more.
• New Regime: Offers lower tax rates with minimal deductions and exemptions. It simplifies tax filing.

2. Threshold for Choosing
• Below ₹7 lakh Annual Income: The new tax regime is typically better as it provides a rebate under Section 87A, making the effective tax liability zero.
• ₹7-10 lakh Annual Income: The old regime may be advantageous if you claim significant deductions.
• Above ₹10 lakh Annual Income: Evaluate based on your deductions. If deductions exceed ₹5 lakh, the old regime might be preferable. Otherwise, the new regime is beneficial with lower tax rates.

3. Key Considerations

• Minimal Deductions: If you don't have major deductions (like home loan interest, insurance premiums, or NPS contributions), the new regime with its lower rates may suit you better.
• High Investment and Expenses: If you actively invest in tax-saving instruments or have substantial home loan interest, the old regime may lead to lower taxes.
• Salaried vs. Self-Employed: Salaried individuals with allowances and deductions may benefit more from the old regime. On the other hand, the new regime may be simpler for self-employed individuals with fewer deductions.