Union Budget 2025 delivered a landmark change for Indian taxpayers: under the new tax regime, income up to ₹12 lakh is now effectively tax-free (₹12.75 lakh for salaried employees after the ₹75,000 standard deduction). This is the biggest relief in years. But does it make the new regime better for everyone? Not necessarily. Here is the complete 2025-26 analysis.
Budget 2025 Big Change: ₹12 Lakh Tax-Free Under New Regime
Finance Minister Nirmala Sitharaman's Union Budget 2025, presented on February 1, 2025, made the new tax regime significantly more attractive. The key changes for FY 2025-26:
- Rebate u/s 87A raised to ₹60,000 — covering full tax liability for income up to ₹12 lakh under the new regime
- Standard deduction maintained at ₹75,000 — making ₹12.75 lakh effectively tax-free for salaried employees
- New slab structure — revised with 0% on first ₹4 lakh (up from ₹3 lakh), making it even more progressive
- TDS threshold for salary increased — reduced compliance burden on employers
This change means a salaried person earning ₹12.75 lakh per year pays zero income tax under the new regime in FY 2025-26. Previously, this level of income would attract significant tax even under the new regime.
New Tax Regime Slabs 2025-26
The new tax regime (now the default regime) has the following slabs for FY 2025-26 (AY 2026-27):
| Income Range | Tax Rate |
|---|---|
| Up to ₹4,00,000 | 0% |
| ₹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 benefits of new regime:
- Standard deduction: ₹75,000 for salaried employees
- Rebate u/s 87A: Tax fully waived if income ≤ ₹12 lakh (making it effectively 0% tax up to ₹12L)
- No need to maintain investment/expenditure proofs
- Employer's contribution to NPS up to 14% of salary is deductible
- Leave travel concession, retrenchment compensation, and VRS exemptions still available
Deductions NOT available in new regime: 80C, 80D, 80E, HRA (Section 10(13A)), LTA, professional tax, interest on housing loan u/s 24(b).
Old Tax Regime Slabs 2025-26
The old regime retains the traditional slab structure with all deductions:
| Income Range | Tax Rate |
|---|---|
| Up to ₹2,50,000 | 0% |
| ₹2,50,001 – ₹5,00,000 | 5% |
| ₹5,00,001 – ₹10,00,000 | 20% |
| Above ₹10,00,000 | 30% |
Available deductions under old regime include:
- Section 80C: Up to ₹1,50,000 (PPF, ELSS, EPF, life insurance, home loan principal)
- Section 80D: Health insurance premium (₹25,000 self + ₹50,000 parents)
- HRA: House Rent Allowance exemption (actual HRA vs 40/50% of basic vs rent paid minus 10% of basic — lowest of three)
- Section 80E: Education loan interest deduction (no limit, 8 years)
- Section 24(b): Home loan interest up to ₹2,00,000
- Standard deduction: ₹50,000
- Rebate 87A: Full tax waived if taxable income ≤ ₹5,00,000
Side-by-Side Tax Comparison 2025-26
Annual gross salary comparison (salaried employee, all figures in ₹):
| Gross Salary | New Regime Tax | Old Regime Tax* | Winner |
|---|---|---|---|
| ₹8,00,000 | ₹0 | ₹42,500 | New ✓ |
| ₹10,00,000 | ₹0 | ₹65,000 | New ✓ |
| ₹12,75,000 | ₹0 | ₹1,05,000 | New ✓ |
| ₹15,00,000 | ₹45,000 | ₹1,12,500 | New ✓ |
| ₹20,00,000 | ₹1,20,000 | ₹2,02,500 (if full deductions used) | Depends on deductions |
| ₹25,00,000 | ₹2,62,500 | ₹3,67,500 (if full deductions) | New ✓ typically |
| ₹50,00,000 | ₹10,12,500 | ₹11,25,000 (with deductions) | New ✓ |
*Old regime assumes: Standard deduction ₹50,000 + 80C ₹1,50,000 + 80D ₹25,000 = ₹2,25,000 total deductions. Actual old regime tax depends on your specific deductions.
When is the Old Regime Still Better in 2026?
After Budget 2025, the old regime is beneficial only in specific situations where total deductions are very high. The break-even point has shifted significantly:
For income of ₹15 lakh:
Old regime beats new only if total deductions exceed approximately ₹4.25 lakh. This means you need 80C (₹1.5L) + 80D (₹25K) + HRA (₹2.5L+) all at their maximum simultaneously — not typical for most salaried employees.
For income of ₹20 lakh:
Old regime can beat new if deductions exceed ₹5.5 lakh — very difficult to achieve legitimately for most employees.
Who should still consider old regime:
- Self-employed individuals with large business expenses (Section 44ADA professionals with high actual expenses)
- Salaried employees paying very high HRA in metro cities (Mumbai, Delhi) where HRA alone can exceed ₹3-4 lakh annually
- Those with active home loans with large interest component (up to ₹2L deduction under 24(b)) AND large HRA AND full 80C
- Senior citizens with high medical insurance premiums (80D up to ₹50,000 for self + ₹50,000 for parents = ₹1L)
When New Regime is Better (Most People)
The new regime is better for:
- Anyone earning ≤ ₹12.75 lakh — zero tax guaranteed
- Young professionals without a home loan, without HRA (company accommodation), minimal 80C investments
- Those who find tax compliance complicated — new regime has no proof requirements
- Employees with company-provided accommodation — cannot claim HRA anyway
- Freelancers and gig economy workers — no HRA, limited 80C benefits
- High earners above ₹25 lakh — new regime is almost always better at this level even with maximum deductions
Worked Examples for 2025-26
Example 1: IT Professional, ₹18 lakh salary, Mumbai
Gross Salary: ₹18,00,000 | HRA: ₹60,000/month (₹7.2L/yr) | Rent paid: ₹80,000/month | 80C: ₹1.5L | 80D: ₹25,000
Old Regime:
Standard deduction: ₹50,000
HRA exempt: Min of (₹7.2L, 50%×basic₹9L=₹4.5L, ₹9.6L-10%×₹9L=₹8.7L) = ₹4.5L
80C: ₹1.5L | 80D: ₹25,000
Total deductions: ₹6.75L | Taxable: ₹11.25L
Tax: ₹2,500 + ₹1,25,000 + ₹3,750 = ₹1,31,250
New Regime:
Standard deduction: ₹75,000 | Taxable: ₹17.25L
Tax: 0+20K+40K+67.5K+17.5K+56.25K = ₹2,01,250
→ Old regime saves ₹70,000 in this specific case (high HRA is the deciding factor)
Example 2: Software Engineer, ₹18 lakh, company accommodation (no HRA claim)
Gross: ₹18L | Lives in company quarters (no HRA) | 80C: ₹1.5L | 80D: ₹25,000
Old Regime: Deductions = ₹50K + ₹1.5L + ₹25K = ₹2.25L | Taxable: ₹15.75L | Tax: ≈ ₹2,17,500
New Regime: Taxable: ₹17.25L | Tax: ≈ ₹2,01,250
→ New regime saves ₹16,250 when no HRA benefit is available
How to Switch Between Regimes in 2025-26
Salaried employees: Inform your employer at the beginning of the financial year (April 1). Submit a declaration form. Your employer will deduct TDS accordingly. You can also switch when filing your ITR if you want to change from what your employer applied.
Business/professional income: You can switch only once from new to old regime. Once switched back to old, you cannot switch to new again (except when you have no business income in a particular year).
ITR filing: New regime is the default — you must actively opt for old regime when filing. ITR-1 and ITR-2 both allow regime selection. Filing deadline: July 31, 2026 (for FY 2025-26).
Special Note for NRIs (Non-Resident Indians)
NRIs can choose between old and new regimes for Indian-sourced income. However, NRIs are not eligible for the ₹2.5 lakh basic exemption under the old regime for specific income types. The Section 87A rebate is NOT available to NRIs — meaning NRIs earning ₹12 lakh will pay tax even under the new regime, unlike resident Indians. NRIs should factor this in and model their tax carefully. Consult a CA familiar with NRI taxation.
Use our India Income Tax Calculator to compare new vs old regime instantly with your specific salary and deductions.
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