Tax Calculation: Old vs. New Tax Regime FY 2025-26


 

Tax Calculation: Old vs. New Tax Regime with an Example

The Indian income tax system offers taxpayers the option to choose between the old tax regime and the new tax regime. The old regime provides multiple deductions and exemptions, whereas the new regime offers lower tax rates but eliminates most exemptions. Understanding the differences between these two regimes can help taxpayers make an informed decision. In this blog, we compare tax calculations under both regimes using an example.

Income Tax Slabs for FY 2025-26

Old Tax Regime (with deductions & exemptions)

  • Income up to ₹2.5 lakh – Nil

  • ₹2.5 lakh to ₹5 lakh – 5%

  • ₹5 lakh to ₹10 lakh – 20%

  • Above ₹10 lakh – 30%

New Tax Regime (lower tax rates, no deductions)

  • Income up to ₹3 lakh – Nil

  • ₹3 lakh to ₹7 lakh – 5%

  • ₹7 lakh to ₹10 lakh – 10%

  • ₹10 lakh to ₹12 lakh – 15%

  • ₹12 lakh to ₹15 lakh – 20%

  • Above ₹15 lakh – 30%

Example: Tax Calculation for an Individual Earning ₹12 Lakhs

Let's consider a salaried individual earning ₹12,00,000 annually and compare tax calculations under both regimes.

1. Old Regime Calculation (With Deductions)

Assuming the individual claims the following deductions:

  • Standard Deduction: ₹50,000

  • Section 80C (Investments like PPF, EPF, Life Insurance, etc.): ₹1,50,000

  • Section 80D (Health Insurance Premium): ₹25,000

  • HRA Exemption (for rented accommodation): ₹1,00,000

Taxable Income After Deductions:

₹12,00,000 - (₹50,000 + ₹1,50,000 + ₹25,000 + ₹1,00,000) = ₹8,75,000

Tax Calculation (Old Regime):

  • Up to ₹2.5 lakh – Nil

  • ₹2.5 lakh to ₹5 lakh – 5% of ₹2.5 lakh = ₹12,500

  • ₹5 lakh to ₹8.75 lakh – 20% of ₹3.75 lakh = ₹75,000

  • Total Tax = ₹87,500

  • Rebate & Cess: Adding 4% cess = ₹91,000

2. New Regime Calculation (No Deductions)

Taxable Income:

₹12,00,000 (since deductions are not allowed)

Tax Calculation (New Regime):

  • Up to ₹3 lakh – Nil

  • ₹3 lakh to ₹7 lakh – 5% of ₹4 lakh = ₹20,000

  • ₹7 lakh to ₹10 lakh – 10% of ₹3 lakh = ₹30,000

  • ₹10 lakh to ₹12 lakh – 15% of ₹2 lakh = ₹30,000

  • Total Tax = ₹80,000

  • Adding 4% cess = ₹83,200

Which Regime is Better?

  • In this example, Old Regime Tax = ₹91,000, while New Regime Tax = ₹83,200.

  • The new regime is beneficial for those who do not claim significant deductions and prefer lower tax rates.

  • The old regime is better for those who invest in tax-saving instruments and claim multiple deductions.

Conclusion

Choosing between the old and new tax regimes depends on your financial habits and investment preferences. If you claim multiple deductions, the old regime is more beneficial. If you prefer a simpler tax structure with lower rates and no deductions, the new regime is a better choice.

Before making a decision, it’s advisable to calculate your tax liability under both regimes and choose the one that minimizes your tax burden!


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