Old vs New Tax Regime: Which One Should You Choose?

Over 8 crore Indians filed income tax returns in the last fiscal. Yet, as we approach the peak of Financial Year 2025–26, confusion persists due to the Union Budget 2025 updates that radically simplified the tax landscape. One wrong choice could lead to significant "tax leakage" money that could otherwise be invested or used for debt repayment.

According to the latest Ministry of Finance notifications, the new vs old tax regime debate now centers on a much higher "zero-tax" threshold. While Hero FinCorp (a regulated NBFC) helps you manage liquidity through credit solutions like personal loans, optimizing your tax outgo is the first step toward true financial wellness. As per the Finance Act 2025, the New Tax Regime is the default choice unless you explicitly opt out by filing Form 10-IEA (for business income) or informing your employer.

Understanding the Two Tax Regimes (Updated for FY 2025-26)

The Union Budget 2025-26 enhanced the New Tax Regime to significantly favor middle-income earners by widening slabs and increasing the rebate limit.

*Basic exemption for the old regime is ₹3L for Senior Citizens and ₹5L for Super Senior Citizens.

Crucial Update: Under the income tax slabs new regime, the Section 87A rebate has been increased to ₹60,000. This means resident individuals with a net taxable income up to ₹12 lakh pay zero tax.

Key Differences at a Glance

• The Old Regime: Retains 70+ exemptions (HRA, LTA, Section 80C, 80D) but keeps a steeper tax curve, with the 30% tax bracket starting at just ₹10 lakh.
• The New Regime: Features lower rates and an increased Standard Deduction of ₹75,000 for salaried individuals (up from ₹50,000 in the previous year).

7 Smart Steps to Choose the Right Tax Regime

Step 1: Calculate Your Gross Total Income

Sum up all sources: Salary, freelance gigs, rental income, and interest. Per RBI's 2025 guidelines on financial transparency, ensure you account for all interest income, as the TDS threshold for senior citizens has been raised to ₹1 lakh.

Step 2: List All Deductions (Old Regime Only)

Compare old vs new tax regime by totaling your potential claims under the income tax slabs old regime:

• Section 80C: (PPF, ELSS, LIC) up to ₹1.5 lakh.
• Section 24(b): Home loan interest up to ₹2 lakh.
• Section 80D: Health insurance premiums for self and parents.

Step 3: Factor in the New Standard Deduction

For FY 2025-26, the income tax slabs new regime allows a ₹75,000 standard deduction. This means a salaried individual earning ₹12.75 lakh gross pays zero tax ($₹12.75L - ₹75,000 = ₹12L$ taxable income, fully covered by the Section 87A rebate).

Step 4: Use the "Breakeven" Analysis

If your total deductions (80C, 80D, HRA, etc.) are less than ₹4.25 lakh, the New Tax Regime is mathematically superior for most taxpayers in 2026. This "breakeven" point has shifted higher due to the Budget 2025 slab revisions.

Step 5: Evaluate Your Life Stage

• Young Professionals: The new vs old tax regime choice is simpler here—the new regime offers higher immediate liquidity and less paperwork.
• Homeowners: If you are paying significant home loan interest, the income tax slabs old regime might still be more beneficial due to the dual benefit of Section 24(b) and 80C.

Step 6: Use Official Comparison Tools

Always verify your specific numbers using the Income Tax Department’s official e-filing calculator. For managing short-term cash flow gaps caused by tax payments or investments, a personal loan from a regulated NBFC like Hero FinCorp can provide support, provided you stay within RBI’s 2025 prudential debt-to-income limits to maintain financial health.

Step 7: Know the Switching Rules

• Salaried Employees: Can switch old vs new tax regime every year at the time of filing their return [U/S 139(1)].
• Business/Professional Income: Can switch only once in a lifetime. Once they opt out of the new regime, they generally cannot return to it in future years under Section 115BAC.

Frequently Asked Questions (FY 2025-26)

Can I switch between tax regimes every year?

Salaried individuals can switch annually; however, those with business income can opt out of the default New Regime only once in a lifetime via Form 10-IEA.

Is the new tax regime better for people with no investments?

Yes, it offers lower rates and a ₹60,000 Section 87A rebate, making income up to ₹12 lakh zero-tax without requiring any investment proofs.

What if I already have a personal loan or home loan?

Personal loans offer no tax breaks, while home loan interest (up to ₹2 lakh) and principal (up to ₹1.5 lakh) are deductible only under the Old Regime.

What is the impact of the increased Standard Deduction?

The New Regime’s standard deduction is now ₹75,000, effectively making a gross salary of up to ₹12.75 lakh tax-free for resident individuals.

Is the Section 87A rebate available in the Old Tax Regime?

Yes, but it is capped at ₹12,500 for income up to ₹5 lakh, whereas the New Regime offers a ₹60,000 rebate for income up to ₹12 lakh.

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