The New Tax Regime provides taxpayers with a standard deduction of ₹75,000, which is higher than the standard deduction in the Old Tax Regime. These include employer contributions to the National Pension Scheme (NPS) under Section 80CCD(2) are deductible, with the limit increased to 14% of salary. Although various deductions and exemptions are available under the Old Tax Regime, they cannot be accessed in the New Tax Regime.
Thus, it is important to carefully analyze both regimes so you can make an informed decision on the regime you want to opt for.
The new tax regime offers a ₹75,000 standard deduction, reducing taxable income without requiring investment proofs. It also allows deductions for employer contributions to NPS, promoting retirement savings while keeping tax filing simple.
New Tax Regime 2025
As per the Finance Act 2024, various changes have been made to India’s income tax structure, which is effective from Assessment Year (AY) 2025-26. This new tax regime is now the default system and offers lower tax rates with limited deductions and exemptions.
Individuals who do not have major investments or can agree to fewer deductions can opt for the New Tax Regime.
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Exemptions & Deductions in New Tax Regime
The deductions and exemptions available under the New Tax Regime for the Finance Year 2025-2026 are as follows:
- Standard deduction of ₹75,000.
- Effective tax-free salary income up to ₹12 lakh per annum.
- Employer’s contribution to the National Pension Scheme (NPS).
- Contributions to Agniveer Corpus Fund under Section 80CCH.
- Standard deduction on family pension Income.
- Exemption on gratuity under Section 10(10).
- Exemption on leave encashment under Section 10(10AA).
Exemptions & Deductions Not Available Under New Tax Regime
Below are the deductions and exemptions that are not included in the New Tax Regime and are available only under the Old Tax Regime.
- Exemptions on gifts up to ₹50,000.
- Exemptions on amounts received under voluntary retirement under Section 10(10C).
- Deductions for interest on home loans for let-out properties.
- Exemptions for daily and conveyance allowances.
- Exemptions for travel allowances for the physically disabled.
- 80C deductions on investments & 80D deductions.
Benefits of New Tax Regime
The New Tax Regime includes various benefits which are as follows:
- Default deductions and exemptions since the new tax regime is the default option to be followed.
- The reduced tax rates and exemptions simplify tax payment processes.
- No tax for salary income up to ₹12 lakh after deductions.
- Surcharge on income over ₹5 crores reduced, lowering the highest tax rate.
- Increased leave encashment exemption limit for government employees (₹3 lakhs to ₹25 lakh).
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New vs Old Tax Regime for Tax Deductions
The table below shows a comparison between the New Tax Regime and the Old Tax Regime based on the deductions.
| Feature | New Tax Regime | Old Tax Regime |
|---|---|---|
| Suitable for | Individuals who prefer lower tax rates with no exemptions | Individuals with high investments & deductions |
| Tax Rates | Low | High |
| Standard Deduction | ₹75,000 | ₹50,000 |
| Deductions & Exemptions | Limited | Multiple |
| Flexibility | Simple structure with automatic tax calculation | Can claim deductions to lower tax |
| Section 80C Deductions | Not Available | Available (up to ₹1.5 lakh) |
| Section 80D (Health Insurance Premiums) | Not Available | Available |
| House Rent Allowance (HRA) | Not Available | Available |
| Leave Travel Allowance (LTA) | Not Available | Available |
You can choose between the Old Tax Regime and the New Tax Regime based on your preferences. That is,
| Old Tax Regime | Allows investment in tax-saving instruments and claiming deductions |
| New Tax Regime | Offers lower tax rates without claiming exemptions |