Old vs New Tax Regime: Which one is better for Salaried Employees

The Government of India introduced a new optional tax rate system for individuals and Hindu Undivided Families (HUF) starting from April 1, 2020, for the financial year 2020-21. As a result, Section 115BAC was added to the Income Tax Act, providing taxpayers with the choice of opting for lower tax rates, provided they forego certain exemptions and deductions that were previously available. This move aimed to simplify the tax structure and provide relief to taxpayers who preferred a lower tax burden over availing multiple deductions. Over the years, this new tax regime has seen modifications and improvements to make it more attractive, particularly to the salaried middle class, which forms a significant portion of the tax-paying population in India. In line with this objective, the Union Budget 2025, presented by Finance Minister Nirmala Sitharaman on February 1, 2025, introduced significant reforms in India’s income tax structure to provide further relief to middle-class taxpayers, particularly salaried employees. One of the most notable changes announced in the Budget 2025 was the increase in the standard deduction from ₹50,000 to ₹75,000 under the new tax regime. The standard deduction is a fixed amount deducted from a salaried individual’s total income before calculating taxable income, providing a direct benefit to employees by reducing their overall tax liability. This increase in standard deduction is particularly beneficial for salaried individuals and pensioners, ensuring a higher portion of their income remains tax-free. Additionally, the government has announced that under the new tax regime, there will be no tax liability for salaried employees earning up to ₹12.75 lakh per annum. This means that a substantial segment of salaried employees will now pay lower or no taxes, enhancing their disposable income and boosting consumption. Another major change introduced in Budget 2025 is the revision of the rebate available under Section 87A of the Income Tax Act. Previously, under the new tax regime, individuals with a taxable income of up to ₹7 lakh were eligible for a full tax rebate, meaning they did not have to pay any income tax. However, with the new changes, the rebate under Section 87A has been increased from ₹25,000 to ₹60,000. Consequently, individuals with taxable income up to ₹12 lakh per annum will now be exempt from paying any income tax. This change marks a significant relief for the middle class, especially those with annual incomes falling within this bracket, as it drastically reduces their tax liability and allows them to retain more of their earnings. The increase in rebate under Section 87A and the enhancement of the standard deduction are expected to simplify tax compliance for individuals, making the new tax regime more attractive and beneficial compared to the old tax regime, which relied on multiple deductions and exemptions. By ensuring that individuals earning up to ₹12 lakh pay no income tax and providing additional relief to those earning up to ₹12.75 lakh, the government has taken a decisive step towards making taxation more taxpayer-friendly and less cumbersome. These reforms align with the broader objective of increasing disposable incomes, boosting savings, and driving economic growth through enhanced consumer spending. Furthermore, the new changes reaffirm the government’s commitment to rationalizing the tax structure and making it more equitable for salaried employees. By reducing the direct tax burden on the middle class, the government aims to improve overall financial well-being and stimulate economic activity. The revised tax provisions will encourage more individuals to opt for the new tax regime, as it now offers greater benefits and simplicity compared to the previous structure. In summary, Budget 2025 has introduced significant reforms to India’s income tax framework, particularly benefiting salaried individuals and the middle class. The increase in the standard deduction from ₹50,000 to ₹75,000 and the enhancement of the rebate under Section 87A to ₹60,000 ensure that individuals earning up to ₹12 lakh per annum will pay no income tax, while those earning up to ₹12.75 lakh will have a significantly reduced tax burden. These changes not only provide direct relief to taxpayers but also contribute to enhancing disposable incomes, promoting economic growth, and simplifying tax compliance under the new tax regime.

Income Tax Slabs (FY 2025-2026)

Comparison

Blog By:

CA Preeti Tiwari

Assistant Professor

Biyani Girls College