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Understanding Income Tax Calculation in India: Old vs New Regime for FY 2025-26

Calculators.club team

March 01, 2025·10 min read

Introduction

Understanding income tax calculation in India can seem daunting with multiple tax slabs, various deductions and exemptions, and now the choice between two tax regimes. However, having a clear grasp of how your taxes are calculated is crucial for effective financial planning and ensuring you don't pay more than necessary.

In this updated guide for FY 2025-26, we'll explore the old vs new tax regime in detail, reflecting the latest changes announced in Union Budget 2025. You'll learn about the revised income tax slab rates, the enhanced rebates and deductions (like the new ₹4 lakh basic exemption and zero tax on incomes up to ₹12 lakh), and how to calculate your tax step-by-step under each regime. By the end, you'll have a better idea of which regime might be more beneficial for your specific financial situation.

Overview of India's Income Tax Structure

Income tax in India is a direct tax levied on the income earned by individuals (as well as entities like Hindu Undivided Families, companies, firms, etc.) during a financial year. For individual taxpayers, income is classified under five heads:

• Income from Salary
• Income from House Property (e.g., rental income)
• Income from Business or Profession
• Income from Capital Gains (profits from sale of assets like stocks or property)
• Income from Other Sources (interest, dividends, etc.)

Your total income from all these sources, after subtracting eligible deductions, is your taxable income. This taxable income is then taxed according to the applicable income tax slabs and rates for that year.

Old Tax Regime vs New Tax Regime

In the 2020 Union Budget, the government introduced a new tax regime alongside the existing one, giving taxpayers the option to choose either regime each financial year. As of FY 2025-26, the new regime is the default (automatically applied if you don't opt out), but you can still choose the old regime when filing your income tax return if it suits you better. Below is a brief comparison of the two regimes:

• Old Tax Regime: Relatively higher tax rates (for instance, a 30% tax rate applies on income above ₹10 lakh) but allows numerous exemptions and deductions (House Rent Allowance, Leave Travel Allowance, investments under Section 80C, home loan interest, etc.). It is more complex to calculate, yet it can potentially lead to lower tax for those who have significant tax-saving investments and expenses.
• New Tax Regime: Lower tax rates spread across more slabs, but very few deductions or exemptions are allowed. It offers a simpler, more straightforward calculation (fewer documents and proofs needed). However, it may result in a higher tax liability for individuals who would otherwise benefit from large deductions under the old regime.

Tax Slabs Under Both Regimes (FY 2025-26)

For the financial year 2025-26 (Assessment Year 2026-27), the income tax slab rates differ based on whether you opt for the old or new tax regime. The old tax regime follows the traditional slab structure, whereas the new tax regime has revised slabs and rates as per the latest budget. Below are the slab rates applicable under each regime:

Old Tax Regime Slab Rates (FY 2025-26)

Note: Under the old regime, a tax rebate (Section 87A) ensures that if your taxable income does not exceed ₹5 lakh, your tax liability becomes zero (you get a rebate of up to ₹12,500). Additionally, the basic exemption limit is higher for senior citizens: individuals aged 60–79 have a ₹3,00,000 threshold, and those 80 or above have ₹5,00,000.

New Tax Regime Slab Rates (FY 2025-26)

Important: The new regime now provides a much higher relief through a rebate under Section 87A. If your taxable income (after deductions allowed in new regime) is up to ₹12,00,000, no income tax is payable. In other words, the rebate (up to ₹60,000) will cover your tax so that incomes up to ₹12 lakh face zero tax. This is a significant increase from the ₹7 lakh threshold in the previous year. The introduction of the 25% slab for ₹20–24 lakh (and shifting the 30% rate to above ₹24 lakh) also means lower taxes for high earners compared to earlier. The new slab structure aims to make the new regime more attractive and beneficial for a wider range of taxpayers.

Deductions and Exemptions: Old Regime vs New Regime

One of the biggest differences between the two regimes is how they handle tax-saving deductions and exemptions. The old regime permits a variety of deductions that can significantly reduce your taxable income, whereas the new regime offers very limited deductions in exchange for lower tax rates. Below we outline the key deductions under each regime.

Deductions and Exemptions Under the Old Tax Regime

Under the old regime, taxpayers can take advantage of numerous deductions and exemptions to lower their taxable income. Some of the major tax breaks include:

• Section 80C investments (up to ₹1.5 lakh): This is one of the most widely used deductions. You can claim up to ₹1,50,000 per year for certain investments and expenses, such as contributions to Employee Provident Fund (EPF), Public Provident Fund (PPF), National Savings Certificate (NSC), Life Insurance Premiums, Equity-Linked Savings Schemes (ELSS mutual funds), Sukanya Samriddhi Account deposits, principal repayment of a home loan, and tuition fees for children (for up to 2 children).
• Section 80D – Health Insurance: You can deduct premiums paid for health insurance (medical insurance) for yourself and your family. The limits are ₹25,000 per year for premiums for self, spouse, and dependent children, plus another ₹25,000 if you also pay for your parents' health cover (₹50,000 if your parents are senior citizens). If you (the taxpayer) are a senior citizen, your own limit is ₹50,000 as well. In the best-case scenario (senior citizen parents and taxpayer), you can claim up to ₹1,00,000 under 80D in a year.
• House Rent Allowance (HRA): Salaried individuals who receive an HRA component and pay rent can get a portion of HRA exempt from tax. The exempt amount depends on factors like your salary, the rent paid, and your city of residence (metro city taxpayers get a higher exemption). Proper rent receipts are needed to claim this exemption.
• Leave Travel Allowance (LTA): Salaried employees can claim exemption for travel expenses (limited to travel fare) for trips taken with family within India. This can be availed for two journeys in a block of four years, subject to certain conditions and submission of travel proof.
• Home Loan Interest (Section 24 & 80EEA): If you have a home loan on a self-occupied property, you can deduct the interest paid up to ₹2,00,000 per year under Section 24(b) of the Income Tax Act. Additionally, first-time homebuyers were eligible for an extra deduction of up to ₹1,50,000 on interest under Section 80EEA (subject to conditions such as the home value and loan sanction date). This could increase the total home loan interest deduction to ₹3.5 lakh in a year.
• Education Loan Interest (Section 80E): Interest paid on an education loan for higher studies (for yourself, spouse, or children) can be fully deducted (no upper limit) for up to 8 years starting from the year you begin repayment.
• Donations (Section 80G): Money donated to specified charitable institutions and relief funds can be claimed as a deduction. Depending on the organization, you can deduct either 50% or 100% of the donated amount (subject to certain qualifying limits in some cases).
• Standard Deduction: A flat ₹50,000 deduction is available to salaried individuals (and pensioners) under the old regime. This is automatically available to everyone with salary income, without needing any proof of expense.
• Other Deductions: There are many other specific deductions (like Section 80TTA/80TTB for interest income, Section 80DD for expenses on a disabled dependent, etc.) that are available under the old regime if relevant to your situation. The above list covers the most common ones.

Deductions and Exemptions Under the New Tax Regime

The new tax regime largely does not allow the above deductions and exemptions. This means you generally cannot claim popular deductions like 80C, 80D, HRA, home loan interest, or LTA if you choose the new regime. The idea is that the lower tax rates in the new regime compensate for the loss of these tax breaks. However, the government has allowed a few specific deductions even under the new regime. The key allowances available are:

• Standard Deduction: Salaried taxpayers (and pensioners) can claim a standard deduction from their salary income under the new regime as well. For FY 2025-26, this standard deduction is ₹75,000 (recently increased from ₹50,000). This deduction is given automatically against salary income.
• Employer's NPS Contribution (Section 80CCD(2)): Contributions made by your employer to your NPS (National Pension System) account are deductible under both regimes, and this continues in the new regime. Effective April 1, 2025, the limit for employer's NPS contribution deduction has been increased to 14% of your basic salary for all employees (it was previously 10% for private sector employees and 14% for government employees). This means if your employer contributes to NPS on your behalf, that amount (up to the limit) won't be counted as taxable income for you.
• Employer's Provident Fund & Other Allowances: Certain components of your salary are tax-free by nature and remain so in the new regime. For example, employer contributions to your provident fund (EPF) or gratuity payouts are tax-exempt up to specified limits, regardless of regime. These aren't deductions you actively claim — rather, they are exemptions built into the income calculation. Similarly, income from investments that are inherently tax-free (like the interest from PPF or the maturity proceeds of a life insurance policy meeting certain conditions) will remain tax-free under the new regime as well.

Aside from the above, virtually no other deductions are available in the new regime. In choosing the new regime, you are essentially trading tax deductions for a lower tax rate structure. If you have been investing primarily to avail deductions under the old regime, you'll want to reconsider the purpose of those investments when under the new regime (you can of course continue them for their own merits, but you won't get a tax break here).

NPS (National Pension System) – Tax Treatment in Old vs New Regime

The National Pension System (NPS) is a popular retirement savings scheme that also offers tax benefits, but how you can claim those benefits differs between the old and new regimes:

• Old Tax Regime: If you invest in NPS, you can claim a deduction for your contributions under Section 80CCD(1) as part of the ₹1.5 lakh 80C limit. Additionally, you get an exclusive deduction of up to ₹50,000 under Section 80CCD(1B) for NPS contributions (this is over and above the ₹1.5 lakh limit of 80C). In total, an individual can deduct up to ₹2,00,000 each year for their own NPS contributions in the old regime (assuming they invest that much in NPS). Employer contributions to your NPS (under Section 80CCD(2)) are also deductible separately (and do not fall under the ₹1.5 lakh 80C limit) – typically up to 10% of your basic salary (now 14% for FY 2025-26, as noted above) can be claimed if your employer contributes to NPS.
• New Tax Regime: Under the new regime, you do not get any deduction for your own NPS contributions. Neither the ₹1.5 lakh 80C portion nor the additional ₹50,000 (80CCD(1B)) can be claimed if you opt for the new regime. The only NPS-related tax benefit you can avail in the new regime is on your employer's contribution: as mentioned, employer contributions to NPS (up to 14% of salary) are not taxed and can be claimed as a deduction from your income. Thus, NPS is still beneficial under the new regime if your employer offers contributions (since that part won't be taxed for you), but any voluntary contributions you make won't reduce your tax under the new system.

Note: The tax treatment when you withdraw from NPS at retirement is the same under both regimes – currently, 60% of the corpus withdrawn as a lump sum is tax-free, and the remaining 40% must be used to purchase an annuity (pension) which is taxed as per your income slab in the year you receive those pension payments.

Step-by-Step Income Tax Calculation (Example)

To better understand how the calculations differ between the two regimes, let's walk through an example.

Example: Consider Rahul, a 35-year-old salaried employee with the following financial details in FY 2025-26:

• Annual Gross Salary: ₹12,00,000 (inclusive of allowances like HRA)
• HRA Received: ₹3,60,000 (annual) – Rahul pays ₹3,00,000 in rent annually
• EPF Contribution: ₹1,00,000 (this is part of his 80C investments)
• ELSS Investment: ₹50,000 (another 80C investment, in a tax-saving mutual fund)
• Health Insurance Premium: ₹20,000 (for himself and family, eligible under 80D)
• Home Loan Interest: ₹2,00,000 (interest paid on a housing loan for a self-occupied house)

Rahul can choose either tax regime. Below is how his tax calculation would look under each:

Calculation under Old Tax Regime:

Now, apply the old regime tax slabs to ₹5,40,000:

• ₹0 to ₹2,50,000: 0% tax on this part
• ₹2,50,001 to ₹5,00,000: 5% tax on ₹2,50,000 = ₹12,500
• ₹5,00,001 to ₹5,40,000: 20% tax on ₹40,000 = ₹8,000

Total tax (before cess) = ₹12,500 + ₹8,000 = ₹20,500. Adding 4% Health & Education Cess (₹820) gives a total tax liability of ₹21,320 under the old regime.

Calculation under New Tax Regime:

Under the new regime, note that Rahul cannot claim HRA exemption or any of the Section 80C/80D deductions (they are all disallowed). Only the standard deduction is applied. Now apply the new regime tax slabs to ₹11,25,000:

• ₹0 to ₹4,00,000: 0% tax on this part
• ₹4,00,001 to ₹8,00,000: 5% tax on ₹4,00,000 = ₹20,000
• ₹8,00,001 to ₹11,25,000: 10% tax on ₹3,25,000 = ₹32,500

Total tax (before cess) = ₹20,000 + ₹32,500 = ₹52,500. Cess at 4% adds ₹2,100, for a total of ₹54,600. However, because Rahul's taxable income (₹11.25 lakh) is within the ₹12 lakh threshold for rebate in the new regime, he is eligible for the Section 87A rebate (up to ₹60,000). His entire tax of ₹52,500 is offset by this rebate, bringing his effective tax liability down to ₹0 under the new regime.

Comparison:

In this example, Rahul would pay ₹21,320 in tax under the old regime versus ₹0 under the new regime. Clearly, the new regime is more beneficial for him given his income and deduction profile, saving him ₹21,320 in taxes. This flip in advantage (compared to earlier years when the old regime used to save more for Rahul) is due to the new regime's enhanced rebate and adjusted slab rates for FY 2025-26.

How to Use Our Income Tax Calculator

Calculating your income tax manually can be time-consuming and prone to errors. Our Income Tax Calculator simplifies this process by:

1. Automatically calculating tax under both regimes
2. Providing a side-by-side comparison of your tax liability
3. Highlighting which regime is more beneficial for you
4. Showing a detailed breakdown of deductions and tax calculations

To use our calculator effectively:

1. Enter your total income from all sources
2. Specify applicable deductions under various sections
3. Add details about your HRA, if applicable
4. Click "Calculate" to see your tax liability under both regimes

Choosing Between the Old and New Regime

Every taxpayer's situation is different. Here are some general considerations to help decide which regime might be better for you:

You might prefer the Old Tax Regime if:

• You have significant tax-saving investments and expenses that you can claim as deductions (e.g., maxing out Section 80C investments, paying substantial home loan interest, etc.), which substantially reduce your taxable income.
• You pay a sizeable rent and can claim a high HRA exemption, or you have other salary components like LTA that you utilize for tax-free reimbursement.
• You have financial commitments like a home loan or insurance that anyway lead you to invest/spend in tax-deductible avenues, and/or you have dependents with high medical or educational expenses (covered under various deductions).
• You are willing to handle a bit more paperwork and complexity in order to save on taxes by claiming multiple exemptions and deductions.

You might prefer the New Tax Regime if:

• You do not have many investments or expenditures that qualify for tax deductions (for example, you are not utilizing the full ₹1.5 lakh under 80C, or you don't have a home loan, etc.).
• You are early in your career or have a relatively lower income, such that even without deductions, your tax liability would be modest. The new regime's lower rates (and the rebate for income up to ₹12 lakh) might automatically give you a very low or zero tax.
• You prefer to keep your money flexible rather than locking it into specific tax-saving schemes just for deductions. The new regime lets you take home more of your income without needing to invest in certain products purely for tax benefits.
• You want a simpler tax filing experience – with the new regime, you don't need to keep track of numerous receipts or investment proofs, since you won't be claiming those deductions.

(Remember, you have the freedom to evaluate and choose your preferred regime each year when filing your tax return. It's wise to compare both regimes annually, especially if your income or eligible deductions change.)

Tax Planning Strategies

Regardless of which regime you choose, smart tax planning can help you optimize your finances. Here are some strategies to consider:

For the Old Regime:

• Maximize Section 80C investments to the ₹1.5 lakh limit. Make full use of options like PF, PPF, NSC, ELSS, life insurance, etc. to reduce your taxable income.
• Leverage NPS contributions for the extra ₹50,000 deduction under Section 80CCD(1B). If you're comfortable locking money in NPS until retirement, it's an efficient way to get additional tax savings beyond 80C.
• Ensure adequate health insurance coverage for yourself and family so you can claim deductions under Section 80D (besides the primary benefit of being financially protected).
• Plan investments early in the financial year instead of scrambling at year-end. This way, your investments (e.g., ELSS mutual funds or PPF deposits) have more time to grow, and you can spread out your cash outflows throughout the year.
• Maintain documentation for all your tax-saving investments and expenses (keep receipts for insurance premiums, rent, donation certificates, loan interest statements, etc.). Good record-keeping will help substantiate your claims in case of any scrutiny and make tax filing easier.

For the New Regime:

• Focus on wealth creation through investments that suit your goals, without the constraint of having to be tax-saving instruments. You might choose higher-return avenues like diversified equity mutual funds, stocks, or other assets based on your risk profile, since you aren't forced to invest in specific products for tax deductions.
• Use tax-efficient investment options. For example, equity-oriented investments held over the long term can yield gains that are taxed at a lower rate (long-term capital gains tax) compared to your normal income slab rate. Similarly, interest from certain bonds (e.g., tax-free bonds) or maturity proceeds from compliant insurance policies are not taxable. Even though you don't need them for deductions under the new regime, such investments can still improve your post-tax returns.
• Think long-term. The new regime's benefit is immediate simplicity, but you should still plan for long-term financial goals. Invest in instruments that align with your objectives (retirement, buying a house, children's education, etc.) and be mindful of their tax implications. For instance, know the holding period required for investments to qualify as long-term capital assets, and the tax rates on such capital gains, so you can optimize your investment strategy beyond just salary income.

Conclusion

Understanding how income tax is calculated – and how the two regimes differ – is essential for effective financial planning. With the changes in FY 2025-26, the new tax regime has become far more attractive for many taxpayers, thanks to its lower rates and generous rebate. However, the old regime with its rich deductions and exemptions can still sometimes result in lower tax for those with substantial investments and expenses. The best choice truly depends on your individual profile.

There is no one-size-fits-all answer. The right regime for you can vary based on your income level, life stage, and how much you are investing in tax-saving avenues. It may even change from year to year as your financial circumstances evolve. That's why it's important to evaluate both options (manually or using an income tax calculator) before making a decision each year.

Lastly, remember that tax planning is just one part of your overall financial strategy. While it's great to save on taxes, make sure your investment decisions align with your broader financial goals and needs, not just the tax benefits. Focus on creating a balanced portfolio that addresses your long-term objectives while also optimizing for tax efficiency. This approach will help you build wealth wisely and minimize your tax liability. Good luck with your tax planning!