The Union Budget 2025 has once again brought the debate between the old and new tax regimes into focus. While the government continues to promote the new tax regime with simplified tax slabs and lower rates, the old tax regime remains attractive for many taxpayers due to extensive exemptions and deductions. With no changes made to the old tax regime in this year’s Budget, taxpayers must carefully evaluate their financial situation to decide whether to stick with it or transition to the new system.
Opting for old regime
The old tax regime is available to all taxpayers, including salaried individuals, self-employed professionals, and business owners, regardless of income bracket. This allows a broad range of taxpayers to benefit from exemptions and deductions [See graphic] under this system, making it a viable option for many taxpayers.
This regime encourages savings and investments by offering deductions for various financial instruments, enabling taxpayers to plan finances as per long-term goals. For those with significant investments in eligible tax-saving schemes, the old regime can lead to higher savings compared to the new despite higher tax rates.
While the old tax regime offers numerous benefits, the new tax regime introduced simplifies taxation with reduced rates but fewer exemptions and deductions. Here are some key factors to consider before making a decision.
Income level and tax-saving Investments: Individuals with substantial investments in tax-saving instruments may find the old tax regime more beneficial. Conversely, those who do not invest heavily in such schemes might benefit from the lower rates of the new tax regime.
Simplicity and compliance: The new tax regime eliminates the need to track multiple deductions and exemptions, simplifying tax calculations and compliance. Those who prefer a straightforward tax approach might find it more appealing.
Tax liability comparison: Comparing tax liabilities under the two regimes can help determine which system results in greater savings, based on an individual’s financial situation.
Revised tax slabs under new regime: Under the new regime, individuals with an income of up to ₹12 lakh are exempt from paying income tax via a mix of rebates and revised tax slabs. This makes the regime attractive for middle-income earners.
Marginal relief for higher earners: The new regime offers marginal relief to those earning a tad above ₹12 lakh, preventing sudden tax jump and making the transition to higher tax brackets smoother.
Restrictions on switching tax regimes Business owners & professionals: If a taxpayer with business income opts for the old regime after initially choosing new regime, they can switch back to the new regime only once in their lifetime. Once they revert , they cannot opt for the old regime again unless business income ceases.
Salaried individuals: They have the flexibility to switch between the two regimes every financial year, based on tax planning.
Impact on disposable income: The new tax regime aims at increasing disposable income by lowering tax liabilities. This can benefit middle-class taxpayers who prioritise higher take-home pay over long-term savings.
Long-term financial planning: Taxpayers must consider long-term financial goals before choosing a regime. The old regime may be more suitable for those focused on retirement planning, savings, and tax-efficient investments while the new regime is more attractive for those seeking immediate tax relief and a simplified process.
Conclusion
The decision to choose between the old and new tax regimes depends on individual financial circumstances, investment habits, and preferences for simplicity or tax-saving opportunities.
If maximising tax deductions through exemptions and deductions is a priority, the old tax regime remains a viable option.
If simplicity and lower tax rates are more important, the new regime offers an easier compliance process with reduced liabilities.
To make an informed choice, taxpayers should carefully evaluate their income, investment plans, and long-term financial goals. Calculating tax liabilities under both regimes can provide clarity on which system best aligns with their financial needs.
(Mr. Chandna is a partner, and Mr. Prashar is an associate director, at Grant Thornton Bharat LLP)
Published – February 17, 2025 07:03 am IST
