The Union Budget 2025 ushered in several changes that were cause of celebration for some. While the new tax regime was a choice introduced a few years ago, the new budget is offering some additional incentive for taxpayers to opt for it, in the form of a higher upper limit on tax exemption, among others.
These changes, effective from FY 2025-26, are important for all taxpaying citizens of the country. Knowing the new tax regime and relevant regulations can help you make informed decisions regarding your taxes. So, what are the top 9 things to know about the new tax regime for FY 2025-26? Let’s find out.
1. Lower Tax Rates
As compared to the old tax regime, the new one was presented as an option that offers relatively better tax slabs and rates. This is often one of the first things that taxpayers know or notice about the new regime. With the new budget, the slab rates have been changed to accommodate a wider taxpaying demographic. According to the new tax slab rates 2025-26, a total income of up to ₹12 lakhs will be exempt from taxes. An additional slab extension of ₹75,000 is also offered, making the total exemption limit 12,75,000.
2. Lesser Exemptions
While the new regime tax structure in India is a viable option for taxpayers looking to save income tax on a salary of up to ₹12 lakhs, it is important to note that there are almost no exemptions to be claimed under this regime. Along with creating more taxpayer-friendly slab rates, the new regime also offers a simplified taxpaying and ITR filing process. So, if you are keen on saving tax above ₹12 lakhs, the new regime may not allow you to claim any deductions.
3. Comparison Between Old and New Regimes
Choosing between the old and new tax regime depends on an individual's financial situation. The old regime may still be beneficial for those who put their money into tax-saving investments and other eligible deductions. However, those who do not wish to engage in any tax planning measures may find the new tax regime more straightforward and financially advantageous.
An income tax calculator available onlin is an essential tool that can help taxpayers compare the tax liability under both regimes. By inputting their income details and eligible deductions, individuals can quickly determine which regime is more beneficial for them.
4. Eligibility for Senior Citizens
Senior citizens can also opt for the new tax regime. While the old regime offers additional exemptions such as a higher basic exemption limit and deductions for medical insurance under Section 80D, the New Tax Regime provides simplicity and lower tax rates without these benefits. Senior citizens should carefully evaluate their income sources and potential tax savings before making a decision.
5. Impact on House Rent Allowance (HRA)
Under the new tax regime, taxpayers cannot claim House Rent Allowance (HRA) exemptions. This could significantly impact salaried individuals who pay rent, as HRA is a substantial part of tax savings in the old regime. Those living in rented accommodations should use an income tax calculator to assess the impact on their taxable income.
6. No Deductions for Life Insurance Premiums
One of the significant features of the new tax regime is the unavailability of deductions for life insurance premiums under Section 80C. While life insurance remains a crucial financial product for risk management, taxpayers need to consider this when evaluating their overall tax liability. The new tax regime prioritises simplicity over incentivising savings and insurance.
7. Standard Deduction in New Tax Regime
In a significant move, the new tax regime offers increased the standard deduction of ₹75,000 to salaries assesses. This deduction is automatically applied, reducing the taxable salary income and making the new tax regime more appealing to salaried individuals.
8. Switching Between Regimes
Salaried taxpayers have the flexibility to switch between the old and new tax regimes every financial year. However, individuals with business income are allowed to switch back and forth only once. This flexibility allows taxpayers to reassess their financial situation annually and choose the regime that offers the most tax savings. An income tax calculator for the new tax regime option can assist in determining which option is more beneficial each year.
9. Tax Planning in the New Regime
While the new tax regime is designed to simplify tax filing, it also reduces the scope for tax planning through investments in tax-saving instruments. Under the old regime, taxpayers could invest in Public Provident Fund (PPF), National Savings Certificates (NSC), life insurance, and other products to reduce their taxable income. The New Tax Regime's lower tax rates aim to compensate for the lack of such deductions, but individuals who rely heavily on these instruments need to reconsider their investment strategies.
The new tax regime as modified in the Finance Act 2024 offers a simplified, lower-tax alternative to the old regime, but it comes with fewer exemptions and deductions. Taxpayers need to carefully evaluate their financial situations, including their investments in tax-saving instruments and life insurance, before making a decision.
** Tax exemptions are as per applicable tax laws from time to time.
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