Table of Contents
Introduction: The Tax Game Changer
The new tax regime has turned traditional tax planning on its head. What seemed like a simple choice between lower rates and familiar deductions has become a complex puzzle that millions of taxpayers grapple with every year.
Here’s the reality: choosing the new tax regime means saying goodbye to dozens of exemptions and deductions that have been the backbone of tax planning for decades. But here’s what makes it interesting – sometimes giving up these benefits actually saves you money.
The new tax regime under Section 115BAC offers reduced tax rates but strips away most deductions. It’s like choosing between a discount coupon and cashback – both have value, but which one benefits you more depends entirely on your financial situation.
Understanding the New Tax Regime Framework
Legal Foundation
Section 115BAC of the Income Tax Act governs the new concessional tax regime. Introduced through the Finance Act 2020 and made the default option from FY 2023-24, this provision fundamentally reshapes how individual taxation works in India.
The regime operates on a simple trade-off principle: accept lower tax rates, but forfeit most exemptions and deductions. What sounds straightforward becomes complex when you realize just how many benefits you’re giving up.
Comprehensive Tax Rate Comparison
FY 2024-25 Tax Rates (Current Filing Year):
Income Slab | Old Regime | New Regime |
Up to ₹2.5 lakh | 0% | 0% |
₹2.5-3 lakh | 5% | 0% |
₹3-5 lakh | 5% | 5% |
₹5-7 lakh | 20% | 5% |
₹7-10 lakh | 20% | 10% |
₹10-12 lakh | 30% | 15% |
₹12-15 lakh | 30% | 20% |
Above ₹15 lakh | 30% | 30% |
| Income Slab | Old Regime | New Regime |
| Up to ₹2.5 lakh | 0% | 0% |
| ₹2.5-4 lakh | 5% | 0% |
| ₹4-8 lakh | 5%/20% | 5% |
| ₹8-12 lakh | 20%/30% | 10% |
| ₹12-16 lakh | 30% | 15% |
| ₹16-20 lakh | 30% | 20% |
| ₹20-24 lakh | 30% | 25% |
| Above ₹24 lakh | 30% | 30% |
Key Features of New Tax Regime:
Feature | FY 2024-25 | FY 2025-26 |
Basic Exemption | ₹3 lakh | ₹4 lakh |
Rebate u/s 87A | ₹25,000 (up to ₹7 lakh income) | ₹60,000 (up to ₹12 lakh income) |
Standard Deduction | ₹75,000 | ₹75,000 |
Family Pension Deduction | ₹25,000 | ₹25,000 |
Employer NPS Contribution | 14% of salary | 14% of salary |
Maximum Surcharge | 25% | 25% |
Zero Tax Income Limit (Salaried) | ₹7.75 lakh | ₹12.75 lakh |
The rate structure shows dramatic improvements across both years. For FY 2024-25, the ₹3 lakh basic exemption and ₹25,000 rebate make income up to ₹7.75 lakh tax-free for salaried employees. The FY 2025-26 changes are even more generous – with ₹4 lakh basic exemption and massive ₹60,000 rebate, salaried individuals earning up to ₹12.75 lakh will pay zero tax.
This represents a fundamental shift in India’s tax policy, making the new tax regime increasingly attractive despite the loss of traditional deductions.
Major Exemptions Not Allowed Under New Tax Regime
Section 10 Exemptions - The Big Losses
The new tax regime blocks several exemptions under Section 10 that have traditionally provided substantial tax relief.
House Rent Allowance (Section 10(13A))
This hits hardest. HRA exemption, which could save ₹50,000-₹1,50,000 annually for metro city dwellers, simply disappears under the new regime.
The calculation was generous under the old regime – least of actual HRA received, rent paid minus 10% of salary, or 50% of salary for metros (40% for non-metros). For someone earning ₹10 lakh in Mumbai with ₹30,000 monthly rent, this exemption alone could provide tax savings of ₹15,000-₹20,000 annually.
Leave Travel Concession (Section 10(5))
LTC exemption allowed tax-free domestic travel for employees and their families. While not universally used, families who regularly claimed this benefit lose a valuable tax-planning tool under the new regime.
Complete List of Restricted Section 10 Exemptions
Section | Exemption Type | Annual Impact |
10(5) | Leave Travel Concession | ₹10,000-₹50,000 |
10(13A) | House Rent Allowance | ₹25,000-₹1,50,000 |
10(14) | Special Allowances | ₹5,000-₹25,000 |
10(17) | MP/MLA Allowances | Variable |
10(32) | Minor Child Income | ₹1,500 per child |
10AA | SEZ Unit Exemption | Significant for businesses |
Salary-Related Deduction Restrictions
Professional Tax (Section 16(iii))
Every salaried employee pays professional tax, ranging from ₹200-₹2,500 annually depending on the state. Under the old regime, this was fully deductible. The new regime removes this basic deduction, directly increasing taxable income for all employees.
Entertainment Allowance (Section 16(ii))
Government employees lose the entertainment allowance deduction of up to ₹5,000 or 20% of salary, whichever is lower. While modest, it represents yet another benefit that disappears under the new regime.
House Property: The Home Loan Interest Blow
Section 24(b) Restriction
Perhaps the most financially impactful restriction is the loss of home loan interest deduction for self-occupied properties. The old regime allowed interest deduction up to ₹2 lakh annually under Section 24(b).
For a home loan borrower paying ₹2 lakh interest annually, this translates to tax savings of ₹60,000 in the 30% bracket under the old regime. The new regime eliminates this benefit entirely
Chapter VI-A Deductions: The Massive Overhaul
Section 80C: The Crown Jewel Lost
Section 80C deduction, allowing up to ₹1.5 lakh investment-linked tax savings, is not available under the new tax regime. This affects:
Investment Options Under Section 80C
Investment Type | Maximum Annual Limit | Tax Saving (30% bracket) |
PPF | ₹1,50,000 | ₹45,000 |
ELSS Mutual Funds | ₹1,50,000 | ₹45,000 |
Life Insurance Premium | ₹1,50,000 | ₹45,000 |
EPF Contribution | No limit | Varies |
Home Loan Principal | ₹1,50,000 | ₹45,000 |
NSC | ₹1,50,000 | ₹45,000 |
Tax Saver FD | ₹1,50,000 | ₹45,000 |
The loss of Section 80C represents the biggest single impact for most taxpayers, potentially increasing tax liability by ₹45,000 annually for those in the highest bracket.
Health Insurance Deductions (Section 80D)
Health insurance premiums, medical expenses, and preventive health check-ups lose their tax deductibility under the new regime.
Section 80D Deduction Limits
Category | Deduction Limit | Lost Tax Benefit (30% bracket) |
Self & Family | ₹25,000 | ₹7,500 |
Parents (Non-Senior) | ₹25,000 | ₹7,500 |
Parents (Senior Citizens) | ₹50,000 | ₹15,000 |
Preventive Health Check-up | ₹5,000 | ₹1,500 |
Education Loan Interest (Section 80E)
The unlimited deduction for education loan interest over eight years disappears under the new regime. For families with education loans carrying high interest rates, this represents a substantial ongoing tax disadvantage.
Other Significant Chapter VI-A Losses
Section | Deduction Type | Maximum Limit | Impact |
80G | Donations | 10%-100% of donation | Variable |
80TTA | Savings Account Interest | ₹10,000 | ₹3,000 |
80TTB | Senior Citizen FD Interest | ₹50,000 | ₹15,000 |
80EE | Home Loan Interest (First-time buyers) | ₹50,000 | ₹15,000 |
Limited Allowed Deductions Under New Tax Regime
The Three Survivors
Only three deductions remain available under the new tax regime:
Section | Deduction | FY 2024-25 Limit | FY 2025-26 Limit |
16(ia) | Standard Deduction | ₹75,000 | ₹75,000 |
57(iia) | Family Pension | ₹25,000 | ₹25,000 |
80CCD(2) | Employer NPS Contribution | 14% of salary | 14% of salary |
80CCH(2) | Agniveer Corpus Fund | As applicable | As applicable |
80JJAA | Employment Generation | 30% of additional employee cost | 30% of additional employee cost |
Key Enhancements:
- Standard deduction increased to ₹75,000 (from ₹50,000)
- Family pension deduction raised to ₹25,000 (from ₹15,000)
- Enhanced NPS employer contribution limit to 14% (from 10%)
These exceptions reflect specific policy priorities rather than general tax relief principles.
Business and Investment Restrictions
Depreciation and Business Deductions
Additional Depreciation (Section 32(1)(iia))
Businesses lose the additional 20% depreciation on new plant and machinery, significantly impacting capital-intensive industries.
Research & Development Incentives
Section | Research Deduction Type | Impact on Innovation |
35(1)(ii) | Revenue R&D Expenditure | Reduced innovation incentive |
35(1)(iia) | Capital R&D Expenditure | Higher cost of research |
35(2AA) | Payments to Research Institutions | Less institutional support |
Who Benefits from the New Tax Regime?
Ideal Candidates for New Regime
The new tax regime works best for:
- Young professionals with minimal investments and no home loans
- Employees in non-metro cities without HRA claims
- High-income earners with low deduction utilization
- Senior citizens with simple financial structures
Who Should Stick to Old Regime
The old regime typically benefits:
- Home loan borrowers with substantial interest payments
- Metro city employees claiming significant HRA
- Investment-heavy individuals maximizing Section 80C
- Families with high medical expenses using Section 80D
Practical Decision-Making Framework
Annual Calculation Method
Calculate your tax liability under both regimes:
Old Regime Calculation:
- Gross Income
- Less: All applicable exemptions (HRA, LTC, etc.)
- Less: Standard deduction (₹50,000)
- Less: Chapter VI-A deductions (80C, 80D, etc.)
- Apply tax rates
New Regime Calculation:
- Gross Income
- Less: Limited allowed deductions
- Apply reduced tax rates
Enhanced Break-Even Analysis for Both Financial Years
FY 2024-25 Break-Even Points: Most taxpayers break even when total deductions equal:
- ₹1-1.5 lakh for income up to ₹7 lakh
- ₹2-3 lakh for income between ₹7-12 lakh
- ₹3.5-4.5 lakh for income between ₹12-15 lakh
- ₹4-5 lakh for income above ₹15 lakh
FY 2025-26 Break-Even Points (Projected): With the enhanced rebate to ₹60,000 and ₹4 lakh exemption:
- ₹0.5-1 lakh for income up to ₹8 lakh (new regime heavily favored)
- ₹1.5-2.5 lakh for income between ₹8-12 lakh
- ₹3-4 lakh for income between ₹12-20 lakh
- ₹4.5-6 lakh for income above ₹20 lakh
Critical Insight: The massive rebate increase in FY 2025-26 means taxpayers with income up to ₹12 lakh will find the new regime beneficial even with moderate deductions, fundamentally changing the tax planning landscape.
Strategic Tax Planning Implications
Investment Strategy Overhaul
The new tax regime fundamentally changes investment decision-making. Traditional tax-saving instruments must now be evaluated purely on investment merit rather than tax benefits.
Before vs After Decision Matrix
Investment | Old Regime Logic | New Regime Logic |
ELSS | Tax saving + returns | Returns only |
PPF | Tax triple benefit | Long-term safety |
Insurance | Tax deduction + protection | Pure protection need |
NSC | Tax saving + fixed returns | Fixed returns only |
Compensation Restructuring
Employers may need to reconsider salary structures. Benefits like HRA and special allowances lose value under the new regime, potentially leading to:
- Higher basic salary components
- Reduced allowance structures
- Alternative employee benefits
Future Outlook and Recommendations
Policy Direction
The government’s push toward the new tax regime signals a broader simplification agenda. Expected developments include:
- Gradual rate reductions in the new regime
- Possible elimination of the old regime option
- Further restrictions on remaining deductions
Taxpayer Action Items
- Annual regime evaluation – Don’t set and forget
- Investment portfolio review – Assess beyond tax benefits
- Professional consultation for complex situations
- Documentation maintenance for both regimes
Common Misconceptions Clarified
Myth vs Reality
Myth | Reality |
“New regime is always better” | Depends on individual deductions |
“Can’t switch back to old regime” | Can switch annually |
“New regime means no tax planning” | Requires different planning approach |
“Only benefits high earners” | Benefits vary by deduction usage |
Conclusion: Making the Smart Choice
The new tax regime represents more than a simple choice between tax rates and deductions. It’s a fundamental shift in how we approach tax planning, investment decisions, and financial goal setting.
The comprehensive list of exemptions and deductions not available under the new tax regime demonstrates the significant trade-offs involved. From essential benefits like HRA and home loan interest to investment-linked deductions under Section 80C, the scope of restricted benefits is extensive.
However, this doesn’t make the new regime universally inferior. For taxpayers with minimal deductions, the lower rates often provide better outcomes. The key lies in annual evaluation and strategic planning.
The decision requires careful analysis of your specific financial situation, investment patterns, and long-term goals. Don’t rely on general rules – calculate both scenarios annually and choose the regime that minimizes your overall tax liability.
Remember, the flexibility to switch between regimes annually provides valuable strategic opportunities. Use this flexibility wisely, and consider professional guidance for complex situations.
For expert assistance in navigating these complex decisions and optimizing your tax planning strategy, TaxGroww offers comprehensive support to help you make informed choices that align with your financial objectives while ensuring full compliance with tax regulations.
The tax landscape continues evolving, but understanding these fundamental changes positions you to make smarter financial decisions regardless of future modifications to tax policy.