With Budget 2025 just around the corner, expectations are mounting about potential income tax reforms that Finance Minister Nirmala Sitharaman might unveil on February 1. Among the key speculations are an increase in the basic exemption limit to ₹10 lakh and the introduction of a 25% tax slab under the new tax regime. Additionally, there is growing anticipation that the standard deduction will be raised to ₹1 lakh, making tax planning more dynamic for salaried individuals.
As the government continues to promote the new tax regime introduced in 2020, taxpayers face an important decision—stick with the old regime that offers deductions and exemptions or shift to the simplified, lower-tax-rate structure with minimal exemptions. Here’s a comprehensive comparison of both regimes and what changes could be on the horizon in Budget 2025.
The New Tax Regime: Simpler and More Attractive
Since its introduction, the new tax regime has undergone multiple enhancements to make it more appealing. The government has steadily reduced tax rates while eliminating most deductions to simplify compliance. In the Budget 2024 announcements on July 23, 2024, the government further liberalized tax slabs, making it a viable alternative for many taxpayers.
Currently, the new tax regime follows this structure for FY 2024-25:
| Annual Income (₹) | Tax Rate (%) |
|---|---|
| 0 – 3,00,000 | 0% |
| 3,00,001 – 6,00,000 | 5% |
| 6,00,001 – 9,00,000 | 10% |
| 9,00,001 – 12,00,000 | 15% |
| 12,00,001 – 15,00,000 | 20% |
| Above 15,00,000 | 30% |
Taxpayers opting for this regime do not need to worry about maintaining multiple proofs for deductions such as HRA, home loan interest, or section 80C investments. However, the lack of deductions makes it less attractive for those who traditionally maximize tax-saving investments.
The Old Tax Regime: Maximum Savings for High Deduction Claimants
The old tax regime, on the other hand, remains unchanged for FY 2024-25 and continues to offer significant tax-saving benefits through various deductions:
- ₹1.5 lakh under Section 80C (for investments like PPF, ELSS, EPF, life insurance premiums, etc.)
- ₹50,000 under Section 80CCD(1B) for NPS contributions
- ₹25,000 to ₹50,000 under Section 80D for health insurance premiums
- Up to ₹2 lakh under Section 24(b) for home loan interest payments
- House Rent Allowance (HRA), which can significantly reduce taxable income
For individuals who claim deductions exceeding ₹4.33 lakh (plus the ₹50,000 standard deduction), the old regime often results in lower tax liability.
Old vs. New Regime – Which One to Pick in 2025?
Government data indicates that nearly 72% of taxpayers opted for the new tax regime in FY 2023-24. However, a sizable section of taxpayers continues to benefit from the old tax regime, particularly those in higher income brackets with substantial deductions.
For example, if an individual earning ₹15 lakh annually claims total deductions of ₹4.5 lakh (including the standard deduction of ₹50,000), they will pay lower taxes under the old regime. However, if they do not have a home loan or HRA, the new regime may be more beneficial due to its reduced tax rates.
The Impact of HRA on Tax Savings
HRA remains a critical factor in deciding between the two regimes. Unlike other deductions, HRA has no absolute cap and is calculated based on:
- The actual HRA received
- 50% of the basic salary (for metro cities) or 40% (for non-metros)
- Actual rent paid minus 10% of basic salary
For a high-income taxpayer earning ₹60 lakh, deductions worth ₹4.5 lakh would save about ₹5,720 in taxes under the old regime. However, if they also claim HRA of ₹12 lakh, the tax savings jump to a staggering ₹4,77,620.
These figures underscore why many individuals, particularly those living in metro cities and claiming high HRA, still find the old tax regime more beneficial.
Will Budget 2025 Bring More Taxpayer-Friendly Changes?
As taxpayers await Budget 2025, several anticipated changes could influence the choice between the old and new regimes:
- Increase in Basic Exemption Limit: If the government raises the tax-free limit to ₹10 lakh under the new regime, it would significantly benefit middle-class taxpayers.
- New 25% Tax Slab: A proposed 25% tax bracket may bridge the gap between the 20% and 30% slabs, potentially making the new regime more attractive.
- Higher Standard Deduction: A standard deduction hike from ₹50,000 to ₹1 lakh would benefit salaried employees and pensioners under both regimes.
- Additional Incentives for the New Regime: Further tax concessions may encourage more people to shift from the old tax structure.
Conclusion
Budget 2025 holds the potential to reshape income tax policies, making the choice between the old and new regimes even more crucial for taxpayers. While the new regime is gaining traction due to its simplicity and lower tax rates, the old regime continues to offer better savings for those who claim multiple deductions.
Taxpayers must analyze their income, exemptions, and investment patterns to make an informed decision. If Budget 2025 introduces further tax reliefs, the tax landscape could shift significantly, making the choice between the two regimes even more interesting.
For more market insights, follow our blog.
Stay tuned for more updates and insights on the stock market! For more insights on investing in the Indian stock market, check out resource like ET, NSE India.
Disclaimer: This blog post is for informational purposes only and should not be considered financial advice. Investors should conduct thorough research and consult with a qualified financial advisor before making any investment decisions.