Under Finance Act amendments for FY 2024-25 (AY 2025-26), the New Tax Regime under Section 115BAC remains the default tax regime in India, offering reduced slab rates and an enhanced Standard Deduction of ₹75,000 for salaried employees and pensioners. With the Section 87A rebate, resident individuals with total taxable income up to ₹7,00,000 pay zero income tax under the New Regime. However, taxpayers with substantial deductions—such as House Rent Allowance (HRA), home loan interest (Section 24b), Chapter VI-A investments (80C, 80D, 80G)—can still opt for the Old Tax Regime if their aggregate deductions exceed the statutory break-even threshold.
Key Statutory Takeaways
- The New Tax Regime is the default regime; taxpayers desiring the Old Regime must explicitly opt out via Form 10-IEA (for business income) or in the ITR filing (for salaried individuals).
- Standard Deduction under the New Tax Regime is ₹75,000 for salaried individuals and ₹25,000 for family pensioners from FY 2024-25 onwards.
- Resident individuals with taxable income up to ₹7,00,000 enjoy full tax rebate under Section 87A, resulting in ₹0 net tax liability.
- Marginal relief is available under Section 87A for taxpayers whose taxable income marginally exceeds ₹7,00,000.
- The break-even deduction threshold typically ranges between ₹3,75,000 and ₹4,25,000 depending on gross salary tiers.
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1. Statutory Overview: Section 115BAC vs Old Regime
The New Tax Regime was originally introduced under Section 115BAC by the Finance Act, 2020, and subsequently revised to become the statutory default tax regime starting from Assessment Year (AY) 2024-25. In the Union Budget amendments for FY 2024-25 (AY 2025-26), the Central Government rationalized tax slab structures, increased the basic exemption threshold to ₹3,00,000, and elevated the standard deduction for salaried taxpayers to ₹75,000.
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2. Tax Slab Rates for FY 2024-25 & FY 2025-26
The table below illustrates the progressive slab structures applicable to resident individuals under both statutory regimes:
| Income Tier (INR) | New Tax Regime (Section 115BAC) | Old Tax Regime (Standard Slabs) |
|---|---|---|
| Up to ₹2,50,000 | NIL | NIL |
| ₹2,50,001 to ₹3,00,000 | NIL (Exemption limit ₹3L) | 5% |
| ₹3,00,001 to ₹5,00,000 | 5% (Rebate under 87A up to ₹7L) | 5% (Rebate under 87A up to ₹5L) |
| ₹5,00,001 to ₹7,00,000 | 5% (Rebate under 87A) | 20% |
| ₹7,00,001 to ₹10,00,000 | 10% | 20% |
| ₹10,00,001 to ₹12,00,000 | 15% | 30% |
| ₹12,00,001 to ₹15,00,000 | 20% | 30% |
| Above ₹15,00,000 | 30% | 30% |
In addition to base income tax, Health and Education Cess is levied uniformly at 4% across all brackets. For high-income earners exceeding ₹5 Crore under the New Regime, the highest surcharge rate is capped at 25% (bringing the maximum effective tax rate down to 39%), whereas under the Old Regime, surcharge can reach 37% (resulting in an effective tax rate of 42.744%).
3. Allowable vs Forfeited Deductions Matrix
The choice between regimes is fundamentally a trade-off between lower base tax rates (New Regime) versus retaining itemized personal deductions (Old Regime). While the New Regime disallows standard Chapter VI-A investments, it permits select corporate and retirement contributions:
| Deduction / Exemption Type | Status in New Tax Regime | Status in Old Tax Regime |
|---|---|---|
| Standard Deduction (Salaried) | Allowed (₹75,000) | Allowed (₹50,000) |
| Employer Contribution to NPS (Sec 80CCD(2)) | Allowed (up to 14% for Govt, 10% for Private) | Allowed (up to 10%) |
| House Rent Allowance (HRA - Sec 10(13A)) | DISALLOWED | Allowed as per formula |
| Leave Travel Concession (LTC - Sec 10(5)) | DISALLOWED | Allowed (2 journeys in 4-year block) |
| Home Loan Interest on Self-Occupied (Sec 24b) | DISALLOWED | Allowed (up to ₹2,00,000) |
| Chapter VI-A (80C: EPF, PPF, ELSS, Life Ins.) | DISALLOWED | Allowed (up to ₹1,50,000) |
| Medical Insurance Premium (Section 80D) | DISALLOWED | Allowed (₹25,000 to ₹1,00,000) |
| Deduction for New Employment (Sec 80JJAA) | Allowed | Allowed |
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4. Mathematical Break-Even Analysis: When to Switch
A taxpayer should only opt for the Old Tax Regime if their aggregate deductions exceed the specific break-even threshold corresponding to their total gross income. Consider the practical scenario below:
| Gross Annual Salary | Deductions Claimed in Old Regime | Tax in Old Regime | Tax in New Regime | Recommended Option |
|---|---|---|---|---|
| ₹9,00,000 | ₹2,50,000 (80C + 80D + Std Ded) | ₹44,200 | ₹41,600 | New Tax Regime (Saves ₹2,600) |
| ₹15,00,000 | ₹4,50,000 (HRA + 80C + 24b + 80D) | ₹1,48,200 | ₹1,45,600 | New Tax Regime (Saves ₹2,600) |
| ₹18,00,000 | ₹5,20,000 (Substantial HRA + Home Loan) | ₹2,09,040 | ₹2,18,400 | Old Tax Regime (Saves ₹9,360) |
| ₹25,00,000 | ₹3,50,000 (Moderate Deductions) | ₹4,68,000 | ₹4,16,000 | New Tax Regime (Saves ₹52,000) |
5. Form 10-IEA Rules: Salaried vs Business Taxpayers
The rules for exercising and switching tax regime options differ critically based on the taxpayer's source of income:
- Salaried Employees (Income from Salaries only): Can switch between the New and Old Tax Regimes every financial year directly while filing their return under Section 139(1). No advance intimation form is required.
- Business & Professional Taxpayers (Income under PGBP): Taxpayers with income from business or profession who wish to opt out of the default New Regime must electronically submit Form 10-IEA on the e-filing portal on or before the statutory due date under Section 139(1).
- One-Time Re-entry Limitation: Once a business taxpayer opts out of the New Regime and subsequently re-enters it in a future year, they are permanently barred from opting back into the Old Regime during the lifetime of that business.
6. Critical Filing Mistakes to Avoid
- Belated Return Penalty: If an ITR is filed after the July 31 due date (belated under Section 139(4)), the taxpayer loses the statutory right to opt for the Old Tax Regime. The return is forcefully processed under the New Regime, and all itemized deductions are irrevocably lost.
- Mismatch in Employer TDS Intimation: Submitting Old Regime declarations to an employer does not bind your final ITR. You can legally recalculate and claim the New Regime at the time of return filing to claim a refund of excess TDS.
- Neglecting Marginal Relief: If taxable income under the New Regime is ₹7,05,000, Section 87A marginal relief caps tax at the incremental income exceeding ₹7,00,000 (₹5,000 + cess), preventing disproportionate tax spikes.
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Schedule Tax Planning SessionFrequently Asked Questions
Is standard deduction available in the New Tax Regime?
Yes. From FY 2024-25 onwards, a standard deduction of ₹75,000 is available for salaried employees and pensioners under the New Tax Regime (Section 115BAC), compared to ₹50,000 under the Old Regime.
What is the tax liability on a salary of ₹7.5 Lakhs under the New Regime?
With gross salary of ₹7,50,000, applying the ₹75,000 standard deduction reduces net taxable income to ₹6,75,000. Since taxable income is below ₹7,00,000, full Section 87A rebate applies, resulting in ZERO tax liability.
Can I switch between the Old and New Tax Regimes every year?
Salaried individuals without business income can freely switch between regimes each financial year when filing their ITR. However, individuals with business or professional income (including freelance income under PGBP) can switch only once in their lifetime.
What happens if I file my ITR after the statutory due date (July 31)?
If you file a belated return under Section 139(4), you cannot opt for the Old Tax Regime. The income tax portal will automatically compute tax under the default New Tax Regime, disallowing deductions like HRA, 80C, and home loan interest.
Which regime is better for taxpayers earning above ₹15 Lakhs?
The New Regime is generally superior for income above ₹15 Lakhs unless total deductions (HRA, 80C, 80D, Section 24b) exceed ₹4,00,000 to ₹4,25,000. A personalized computation is recommended before filing.
This publication provides general educational information and analysis. It does not constitute formal tax or legal counsel. For specific case evaluation, consultation with an authorized tax professional is recommended.
