Confused between old and new tax regimes for FY25? We have it sorted for you

With the new financial year kicking in, the debate between opting for old and new tax regimes is back. 

For those with fewer investments to claim, the new regime offers advantages, while the old regime is more favorable for taxpayers eligible for deductions such as HRA and home loan. 

So, if you are confused between the two regimes, it is better to work out the tax payable before opting for one. The initial phase of tax planning involves assessing  how much tax savings you have already done under old tax regime. 

This is a crucial step often overlooked amidst life's routine activities such as deduction available on home loan, education loan, life and health insurance, with little regard for their tax implications. Subsequently, it's essential to determine the available room for further tax-saving investments. Understanding the remaining space within the Rs 1.5 lakh bracket, HRA and home loan deduction that you can avail to take informed decisions on additional investments.  

The third step entails exploring suitable investment avenues aligned with individual life goals and risk tolerance. Selecting options meticulously ensures a balanced approach to tax planning. 

The above mentioned deductions are offered under old tax regime whereas the new regime has a very few deductions like employers contribution under NPS. However, there is no tax on income up to Rs 7 lakh under new tax regime. Opting for the new regime means accepting lower tax rates without the option to claim deductions, ideal for those prioritizing increased disposable income and those who have not big ticket deductions available such as home loans and HRA. 

Hence, taxpayers now have more flexibility, as those preferring not to invest in tax-saving instruments can choose the new regime, while those aiming for comprehensive tax planning and wealth creation may opt for the old regime. Salaried individuals should inform their employers if selecting the old tax regime to ensure proper TDS planning. Importantly, taxpayers can switch tax regimes when filing their income tax returns.

Break-even limits

To simplify this decision-making process, we've calculated breakeven deduction limits for various income brackets. This will help you determine which regime suits you best. If your deductions fall below a specific threshold, then new tax regime is better otherwise if you have higher deductions old tax regime is better for you.

For example, if your eligible deductions total Rs 2,37,500 (excluding the standard deduction of Rs 50,000), your tax liability will be identical under both regimes if your gross income is Rs 9.50 lakh. Beyond this threshold, the old regime becomes more advantageous.

Similarly, considering a deduction of Rs 3.75 lakh (excluding the standard deduction of Rs 50,000), the tax liability is the same for a gross income of Rs 15.5 lakh and above. Below this income level, different breakeven deductions apply.

Neeraj Agarwala, Partner at Nangia Andersen India, explained that the break-even deduction is Rs 3,75,000 for a gross income of up to Rs 5 crore.

Beyond this, the reduced surcharge of 25% in the new tax regime makes it more beneficial.