New Tax Regime
The New Tax Regime, introduced by Budget 2020 under Section 115BAC and made the default regime from AY 2024-25, offers lower slab rates — including zero tax up to ₹3 lakh and a 30% peak rate above ₹15 lakh — in exchange for foregoing most deductions and exemptions including Section 80C and 80D.
Budget 2020 introduced the New Tax Regime as an optional alternative to the existing Old Tax Regime, with the stated aim of simplifying tax compliance and reducing rates while eliminating the complex web of deductions. Finance Act 2023 made the New Regime the default from AY 2024-25 — taxpayers who wish to continue with the Old Regime must now actively opt in by filing Form 10-IEA (for business income) or indicating the preference in their ITR (for salary/capital gains income).
The New Regime tax slabs effective from AY 2024-25 are: ₹0–₹3 lakh (nil), ₹3–₹7 lakh (5%), ₹7–₹10 lakh (10%), ₹10–₹12 lakh (15%), ₹12–₹15 lakh (20%), and above ₹15 lakh (30%). A tax rebate under Section 87A of up to ₹25,000 ensures zero tax for incomes up to ₹7 lakh under the New Regime. Budget 2025 further enhanced the rebate — income up to ₹12 lakh is effectively tax-free under the New Regime for resident individuals.
Deductions not available under the New Regime include Section 80C (investments and insurance), Section 80D (health insurance), HRA exemption, Leave Travel Allowance, standard deduction (partially restored at ₹75,000 for salaried individuals from FY 2024-25), and most Chapter VI-A deductions. Capital gains taxation rates, however, remain unchanged — LTCG at 12.5% and STCG at 20% under Section 111A apply identically in both regimes, as these are flat rates independent of the basic slab rate.
The optimal regime choice depends on a taxpayer's income level and actual deductions. For salaried individuals with modest deductions (below approximately ₹3–4 lakh in combined 80C, 80D, HRA, and other exemptions), the New Regime typically results in lower tax. For individuals with substantial deductions — particularly those maximising 80C, 80D, and HRA simultaneously — the Old Regime may remain more beneficial.
A key misconception is that the New Regime is always better because rates are lower. The effective tax rate under the New Regime can be higher than the Old Regime for individuals in the 15%–20% New Regime slabs who have large deductions. Every taxpayer should compute tax liability under both regimes before making the choice, using actual income and deduction figures for the financial year — and making an informed decision rather than a default one.