New vs old tax regime - which is beneficial for you? Amount of deductions you can claim decides (2024)

Choosing between the old and new income tax regimes to minimise tax outgo can be a difficult task for many taxpayers. It really depends on the amount of deductions from gross total income that you can claim to reduce your taxable income. If you knew your gross total income and the minimum amount of deductions at which you would pay the same tax under both regimes, then you would be able to choose easily. This is because if you can claim more than this deduction amount then the old tax regime would be beneficial and in case the amount of deductions you can claim is less than this minimum level then the new tax regime would save you more tax

Knowing the minimum deductions gives an individual a rough idea about the tax regime beneficial for them (i.e., making them pay less tax in a relevant financial year). This knowledge can be helpful when choosing a tax regime for TDS on salary. When choosing a tax regime for TDS on salary you would use an expected/estimated gross total income figure and similarly deductions proposed to be claimed would also be estimated. However, once the financial year is over and one has the final figures for income and deductions then one must do the exact calculations before selecting a tax regime while filing the income tax return. Taxpayers can change the tax regime chosen by them earlier at the time of filing income tax return

The income tax laws under the new tax regime were revised with effect from April 1, 2023, and have been kept unchanged for the current FY, 2024-25 (April 1, 2024-March 31, 2025). The new tax regime has a basic income exemption limit of Rs 3 lakh for all taxpayers. It offers more income tax slabs with lower tax rates.

Further, a salaried individual can claim two deductions under the new tax regime: a standard deduction of Rs 50,000 from salary/pension income and for employer's contribution to NPS account for up to 10% of salary (14% of the basic salary for government employees).

Coming back to the comparison of the tax regimes, it is important to remember that the minimum deductions that must be claimed in the old tax regime such that the tax outgo is equal in both tax regimes will depend on the income level.

Also Read: Latest income tax slabs

For instance, total deductions that must be claimed by A and B with gross taxable incomes of Rs 8 lakh and Rs 12 lakh, respectively, will be different in order to make the tax payable equal in both tax regimes. If an individual's actual total deduction in the old tax regime is less than the required minimum deduction amount (we can call this break-even level), the new tax regime is more beneficial.

Here is an example to understand this. Assume individuals A and B have gross taxable incomes of Rs 8 lakh and Rs 12 lakh, respectively. Both can claim a deduction of Rs 2.5 lakh in a financial year, including a standard deduction of Rs 50,000.

Calculation under old tax regime (Rs)

Calculation under new tax regime (Rs)

Cess at 4% is included in final tax liability. Both tax regime calculations have excluded deduction claimed on employer's contribution to NPS. The table is based on certain assumptions mentioned above and is not an exhaustive one.

The above table shows that for Mr A with gross taxable income of Rs 8 lakh, the final tax amount payable is lower in the old tax regime if the total deduction of Rs 2.5 lakh is claimed. Despite the same deduction amount, Mr B with a gross taxable income of Rs 12 lakh will find the tax outgo lower in the new tax regime. The old tax regime will be favourable for a person with taxable income of Rs 12 lakh only if more deductions are claimed.

Also Read: Consequences of choosing wrong tax regime

The break-even point
The example above has shown that the break even or tax neutral amount of deductions to be claimed such that tax payable in both regimes is equal will vary depending on the income level. The break-even point can be explained as deductions that must be claimed in the old tax regime from the gross taxable income so that tax payable in both old and new tax regimes become same.

Break-even point: (Gross taxable income - deductions) = Tax payable in both tax regimes is same

Here is a table showing the minimum deduction amounts that must be claimed by people at different gross taxable income levels such that their income tax payable is equal in both tax regimes i.e. to find their break-even level of deductions.

Cess at 4% is included in final tax liability.

From the table above, it can be seen that once the income crosses the threshold of Rs 15.5 lakh, the maximum deduction of Rs 4.25 lakh remains constant. This is because the income tax rate of 30% remains constant after income crosses Rs 15 lakh in the new tax regime. Under the old tax regime, the income tax rate of 30% becomes constant once income exceeds Rs 10 lakh. Do remember that surcharges are levied when taxable income exceeds Rs 50 lakh. Hence, for those incomes, the minimum deduction amount will vary.

The above table is for salaried individuals who can take the benefit of standard deduction of Rs 50,000 from salary income in both the tax regimes. We have not considered the deduction available on employer's contribution to NPS to determine the break-even/minimum deduction amount. If a salaried individual claims this deduction in both regimes, the break-even/ minimum deduction amount will become lower.

Also Read: Does old tax regime leads to smoother ITR processing?

For individuals who cannot claim the benefit of standard deduction of Rs 50,000 in both the tax regimes (i.e. non-salaried, self-employed individuals), the amount of minimum deductions that must be claimed will differ from the table above. For example, see the table below.

Cess at 4% is included in final tax liability calculations above.

The table above shows that for non-salaried individuals, a maximum deduction of Rs 3.75 lakh must be claimed to make the income tax amount the same in both tax regimes.

Deductions that can be claimed under old tax regime

An individual can claim various deductions from gross total income and tax exemptions under the old tax regime. Deductions under Section 80C for up to Rs 1.5 lakh can be claimed by both the salaried and non-salaried. An individual is required to make specified investment and expenditures to claim deduction under Section 80C. Some of the common ones are investment in Employees' Provident Fund (EPF), Public Provident Fund (PPF), ELSS mutual fund, repayment of principal of home loan and payment of children's tuition fees.

Apart from Section 80C, an additional deduction of Rs 50,000 can be claimed for investments made in the National Pension System (NPS) as per specified rules. This will make the total deduction Rs 2 lakh.

A deduction can be claimed for payment of health insurance premium of up to Rs 25,000 or Rs 50,000, depending on the age of an individual. An additional deduction can be claimed for payment of parents' health insurance premium of up to Rs 25,000 or Rs 50,000, depending on the age of the parents. If senior citizens' parents are not covered under any health insurance policy, a deduction of Rs 50,000 can be claimed for medical expenses incurred on the senior citizen.

A deduction of Rs 2 lakh can be claimed for interest paid on a home loan during the financial year. Interest paid on an education loan is eligible for deduction under Section 80E without any monetary limit.

Interest earned from savings accounts is eligible for deduction under Section 80TTA. For senior citizens, interest earned from deposits - including savings accounts, fixed deposits and others - can get a deduction of Rs 50,000 under Section 80TTB.