Struggling to choose between the old and new tax regimes? The answer lies in your deductions. With the new regime becoming the default choice, understanding the pros and cons of each is more important than ever.
Old vs. New: The Key Difference
The choice comes down to a simple trade-off:
- The new tax regime offers lower tax slab rates but strips away most major exemptions and deductions.
- The old tax regime has higher slab rates but allows you to claim traditional benefits like those for home loan interest, HRA, medical insurance, and investments under Section 80C.
Finding Your Breakeven Point
The real question is, how many deductions do you need for the old regime to be more beneficial? Experts call this your breakeven point.
- For an individual earning around ₹13.5 lakh annually, the tipping point is roughly ₹5.5–6.5 lakh in deductions. If your total deductions (including provident fund, HRA, and home loan interest) cross this threshold, the old regime will lead to a lower tax bill.
- For higher-income earners, a total of ₹4 lakh in deductions can often be the pivot point for greater tax savings under the old system.
Who Should Choose Which Regime?
Ultimately, your personal finances determine the best choice.
- The Old Regime works best for you if: You have significant deductions. This is especially true for those with housing loans or heavy investments in schemes like Section 80C and 80D.
- The New Regime is likely better if: You have minimal deductions and prefer a simpler tax structure with lower rates.
The smartest approach is not to choose by habit but by calculation. Your income and eligible deductions can change each year, so running the numbers annually is the only way to ensure you’re maximizing your take-home pay.