Tax Regimes for a 12-lakh Salary: Which One’s Better?

The New Tax Regime

 

During Budget 2025*, Finance Minister Nirmala Sitharaman announced a revamped new income tax regime, changing income tax slabs and income tax rates for individual and corporate taxpayers. Under the new tax regime, individuals with a gross income of Rs.12 lakhs will have to pay zero tax^[2]. Salaried taxpayers will additionally benefit from a Rs.75,000 standard deduction, increasing the income tax exemption limit to Rs. 12.75 lakhs^[2]. The updated income tax slabs under the new regime after budget 2025 are as follows^[2]:

 

In comparison to the old tax regime, the updated new income tax regime offers significantly lower tax rates. This will allow employees to save money that would otherwise go into paying taxes, thus increasing their in-hand income. Additionally, the new tax regime has a simpler tax structure. So, the updated tax regime can be chosen by people who  wish not to claim  exemptions and deductions thereby simplifying the tax filling process. The tax planning opportunities available under the new tax regime are limited^[2].

 

The Old Tax Regime

 

Contrary to the new tax regime, the old tax regime offers comparatively higher tax rates but comes with a number of deductions. There is a lack of flexibility in the old regime as taxpayers are not allowed to change their tax plan for the particular financial year once they have claimed (options to change the tax regime are available the next time you file for taxes) The income tax regime under the old regime is mentioned below^[2]:

 

Now, there are over 70 tax deductions and exemptions^[3] available under the old tax regime. Some of the major tax exemptions or deductions that are claimed by employees include:

 

Section 80 C

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Section 80 C of the Income Tax Act allows tax deductions of up to Rs.1.5 lakh for making investments in eligible instruments. Your investments in the form of Public Provident Fund (PPF), Unit Linked Insurance Plan  (ULIP), National Pension System (NPS), Sukanya Samriddhi Yojana (SSY), Equity Linked Saving Scheme (ELSS), Senior Citizen Savings Scheme (SCSS) etc. will qualify for this deduction. Additionally, expenses such as children's school fees, principal component of home loans, and life insurance premiums  are included under section 80 C.

 

Section 80 D

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For people below the age of 60 years, a deduction of Rs.25,000 is available under the old tax regime for paying health insurance premiums. The same deduction can be availed for your parents' insurance premiums if they are under 60 years old. In case they are 60 years old or above, the deduction amount will go up to Rs. 50,000 (including both parents). So, a person with two senior citizen parents will be able to claim a deduction of up to Rs.75,000 (including self, and both parents).

 

Section 80 CCD (1B)

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Investments in the National Pension System allow taxpayers to claim a tax deduction of up to Rs.50,000 . This is over and above the deduction limit under section 80C  of the Income Tax Act. If your employer contributes to the NPS scheme, you will get tax benefits under Section 80 CCD (2).

 

Section 24B

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If you have taken a loan for the construction or purchase of a house/flat, you will be able to claim deductions on the interest paid for home loans. You will qualify to claim a total deduction of up to Rs.2 lakhs under this section in a given financial year.

 

House Rent Allowance (HRA)

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If you are a salaried individual living on rent, the old tax regime will allow a tax deduction based on the rent paid. This deduction can be claimed under section 10(13 A) of the Income Tax Act.

 

New Tax Regime v/s Old Tax Regime

 

The comparison boils down to one question- Tax regimes for a 12-lakh salary: which one’s better? The decision to switch to the updated tax regime or not depends on the tax deductions and exemptions you are eligible for in accordance with the old regime. You need to weigh the pros and cons of both tax regimes before making a decision. While the old tax regime will benefit someone who has substantial tax-saving investments, the new regime is ideal for people who do not enjoy many deductions.

 

FAQs

 

What is the difference between the old and new tax regimes?

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While the old tax regime offers various deductions and exemptions in comparison to the new tax regime, the new regime benefits the taxpayers with relatively lower tax rates^[5].

 

Which is better: the old tax regime or the new tax regime?

 

It depends on the person and the available tax deductions and exemptions. You are advised to estimate your tax liability under both regimes using an income tax calculator and make the decision accordingly.

 

Is it necessary for the employee to intimate the tax regime to the employer?

 

Yes, the employees must notify their employer about the tax regime they plan to choose. Otherwise,

it should be assumed that the employee remains under the default tax regime and has not chosen to opt out of  the new tax regime. Consequently, the employer will deduct tax based on the rates specified under section 115BAC. Whereas, the intimation provided to the employer does not constitute an exercise of the option to opt out of the new tax regime as per subsection (6) of section 115BAC. The employee must separately exercise this option before the deadline specified under section 139(1) for filing the income tax return. ^[5].

   

References:

^[1]https://pib.gov.in/PressReleaseIframePage.aspx?PRID=2098406

 

^[2]https://www.financialexpress.com/money/new-tax-regime-vs-old-tax-regime-which-offers-better-deductions-and-exemptions-3738244/#amp_tf=From%20%251%24s&aoh=17387478999213&referrer=https%3A%2F%2Fwww.google.com&ampshare=https%3A%2F%2Fwww.financialexpress.com%2Fmoney%2Fnew-tax-regime-vs-old-tax-regime-which-offers-better-deductions-and-exemptions-3738244%2F

 

^[3]https://cleartax.in/s/old-tax-regime-vs-new-tax-regime

 

^[4]https://economictimes.indiatimes.com/wealth/tax/how-to-pay-lower-tax-under-old-tax-regime-this-much-deduction-can-help-you-save-more-income-tax-than-new-tax-regime/articleshow/117887235.cms?from=mdr

 

^[5]https://www.incometax.gov.in/iec/foportal/help/new-tax-vs-old-tax-regime-faqs