As the Union Budget 2026 approaches, confusion around choosing between the new and old income tax regimes has once again surfaced among taxpayers. With Finance Minister Nirmala Sitharaman set to present her ninth consecutive budget on February 1, expectations are high for further tax-related announcements. Over the past few years, the government has introduced major reforms in personal taxation, but the coexistence of two parallel tax regimes continues to puzzle many individuals.

Tax experts believe that making the right choice between the new tax regime and the old tax regime is crucial for effective tax planning. Understanding how both systems work, their benefits, and their limitations can help taxpayers minimize liability and avoid last-minute confusion.

How the New Tax Regime Came Into Force

The new tax regime was introduced in Union Budget 2020 under Section 115BAC of the Income Tax Act and became effective from the financial year 2020–21. Unlike the traditional system, the new regime offers lower tax slab rates but does away with most deductions and exemptions.

In Union Budget 2023, the government went a step further by declaring the new tax regime as the default option for individual taxpayers. To make it more attractive, several changes were announced, including an increase in the basic exemption limit and a higher income threshold for claiming full tax rebate under Section 87A.

Key Features of the New Tax Regime

One of the biggest highlights of the new regime is its simplified structure. While taxpayers give up common deductions such as those under Section 80C, 80D, and house rent allowance (HRA), they benefit from reduced tax rates.

Some major features include:

• Basic exemption limit increased to ₹3 lakh




• Full tax rebate under Section 87A available up to ₹7 lakh annual income




• Standard deduction of ₹50,000 for salaried individuals and pensioners (introduced later)




• Fewer compliances and simpler return filing

Major Announcements in Budget 2025

Union Budget 2025 further strengthened the new regime. The government:

• Increased the standard deduction to ₹75,000




• Raised the basic exemption limit to ₹4 lakh




• Made income up to ₹12 lakh completely tax-free




• For salaried taxpayers, income up to ₹12.75 lakh became tax-exempt due to standard deduction

These changes were widely seen as a major relief for the middle class and helped make the new regime significantly more popular. As a result, a growing number of taxpayers are now opting for it.

What Makes the Old Tax Regime Still Relevant?

Despite the push towards the new regime, the government has not discontinued the old tax regime. Individual taxpayers can still switch between the two every financial year, depending on which option suits them better.

The old regime allows taxpayers to claim over 70 deductions and exemptions, making it ideal for those with structured tax-saving investments. Popular deductions include:

• Section 80C (PPF, ELSS, LIC, etc.)




• Section 80D (health insurance premium)




• Section 24(b) (home loan interest)

Another distinguishing feature of the old regime is its age-based tax slabs. Separate tax slabs exist for:

• Individuals below 60 years




• Senior citizens (60–80 years)




• Super senior citizens (above 80 years)

However, the drawback is higher tax rates, which can increase overall tax liability if deductions are limited.

Surcharge Rules: A Key Difference

Surcharge plays a critical role for high-income earners. An additional surcharge applies to individuals earning more than ₹50 lakh annually.

• Under the new tax regime, the maximum surcharge is capped at 25% for income above ₹5 crore




• Under the old tax regime, surcharge can go as high as 37%

This makes the new regime more attractive for high-net-worth individuals, as it significantly lowers the effective tax rate.

Which Tax Regime Should You Choose?

Experts advise that there is no one-size-fits-all answer. Taxpayers with minimal deductions and a preference for simplicity may find the new regime beneficial. On the other hand, those who invest heavily in tax-saving instruments or pay home loan interest may still save more under the old regime.

With Budget 2026 around the corner, taxpayers should carefully assess their income structure, deductions, and long-term financial goals before making a choice. Understanding the differences between the new and old tax regimes is the first step towards smarter, stress-free tax planning.