New vs old tax regime for TDS on salary

At the beginning of each financial year, salaried employees face an important question from their employers: Which tax regime do they want to choose - the old tax regime or new - for the purpose of TDS from salary. The choice for the financial year 2025-26, however, will be easier for many salaried employees. This is because there is no tax payable if an individual's net taxable income does not exceed Rs 12 lakh.

Salaried employees with a gross taxable income not exceeding Rs 12.75 lakh can use the standard deduction of Rs 75,000 to pay zero tax. Further, they can use the employer's contribution to the National Pension System (NPS) account to reduce their net taxable income and thereby pay zero or a lower tax.

However, for salaried individuals with taxable income ranging between Rs 12 lakh and Rs 24 lakh, it is important to determine which tax regime suits them better to ensure that the lower tax is deducted from their salary income during the fiscal year.

Further, for salaried individuals earning more than Rs 24 lakh, it is important to know how much deduction they should claim such that the tax liability is same in the new and old tax regimes - i.e. a breakeven level of deduction. This calculation of 'breakeven' would help them decide as to under which regime they would pay less tax once they know the maximum amount of deductions they can claim from gross taxable income. If they can claim more than the breakeven level of deductions, then old tax regime would be favourable and if they can claim less than the breakeven level, then the new tax regime would be favourable.

ET Wealth lists three scenarios for salaried employees to consider when choosing between the old and new tax regimes.

Also Read: How to calculate income tax on taxable income above Rs 12 lakh
Scenario 1: If your taxable income is below Rs 12 lakh
If your taxable income is below Rs 12 lakh, then the new tax regime is your go-to option. Further, if your gross taxable income is just above Rs 12 lakh, then you can use the standard deduction of Rs 75,000 and the employer's contribution to NPS to lower the taxable income to Rs 12 lakh or less and pay zero tax.

The new tax regime can help you save tax without going through the hassle of looking for tax-saving investment options.

There is zero tax payable on net taxable income up to Rs 12 lakh in the new tax regime due to a tax rebate under Section 87A. A tax rebate of Rs 60,000 is available under Section 87A, which makes tax payable zero.

It is important to note that your taxable income includes income from various sources, such as salary and interest income. Naveen Wadhwa, Vice-President, Advisory and Research, Taxmann.com, says, "If your taxable income includes incomes that are taxed at a special rate, then you cannot claim the Section 87A tax rebate for those incomes. However, you can claim the Section 87A rebate for that part of the total income that is not taxable at special rates. Some of the incomes that are taxed at special rates are short-term and long-term capital gains from equity, gains from crypto, other virtual digital assets, winnings from the lottery, etc. Hence, a taxpayer needs to know the sources of income to know eligibility to claim a tax rebate under Section 87A."

Scenario 2: If your taxable income is between Rs 12 lakh and Rs 24 lakh
For individuals with a net taxable income between Rs 12 lakh and Rs 24 lakh, it will depend on the amount of tax deductions they can claim.

The new tax regime will help those salaried taxpayers who do not want the hassle of paperwork. These taxpayers should explore ways to fully utilise the standard deduction of Rs 75,000 and the deduction on the employer's contribution to the NPS account (14% of basic salary). Further, they should check if their employer allows reimbursements, such as telephone and mobile reimbursements and conveyance reimbursements, etc.

Wadhwa says, "These reimbursements are not taxable in the hands of an employee if the money is spent in performing official duties and bills are submitted to the employer."

A salaried employee having a salary income of more than Rs 16 lakh can still pay zero tax by claiming a standard deduction of Rs 75,000 from salary income, the deduction related to the employer's contribution to the NPS account and by using different reimbursements, such as mobile reimbursements and conveyance reimbursements.

Also Read: You can still pay zero tax even with a salary income above Rs 16 lakh

However, there can be salaried individuals who want to stay with the old tax regime so that they can continue with their savings habits. Such salaried individuals must claim a certain amount of deductions under the old tax regime to pay less tax than in the new regime.

Individuals opting for the old tax regime must claim more deductions than the breakeven level to ensure that the lower tax is payable in the old tax regime as compared to the new tax regime.

Here is an example to understand when the old tax regime will score over the new tax regime:
Let us assume an individual is earning Rs 18 lakh in a financial year. By claiming exemptions of Rs 8,63,900, he will end up paying a lower tax in the old tax regime as compared to the new tax regime.

Break-up of salary income of Rs 18 lakh

The above table shows different break-ups for the salary income of Rs 18 lakh for the old tax regime and the new tax regime. This is because the maximum exemption for the employer's contribution to the NPS is different in both tax regimes. The old tax regime offers a maximum exemption of 10% of basic salary, whereas the new tax regime offers a maximum exemption of 14% of basic salary, provided the employer allows the NPS contribution under Section 80CCD (2).

Here is how the income tax calculation will look like under the old and new tax regimes.
Income tax calculation of Rs 18 lakh salary income in old tax regime and new tax regime

It is important to note that the employer's contribution to the EPF account is not income in the hands of an employee. Hence, it will be deducted from the gross pay under both tax regimes.

Scenario 3: Taxable income exceeds Rs 24 lakh
If your taxable income exceeds Rs 24 lakh, then it is important to understand how much deduction you can claim to determine which tax regime is beneficial for you.

There is an equalisation/breakeven point where an individual claiming certain amount of deduction in the old tax regime will pay the same tax as someone who is opting for the new tax regime (which doesn't allow most deductions).

Also Read: Who should switch to new tax regime and who stay with the old tax regime?

Here is an example to understand the same:
An individual's salary income is Rs 25 lakh in a financial year. He claims a total deduction of Rs 8,73,800 in a financial year. However, despite claiming this deduction, calculations show that he would pay less tax under the new tax regime as compared to the old tax regime.

Break up of salary income of Rs 25 lakh

Here also break-up of different break-up of salary under old and new tax regime is shown due to different exemption amount for employer's NPS account.

Income tax calculation of salary income of Rs 25 lakh

From the table above, an individual will pay lower tax despite having higher net taxable income in the new tax regime. This is because, in the new tax regime, the highest tax rate of 30% will be applicable for incomes exceeding Rs 24 lakh. However, in the old tax regime, the highest tax rate is applicable for incomes above Rs 10 lakh.
Choosing between old and new tax regimes
To choose between the old and new tax regimes, an individual must check his/her gross taxable income. Once the gross taxable income is known, you must check the list of deductions and exemptions that you can claim from your gross taxable income. Once the total amount of deductions is known, compare the estimated tax payable in both the tax regimes to know which tax regime saves you more tax.