New Tax System: Finance Minister Nirmala Sitharaman gave a big relief to the middle class in the budget by announcing complete exemption from income tax on annual income up to Rs 12 lakh.
With the start of the new financial year, taxpayers will need to choose between the new and the old tax regime. In such a situation, with the increase in the exemption limit in the new tax system, it is important to know which tax system is better for them. Vivek Jalan, partner at consultancy firm Tax Connect Advisory Services LLP, says that the new tax system is suitable for taxpayers with annual income up to Rs 12 lakh (Rs 12.75 lakh for salaried individuals), but for those with income above Rs 12 lakh and up to Rs 15 lakh, the old tax system will provide more savings. However, this will depend on how much taxpayers save.
Right only for those who claim tax deduction
He also said that the old tax system will be beneficial only if the taxpayer is in a position to claim a deduction of about Rs 5.5 lakh. However, if the total annual income does not exceed about Rs 15,00,000, then only there will be a benefit of deduction of about 5.5 lakh. The new tax system will be suitable for annual income more than this. The exemption of Rs 5.5 lakh includes Rs 1.5 lakh under Section 80C of the Income Tax Act, Rs 2 lakh for housing loan interest under Section 24 (B) and about Rs 2 lakh under other deductions like Section 80D (medical insurance), 80G (donation to eligible institutions), 80E (interest on education loan) etc.
Exemption up to Rs 12 lakh in new tax system
Finance Minister Nirmala Sitharaman gave a big relief to the middle class in the 2025-26 budget by announcing full exemption from income tax for annual income up to Rs 12 lakh (now Rs 12.75 lakh with standard deduction of Rs 75,000 for salaried taxpayers). Income tax exemption will be available to taxpayers who opt for the new tax system. Jalan said, “If the taxpayer does not have any tax plan or eligible deduction, then generally the new system will be more beneficial. Moreover, even if the taxpayer has made a plan to avoid tax liability, the old tax regime will be beneficial only if the taxpayer is in a position to claim deduction of about Rs 5.5 lakh. He also said, “In case of deduction less than Rs 5.5 lakh, the new regime will be beneficial in most of the cases.
Old tax regime beneficial only for savers
If a taxpayer claims deduction of about Rs 5.5 lakh by saving and investing annually, then the old tax regime may be beneficial for him. That too only if the annual income is not more than Rs 15,00,000.” If we make a basic comparison of tax between the old and new regime with a deduction of about Rs 5.5 lakh, then on an annual income of about Rs 13 lakh, the tax liability with standard deduction and 4 per cent cess in the old tax regime will be Rs 54,600, while in the new tax regime it will be Rs 66,300. In case of annual income of Rs 14 lakh, the tax liability will be Rs 75,400 with 4% cess in the old tax system, while in the new system it will be Rs 81,900. Similarly, in case of annual income of Rs 15 lakh, the tax liability will be Rs 96,200 in the old tax system and Rs 97,500 in the new one.
New right for those with income more than Rs 16 lakh
In the old tax system, the tax liability for Rs 16 lakh will be Rs 1,17,000, while in the new system it will be Rs 1,13,100. On an annual income of Rs 13 lakh without standard deduction, the tax liability will be Rs 65,000 in the old tax system, while in the new system it will be Rs 78,000. In case of Rs 14 lakh, it will be Rs 85,800 and Rs 93,600 respectively. The tax liability on an annual income of Rs 15 lakh would be Rs 1,06,600 under the old tax system and Rs 1,09,200 under the new system. In case of an annual income of Rs 16 lakh, the tax liability would be Rs 1,32,600 under the old tax system and Rs 1,24,800 under the new system. There is no tax on an annual income of Rs 4 lakh in the new tax system. Five per cent tax will be levied on Rs 4 lakh to 8 lakh, 10 per cent on Rs 8 lakh to 12 lakh, 15 per cent on Rs 12 lakh to 16 lakh, 20 per cent on Rs 16 to 20 lakh, 25 per cent on Rs 20 lakh to Rs 24 lakh and 30 per cent tax will be levied on annual income above Rs 24 lakh.
