Union Budget 2025: Is the New Tax Regime Really Beneficial for You
Mitali Dhoke
Feb 03, 2025 / Reading Time: Approx. 10 mins
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Like every year, the Finance Minister Ms Nirmala Sitharaman has presented the 8th consecutive Union Budget, marking a significant milestone in Modi's 3rd term. She mentioned, "As we complete the first quarter of the 21st century, continuing geopolitical headwinds suggest lower global economic growth over the medium term.
However, our aspiration for a Viksit Bharat inspires us, and the transformative work we have done during our Government's first two terms guides us, to march forward resolutely."
The Union Budget 2025-26 carries the weight of expectations as it aims to accelerate India's journey toward the ambitious Viksit Bharat mission-envisioning a developed, self-reliant economy by 2047. With a strong focus on fiscal consolidation, growth-oriented reforms, and inclusive development, the Union Budget 2025 reflects the government's strategic roadmap to strengthen India's economic resilience amidst global uncertainties.
One of the key highlights of this budget is the continued push towards the New Tax Regime, which has been positioned as the default tax structure. The most talked-about topic is the claim that income up to Rs 12 lacs might effectively be tax-exempt. But is this truly the case?
While the government claims it simplifies taxation and reduces the burden for middle-class taxpayers, many are still evaluating whether it truly offers substantial benefits compared to the Old Tax Regime.
[Read: Union Budget 2025-26: Here is What Changed for Your Personal Finance and Income Tax]
This raises a critical question: Is the New Tax Regime genuinely advantageous for you, or does the Old Regime still hold merit depending on your income, deductions, and financial goals?
In this article, we'll delve deep into the provisions of the New Tax Regime under Budget 2025, compare it with the Old Regime, and help you assess which framework aligns better with your financial planning needs.
Overview of the New Tax Regime 2025
The new tax regime under Budget 2025 has introduced several modifications to personal income tax slabs, aiming to simplify tax compliance and offer potential savings to middle-class taxpayers. Here are the key features:
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Revised Tax Slabs: The new regime introduces modified tax slabs with reduced rates for various income groups.
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Standard Deduction: A standard deduction has been reintroduced to provide additional relief.
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Increased Rebate: The rebate limit under Section 87A has been extended, claiming to make income up to Rs 12 lacs effectively tax-free.
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Focus on Simplification: The new regime reduces the dependency on exemptions and deductions, promoting a straightforward tax calculation process.
Old Tax Regime vs. New Tax Regime
Tax Slabs Comparison
Latest Income Tax Slabs FY 2025-26 Under Old Income Tax Regime
| Income Slab (Rs) |
Old Tax Regime Rate |
| Up to 2.5 lacs |
Nil |
| 2.5 lacs - 5 lacs |
5% |
| 5 lacs - 10 lacs |
20% |
| Above 10 lacs |
30% |
(Source: http://www.indiabudget.gov.in)
Latest Income Tax Slabs FY 2025-26 Under New Income Tax Regime
| Income Slab (Rs) |
New Tax Regime Rate
FY 2025-26 |
Income Slab (Rs) |
New Tax Regime Rate
FY 2024-25 |
| Up to 4 lacs |
Nil |
Up to 3 lacs |
Nil |
| 4 lacs - 8 lacs |
5% |
3 lacs - 7 lacs |
5% |
| 8 lacs - 12 lacs |
10% |
7 lacs - 10 lacs |
10% |
| 12 lacs - 16 lacs |
15% |
10 lacs - 12 lacs |
15% |
| 16 lacs - 20 lacs |
20% |
12 lacs - 15 lacs |
20% |
| 20 lacs - 24 lacs |
25% |
Above 15 lacs |
30% |
| Above 24 lacs |
30% |
|
|
(Source: http://www.indiabudget.gov.in)
The new income tax slabs under the new tax regime will allow taxpayers to save up to Rs 1.14 lac in a financial year and continue to remain in the default tax regime.
[Read: New Tax Regime v/s Old Tax Regime: Which One Should You Opt for After Modi 3.0 Budget?]
Deductions and Exemptions
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Old Regime: Allowed various deductions under Section 80C (up to Rs 1.5 lacs), HRA, LTA, and more.
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New Regime: Minimal deductions, focusing instead on lower tax rates and higher rebates.
What is Section 87A tax rebate?
Section 87A of the Income Tax Act, of 1961, provides a tax rebate to individual taxpayers, effectively reducing their tax liability. This rebate is available only to resident individuals whose total income does not exceed a specified threshold. The rebate amount is directly deducted from the total tax payable, thereby offering tax relief to low and middle-income earners. It is important to note that this benefit does not apply to Hindu Undivided Families (HUFs), companies, or firms-only individual taxpayers qualify.
Prior, the rebate under Section 87A was available for individuals with an annual income of up to Rs 7 lacs under the new tax regime. The rebate amount was capped at Rs 25,000, ensuring that individuals earning up to Rs 7 lakh had zero tax liability after accounting for this rebate.
As per the Budget 2025 announcements, significant changes have been proposed to Section 87A. The income eligibility limit for the rebate has been increased from Rs 7 lacs to Rs 12 lacs. The rebate allowed has now been increased to Rs 60,000 from Rs 25,000 for the new tax regime.
Consequently, individuals earning up to Rs 12 lacs annually will now be eligible for a rebate, effectively paying zero tax after deductions.
| Income Eligibility Limit under Section 87A |
Rebate Amount (in INR) |
| For FY 2024-25 upto Rs 7 lacs |
25,000/- |
| For FY 2025-26 upto Rs 12 lacs |
60,000/- |
Additionally, the enhanced standard deduction of Rs 75,000 for salaried individuals has been introduced, replacing the earlier Rs 50,000 deduction. Combined with rebates under Section 87A for incomes up to Rs 12 lacs, even individuals with an income of up to Rs 12.75 lakh can enjoy zero tax liability for the FY 2025-26.
This provision is aimed at promoting the new tax regime by offering greater tax relief to the middle-class population.
Is Income Up to Rs 12 Lacs Really Exempt?
The Budget claims that income up to Rs 12 lacs can be tax-free due to the increased rebate under Section 87A. Here's how it works:
Example Calculation
Scenario 1: Income of Rs 12 Lacs (New Tax Regime)
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Tax Calculation Before Rebate:
- 0% on first 4 lacs = 0
- 5% on the next 4 lacs = 20,000
- 10% on the next 4 lacs = 40,000
Total Tax = Rs 60,000/-
Rebate Under Section 87A (for FY 2025-26): Rs 60,000/- (making net tax = 0)
Scenario 2: Income of Rs 12.75 Lacs (New Tax Regime)
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Standard Deduction: Rs 75,000/- (Rs 12.75 lacs - Rs 75,000/-)
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Taxable Income: Rs 12 lacs
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Tax Calculation Before Rebate:
- 0% on first 4 lacs = 0
- 5% on the next 4 lacs = 20,000
- 10% on the next 4 lacs = 40,000
Total Tax = Rs 60,000/-
Rebate Under Section 87A (for FY 2025-26): Rs 60,000/- (making net tax = 0)
Pros and Cons of the New Tax Regime for FY 2025-26
Pros:
1. Simplified Tax Structure: Fewer exemptions and deductions make tax filing straightforward.
2. Lower Tax Rates: Beneficial for those without significant investments or deductions.
3. Higher Rebate Limit: Makes income up to Rs 12 lacs effectively tax-free for many.
Cons:
1. No Major Deductions: Loss of benefits from popular deductions like 80C, HRA, etc.
2. Not Beneficial for All: High earners with multiple deductions may pay more tax.
3. Limited Flexibility: Individuals lose tax-saving opportunities through investments.
Who Should Opt for the New Tax Regime?
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Ideal For: Salaried individuals without significant investments or deductions.
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Not Ideal For: Taxpayers with substantial home loans, insurance policies, or other deductions under the old regime.
Key Considerations Before Making the Switch
1. Evaluate Your Deductions: Calculate your total deductions under the old regime.
2. Compare Tax Liability: Use online tax calculators to compare both regimes.
3. Long-Term Impact: Consider how the regime affects your financial goals and tax planning.
To Conclude...
While the new tax regime offers simplicity and potential tax savings for specific income groups, it may not be the best choice for everyone. The claim that income up to Rs 12 lacs is exempt holds only under particular conditions. Taxpayers should carefully evaluate their financial situation, deductions, and long-term goals before deciding.
The Union Budget 2025's new tax regime aims to streamline tax compliance and offer relief to the middle class. However, the real benefits depend on individual circumstances. The key takeaway is to make an informed decision, comparing both regimes and choosing the one that aligns best with your financial strategy.
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MITALI DHOKE is a Research Analyst at PersonalFN. She is an MBA (Finance) and a post-graduate in commerce (M. Com). She focuses primarily on covering articles around mutual funds including NFOs, financial planning and fixed-income products. Mitali holds an overall experience of 4 years in the financial services industry.
She also actively contributes towards content creation for PersonalFN’s social media platforms in the endeavour to educate investors and enhance their financial knowledge.
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This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.