New Tax Regime: Has its time finally come?

The new tax regime is set to get a big boost after Finance Minister Nirmala Sitharaman proposed a substantial income tax relief under the revised slabs.

Currently, resident individuals with income up to ₹7 lakh do not pay any tax due to rebate under the new tax regime.  The finance minister, in her Budget speech, proposed to increase the rebate for the resident individual under the new regime so that they do not pay tax if their total income is up to ₹12 lakh.

Under the new income tax regime, a taxpayer with an annual income of ₹12 lakh will get a benefit of ₹80,000 in taxes payable as per existing rates.

An individual earning ₹13 lakh currently pays ₹1 lakh in tax as per existing rates. Under the proposed rates of the new slab, the taxpayer will have to pay ₹75,000, allowing savings of ₹25,000.

A taxpayer getting an annual salary of ₹14 lakh presently pays ₹1.2 lakh in taxes. However, under the new tax regime, he or she will pay ₹90,000 – a saving of ₹30,000 per year.

Individuals whose income is ₹15 lakh were earlier shelling out ₹1.4 lakh in taxes. But the new tax regime brings their tax liability down to ₹1.05 lakh – implying savings of ₹35,000.

Similarly, a taxpayer with a pay package of ₹16 lakh per year was paying ₹1.7 lakh in taxes. Under the revised tax slabs, this liability stands at ₹1.2 lakh – implying savings of ₹50,000.

Likewise, ₹2 lakh was tax liability for those earning ₹17 lakh. This has now come down to ₹1.4 lakh, allowing them to save ₹60,000.

A person having an income of ₹18 lakh will get a benefit of ₹70,000 in tax (30% of tax payable as per existing rates).

If a taxpayer has an annual salary of ₹20 lakh, they will be able to save ₹90,000 under the new income tax regime.

A person with an income of ₹25 lakh gets a benefit of ₹1.10 lakh (25% of his tax payable as per existing rates). Individuals earning ₹50 lakh will also save ₹1.10 lakh.

The Indian government introduced the new tax regime in Budget 2020 as an alternative to the existing old tax system. The objective was to simplify the tax structure, reduce paperwork, and encourage more taxpayers to come under the formal tax net. Under this regime, individuals and Hindu Undivided Families (HUFs) are offered lower tax rates but must forgo most exemptions and deductions available under the old system.

In Budget 2023, Finance Minister Nirmala Sitharaman made the new tax regime the default option while retaining the old regime as an alternative for those who prefer deductions and exemptions. Further incentives were introduced, such as increasing the tax rebate limit under Section 87A to ₹7 lakh, effectively making income up to this amount tax-free. The basic exemption limit was also raised from ₹2.5 lakh to ₹3 lakh, and the highest surcharge on income above ₹5 crore was reduced from 37% to 25%, lowering the peak tax rate from 42.74% to 39%.

The new tax slabs under this regime are:

Income up to ₹3 lakh – Nil

₹3 lakh to ₹6 lakh – 5%

₹6 lakh to ₹9 lakh – 10%

₹9 lakh to ₹12 lakh – 15%

₹12 lakh to ₹15 lakh – 20%

Above ₹15 lakh – 30%

The government has consistently maintained that it wants to transition more taxpayers to the new system by making it more attractive. However, many individuals, especially those with high deductions on housing loans, insurance, and savings, still find the old regime beneficial.

The choice between the two depends on individual financial planning, but the new tax regime signals the government's intent to make taxation more streamlined and hassle-free in India.

But this massive tax break in Budget 2025, can very well spur taxpayers to move to the new tax regime, especially those in the income bracket ₹12 lakh and below.