How Income Tax Works in India (Old vs New Regime)
FY2024-25 tax slabs, old vs new regime comparison with real INR examples, all key deductions explained, and how to decide which regime saves you more money.
TL;DR — Key Points
How India's Income Tax System Works
India uses a progressive income tax system — the more you earn, the higher the rate on the additional income (not on your total income). Income is divided into slabs, and each slab is taxed at its corresponding rate. Only the income that falls within a slab is taxed at that slab's rate — a common misconception is that crossing into a higher bracket taxes all income at the new rate.
For example, if you earn ₹10 lakh under the new regime: the first ₹3 lakh is taxed at 0%, the next ₹4 lakh (₹3L–₹7L) at 5%, and the remaining ₹3 lakh (₹7L–₹10L) at 10%. Your total tax is ₹0 + ₹20,000 + ₹30,000 = ₹50,000 — not 10% of ₹10 lakh.
Since FY2023-24, India has two tax regimes: the old regime (higher slabs but many deductions available) and the new regime (lower slabs but minimal deductions). The new regime became the default from FY2023-24. You must actively opt for the old regime if you want to use it. Both regimes are legitimate options — the choice depends entirely on your deduction profile.
Additionally, a 4% Health and Education Cess applies on the total calculated tax. Surcharge applies on higher incomes (above ₹50 lakh). Section 87A provides a full rebate (zero tax) for incomes up to ₹7 lakh in the new regime and ₹5 lakh in the old regime — a significant benefit for middle-income earners.
FY2024-25 Tax Slabs — New Regime
The new regime slabs for FY2024-25 (AY2025-26), updated in the Union Budget 2024:
| Income Slab | Tax Rate | Tax on Slab |
|---|---|---|
| Up to ₹3,00,000 | 0% | Nil |
| ₹3,00,001 – ₹7,00,000 | 5% | Up to ₹20,000 |
| ₹7,00,001 – ₹10,00,000 | 10% | ₹20,000 + 10% above ₹7L |
| ₹10,00,001 – ₹12,00,000 | 15% | ₹50,000 + 15% above ₹10L |
| ₹12,00,001 – ₹15,00,000 | 20% | ₹80,000 + 20% above ₹12L |
| Above ₹15,00,000 | 30% | ₹1,40,000 + 30% above ₹15L |
Key: Standard deduction of ₹75,000 applies before tax calculation. Section 87A rebate eliminates tax for taxable income up to ₹7 lakh. Add 4% cess on final tax.
FY2024-25 Tax Slabs — Old Regime
The old regime slabs remain unchanged — the advantage is access to extensive deductions that can substantially reduce taxable income:
| Income Slab | Tax Rate | Tax on Slab |
|---|---|---|
| Up to ₹2,50,000 | 0% | Nil |
| ₹2,50,001 – ₹5,00,000 | 5% | Up to ₹12,500 |
| ₹5,00,001 – ₹10,00,000 | 20% | ₹12,500 + 20% above ₹5L |
| Above ₹10,00,000 | 30% | ₹1,12,500 + 30% above ₹10L |
The old regime has higher slab rates but allows deductions (80C, HRA, home loan interest, 80D, etc.) that can reduce taxable income significantly. The ₹10 lakh exemption limit for senior citizens (60+) and ₹5L for super senior citizens (80+) applies under the old regime.
Key Deductions Under the Old Regime
| Section | Limit | What It Covers | Regime |
|---|---|---|---|
| 80C | ₹1,50,000 | EPF, PPF, ELSS, LIC premium, NSC, home loan principal, tuition fees, 5-year FD | Old only |
| 80CCD(1B) | ₹50,000 | NPS (National Pension System) additional contribution — over and above 80C limit | Old only |
| 80D | ₹25,000 (self) + ₹50,000 (parents 60+) | Health insurance premiums for self, family, and parents | Old only |
| 24(b) | ₹2,00,000 | Home loan interest for self-occupied property | Old only |
| HRA | Actual HRA or formula | House Rent Allowance for employees paying rent. Cannot claim if living in own house. | Old only |
| 80E | No cap | Interest on education loan (full deduction for 8 years) | Old only |
| 80G | 50–100% of donation | Donations to approved charitable organisations | Old only |
| Standard Deduction | ₹75,000 (new) / ₹50,000 (old) | Automatic deduction from salary income — no receipts needed | Both regimes |
| 80CCD(2) | Up to 10% of basic salary | Employer's NPS contribution — no monetary cap on employer side | Both regimes |
Worked Example: ₹12 LPA Salaried Employee
Here is a full side-by-side tax calculation for a salaried employee earning ₹12 lakh per annum, claiming HRA, 80C, and 80D under the old regime:
New Regime
Old Regime (with deductions)
In this example, the old regime (₹86,840) costs more than the new regime (₹71,500) despite the deductions — because the 20% slab in the old regime on ₹5L–₹10L income is higher than the new regime's 10–15% rates. The old regime only wins when deductions are significantly larger than this example.
Old vs New Regime — Side-by-Side Comparison
| Income | Old Regime Tax | New Regime Tax | Winner |
|---|---|---|---|
| ₹6,00,000 | ₹0 (87A rebate) | ₹0 (87A rebate) | Equal |
| ₹8,00,000 | ₹42,500 (before deductions) | ₹30,000 (after ₹75K std deduction) | New regime likely |
| ₹10,00,000 | ₹75,400 (before deductions) | ₹54,600 | New if deductions < ₹2.5L |
| ₹12,00,000 | ₹1,17,000 (before deductions) | ₹80,000 | Compare carefully |
| ₹15,00,000 | ₹1,87,500 (before deductions) | ₹1,45,000 | New if deductions < ₹4L |
| ₹20,00,000 | ₹3,37,500 (before deductions) | ₹2,95,000 | Old regime with full deductions |
How to Handle Common Tax Scenarios
Your salary is below ₹7.75 lakh (with standard deduction in new regime)
→ New regime is clearly better. Your taxable income after ₹75,000 standard deduction is ₹7L or below — zero tax under Section 87A rebate. No calculation needed.
You live in a metro city, pay rent, and have a home loan
→ Calculate carefully. HRA exemption + home loan interest (₹2L) + 80C (₹1.5L) + standard deduction (₹50K) can total ₹5–6L in deductions. At ₹15L+ income, old regime likely wins.
You are self-employed or have business income
→ Old regime allows business expense deductions that reduce your net income significantly. New regime has fewer deductions available for business income. Consult a CA before choosing.
You want the simplest possible tax filing
→ New regime. No need to collect rent receipts, submit investment proofs to HR, or track 80C investments. Employer deducts TDS at new regime rates by default. Switch to old regime only if calculations show meaningful savings.
You changed jobs mid-year — which regime applies?
→ Your regime choice is annual — made at the time of filing your ITR (or declaring to your employer at year start). If you declared old regime to employer and want to file under new regime, you can do so in your ITR, but the employer's TDS may have been calculated differently.
You missed the ITR deadline — can you still file?
→ You can file a belated ITR until December 31 of the assessment year (e.g., December 31, 2025 for FY2024-25) with a late filing fee of ₹1,000 (income below ₹5L) or ₹5,000 (income above ₹5L). After December 31, you need to apply for condonation of delay.
Tax Calculation Scenarios
| Scenario | Old Regime Tax | New Regime Tax | Best Regime |
|---|---|---|---|
| ₹8L salary, metro city, pays rent of ₹15K/month, no other deductions | ~₹35,000 | ~₹26,000 | New regime |
| ₹12L salary, HRA + 80C full + 80D + home loan interest | ~₹87,000 | ~₹71,500 | Old regime (saves ₹15K) |
| ₹15L salary, full 80C + NPS + home loan interest (₹2L) + HRA | ~₹95,000 | ~₹1,45,000 | Old regime (saves ₹50K) |
| ₹20L salary, no HRA (own house), no home loan, 80C only | ~₹2,73,000 | ~₹2,95,000 | New regime (saves ₹22K) |
| ₹7L salary, no deductions except standard deduction | ₹0 (rebate) | ₹0 (rebate) | Equal — both zero tax |
| ₹25L salary, full deduction portfolio (₹5L+ in deductions) | ~₹3,50,000 | ~₹4,45,000 | Old regime (saves ₹95K) |
Frequently Asked Questions
What is the difference between FY and AY?
Financial Year (FY) is when you earn the income — April 1 to March 31. Assessment Year (AY) is when you file the tax return for that income — one year after. So income earned in FY2024-25 (April 2024 – March 2025) is reported in the income tax return filed in AY2025-26 (typically by July 31, 2025). When someone says 'which regime is better for FY2024-25', they mean for income earned from April 2024 to March 2025.
Is the new tax regime mandatory?
No, but it is the default. From FY2023-24, the new regime became the default — if you do not declare a regime choice to your employer or in your ITR, the new regime applies automatically. To use the old regime, you must actively opt in by declaring it to your employer at the start of the financial year, and confirming it in your ITR. Salaried employees can switch between regimes every year. Self-employed individuals can switch to the old regime once per year.
What is Section 87A and who qualifies?
Section 87A provides a full tax rebate — meaning zero tax — for individuals whose net taxable income does not exceed ₹7 lakh under the new regime (or ₹5 lakh under the old regime). This is a rebate on the tax calculated, not a deduction from income. If your taxable income is ₹7,00,000 (new regime), the tax computed on the slabs is ₹20,000, but the rebate eliminates it entirely — you pay zero. If your income is ₹7,00,001, the rebate does not apply and you pay full slab tax on the entire ₹7,00,001.
What deductions are available in the new tax regime?
The new regime has very few deductions. Available deductions/exemptions include: Standard deduction of ₹75,000 (from FY2024-25 Budget), employer's NPS contribution under 80CCD(2) (up to 10% of basic salary), gratuity exemption, leave encashment exemption up to ₹25 lakh, family pension standard deduction. Most other deductions — 80C, 80D, HRA, home loan interest — are not available in the new regime.
How is HRA exemption calculated?
HRA exemption under the old regime is the minimum of three amounts: (1) Actual HRA received, (2) 50% of basic salary if in metro city (Mumbai, Delhi, Chennai, Kolkata) or 40% for non-metro, (3) Rent paid minus 10% of basic salary. Example: Basic = ₹5L, HRA received = ₹2L, rent paid = ₹1.8L, metro city. Min of (₹2L, ₹2.5L, ₹1.3L) = ₹1.3L is exempt. You cannot claim HRA if you own the house you live in, or if you live rent-free with family.
When is the last date to file ITR?
The standard deadline for salaried individuals and non-audit cases is July 31 of the assessment year (e.g., July 31, 2025 for FY2024-25). Businesses requiring audit have until October 31. Belated returns can be filed until December 31 with a late filing fee. Updated returns (ITR-U) can be filed up to 2 years from the end of the assessment year for correcting errors. Missing the July 31 deadline results in late fees of ₹1,000–₹5,000 and loss of ability to carry forward certain losses.
What is the surcharge on high income?
Surcharge is an additional tax on top of the calculated income tax, applicable only if your total income exceeds ₹50 lakh. Rates: ₹50L–₹1 crore = 10% surcharge; ₹1–2 crore = 15%; ₹2–5 crore = 25%; above ₹5 crore = 37% (capped at 25% for certain capital gains under new regime). The surcharge applies on the tax amount, not the income. So if tax is ₹5L and surcharge is 10%, you pay ₹5L + ₹50,000 (surcharge) = ₹5.5L before cess.
Can I claim both HRA and home loan deductions simultaneously?
Yes — both can be claimed simultaneously under the old regime, but only in specific circumstances. You can claim HRA for the house you rent (you pay rent to the owner) AND claim home loan interest deduction (Section 24) for a house you own but do not live in (it is rented out or under construction) or a house you own in another city while working in a different city. If you own a house in the same city you work in and live in it, you cannot claim HRA — you must live in the rented accommodation to claim HRA.
Related Concepts
Related Tools
Income Tax Calculator India
Calculate your income tax under both old and new regimes for FY2024-25 with all deductions.
TDS Calculator India
Calculate TDS on salary, professional fees, rent, and other payments.
Salary Calculator India
Calculate your in-hand salary from CTC including PF, professional tax, and income tax.
Gratuity Calculator India
Calculate gratuity payable under the Payment of Gratuity Act.