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Old vs New Income Tax Regime: What To Choose in New Financal Year If You Earn Rs 40 Lakh Annually?
Old Tax Regime vs New Tax Regime: Income taxpayers will get significant relief in the upcoming financial year with revised slabs under the new tax regime announced by Finance Minister Nirmala Sitharaman in the Union Budget 2025-26.
As per the recent announcement, annual income up to Rs 12 lakh will be exempted in the new tax regime in FY26. Another change that will come into effect from the new financial year will be the rationalisation of the personal income tax slabs. As per the revised tax rates, individuals opting for the new tax regime will have to pay the highest 30 per cent tax if they earn above Rs 24 lakh.
With the revised tax rates being implemented from 1 April 2025, many individuals must be considering which income tax regime to choose: The old tax regime or the new tax regime, now marked as the default tax regime. While the old tax regime offers multiple options to save taxes, the new tax regime offers more tax brackets with reduced rates for incomes under Rs 15 lakh. While it is easier to select a tax regime in lower income brackets, it gets quite tricky for individuals earning higher incomes.
Under the default tax regime, individuals can get wider tax brackets and enjoy a standard deduction (which is now increased to Rs 75,000). To avail the benefits of the new tax regime, they have to forego various exemptions and tax benefits they used to get on savings on instruments like fixed deposits, life insurance schemes, national savings certificate, etc.
Old vs new tax regime: Which is better if you earn Rs 40 lakh per year?
To elucidate on the benefits of both income tax regimes, Harsh Bhuta, Partner, Bhuta Shah & Co LLP, has compared how much an individual earning Rs 40 lakh annually will have to pay in taxes in FY 2025-26.
Let's consider the example of an individual who earns Rs 40 lakh annually, pays house rentals of Rs 40,000 monthly and incurs travel expenses of Rs 2 lakh. These expenses make him eligible for HRA exemption under the old tax regime and LTA exemption. Additionally, he donates an estimated Rs 1 lakh to PMNRF, which makes him eligible for a deduction under Section 80G.
Old tax regime vs new tax regime
As per the analysis, an individual earning Rs 40 lakh annually, will have a taxable income of Rs 39,50,000 in old tax regime and Rs 39,25,000 in the default tax regime if he or she does not claim any exemption under the old tax regime.
| Particulars | Old Tax Regime | Default Tax Regime |
|---|---|---|
| Basic Salary [50%] | 20,00,000 | 20,00,000 |
| HRA [25%] | 10,00,000 | 10,00,000 |
| Leave Travel Allowance [10%] | 4,00,000 | 4,00,000 |
| Other Allowance [15%] | 6,00,000 | 6,00,000 |
| Total Salary Income | 40,00,000 | 40,00,000 |
| Less: Standard Deduction | 50,000 | 75,000 |
| Net Salary Income | 39,50,000 | 39,25,000 |
| Total Taxable Income | 39,50,000 | 39,25,000 |
| Tax Liability | ||
| Under Old Tax Regime | ||
| First INR 2.50 Lakhs | NIL | |
| Next INR 2.50 Lakhs @ 5% | 12,500 | |
| Next INR 5 Lakhs @ 20% | 1,00,000 | |
| Above INR 10 Lakhs @30% | 8,85,000 | |
| Under Default Tax Regime | ||
| First INR 4 Lakhs | NIL | |
| Next INR 4 Lakhs @ 5% | 20,000 | |
| Next INR 4 Lakhs @ 10% | 40,000 | |
| Next INR 4 Lakhs @ 15% | 60,000 | |
| Next INR 4 Lakhs @ 20% | 80,000 | |
| Next INR 4 Lakhs @ 25% | 1,00,000 | |
| Above INR 24 Lakhs @30% | 4,57,500 | |
| Total Tax Liability | 9,97,500 | 7,57,500 |
| Add: Education Cess @4% | 39,900 | 30,300 |
| Total tax liability | 10,37,400 | 7,87,800 |
| Net Benefit | 2,49,600 |
On the other hand, the total taxable income will reduce to Rs 33,70,000 per year from Rs 39,25,000 per year if he or she opts for exemptions and deductions under the old tax regime.
| Particulars | Old Tax Regime | Default Tax Regime |
|---|---|---|
| Basic Salary [50%] | 20,00,000 | 20,00,000 |
| HRA [25%] | 10,00,000 | 10,00,000 |
| Leave Travel Allowance [10%] | 4,00,000 | 4,00,000 |
| Other Allowance [15%] | 6,00,000 | 6,00,000 |
| Total Salary Income | 40,00,000 | 40,00,000 |
| Less: Exempt Income | ||
| Leave Travel Allowance [Section 10(5)] Actual travel expense allowable as exempt | 2,00,000 | - |
| Exempt HRA [Section 10(13A)] (Rent paid - 10% of basic salary income) (INR 40,000 x 12 - INR 20,00,000 x 10%) | 2,80,000 | - |
| Salary Income | 35,20,000 | 40,00,000 |
| Less: Standard Deduction | 50,000 | 75,000 |
| Net Salary Income | 34,70,000 | 39,25,000 |
| Gross Total Income | 34,70,000 | 39,25,000 |
| Less: Donation to PMNRF | 1,00,000 | - |
| Total Taxable Income | 33,70,000 | 39,25,000 |
| Tax Liability | ||
| Under Old Tax Regime | ||
| First INR 2.50 Lakhs | NIL | |
| Next INR 2.50 Lakhs @ 5% | 12,500 | |
| Next INR 5 Lakhs @ 20% | 1,00,000 | |
| Above INR 10 Lakhs @30% | 7,11,000 | |
| Under Default Tax Regime | ||
| First INR 4 Lakhs | NIL | |
| Next INR 4 Lakhs @ 5% | 20,000 | |
| Next INR 4 Lakhs @ 10% | 40,000 | |
| Next INR 4 Lakhs @ 15% | 60,000 | |
| Next INR 4 Lakhs @ 20% | 80,000 | |
| Next INR 4 Lakhs @ 25% | 1,00,000 | |
| Above INR 24 Lakhs @30% | 4,57,500 | |
| Total Tax Liability | 8,23,500 | 7,57,500 |
| Add: Education Cess @4% | 32,940 | 30,300 |
| Total tax liability | 8,56,440 | 7,87,800 |
| Net Benefit | 68,640 |
From the analysis of income under the old tax regime and new tax regime, it is evident that the individual would be able to save more in the new tax regime. Even after utilising most of the tax deductions and the old tax regime, he will have a tax liability of Rs 8,56,440 per year against Rs 7,87,800 per year under the new tax regime.
"Even after availing the exemption and deduction under the old tax regime, the default (new) tax regime still results in lower tax liability for the salaried individual in this scenario. With the widened slab benefits and enhanced standard deduction, the new regime is clearly more beneficial for most middle to high-income salaried taxpayers," said Harsh Bhuta.
In what cases is the old income tax regime beneficial?
If you master the art of availing exemption and deductions under the old tax regime, then you can significantly reduce your tax liability without going for the default regime.
"If an individual claims more exemptions and deductions, then the old tax regime may prove to be beneficial. For instance, if in the current scenario, the individual claims additional deductions / enhanced existing deduction as well as enhanced existing exemption, then the old tax regime may be beneficial," noted Bhuta.
According to the tax expert, rental payments, eligible payments, interest on housing loan, medical insurance premium, and donations can help in reducing tax liability under the old tax regime.
Disclaimer: The views and recommendations expressed are solely those of the individual analysts or entities and do not reflect the views of GoodReturns.in or Greynium Information Technologies Private Limited (together referred as “we”). We do not guarantee, endorse or take responsibility for the accuracy, completeness or reliability of any content, nor do we provide any investment advice or solicit the purchase or sale of securities. All information is provided for informational and educational purposes only and should be independently verified from licensed financial advisors before making any investment decisions.
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