Every salaried individual and business owner in India needs to understand the income tax structure to plan their finances effectively. India currently offers two tax regimes — the old regime with deductions and exemptions, and the new regime with lower rates but fewer deductions. This guide explains both systems to help you determine which one is more beneficial for your situation.
How Income Tax Works
Income tax in India is calculated on a slab basis, meaning different portions of your income are taxed at different rates. Only income above the basic exemption limit is taxable. Your total taxable income is your gross income minus eligible deductions and exemptions.
New Tax Regime
The new tax regime, which became the default option from FY 2023-24, offers lower tax rates but eliminates most deductions and exemptions. Under this regime, income up to ₹3 lakh is exempt, and tax rates increase progressively through several slabs up to 30 percent for income above ₹15 lakh. A standard deduction of ₹75,000 is available for salaried individuals.
Old Tax Regime
The old regime has higher base rates but allows numerous deductions including Section 80C (up to ₹1.5 lakh for investments in PPF, ELSS, life insurance, etc.), Section 80D (health insurance premiums), HRA exemption, and several others. For individuals who actively invest in tax-saving instruments and have home loans, the old regime may result in lower tax liability.
Which Regime Should You Choose
The decision depends on your specific financial situation. If your total deductions under the old regime exceed approximately ₹3-4 lakh, the old regime is likely more beneficial. If you prefer simplicity and do not invest heavily in tax-saving instruments, the new regime with its lower rates may save you money. You can switch between regimes each financial year, so it is worth calculating your liability under both options annually.
Tax Planning Best Practices
Regardless of which regime you choose, maintain organised records of all income sources and investments. File your returns before the deadline to avoid penalties. Use the Income Tax Department’s online portal for accurate calculation and e-filing. Consider consulting a qualified tax professional for complex financial situations.
Tax laws are subject to change. This article reflects the tax structure as of the assessment year 2026-27. Consult a chartered accountant for personalised tax advice.
