New vs old tax regime: How much tax do you pay on a ₹25 lakh salary?

For salaried taxpayers, choosing between the old and new tax regimes remains one of the most important decisions while filing income tax returns. While the new regime offers lower tax rates with fewer deductions, the old regime allows taxpayers to reduce their taxable income by claiming exemptions such as House Rent Allowance (HRA), deductions under Section 80C, health insurance premiums and home loan interest.

For someone earning ₹25 lakh annually, the new regime is likely to result in a lower tax bill in most cases. However, taxpayers with substantial deductions, such as House Rent Allowance (HRA), home loan interest, investments under Section 80C and health insurance premiums, may still find the old regime more beneficial.

Based on calculations by ClearTax, here’s how the tax liability compares under both regimes for a salaried individual earning ₹25 lakh a year.

How much tax do you pay under the new regime?

A salaried individual earning ₹25 lakh annually would pay ₹3,19,800 in income tax, including 4% health and education cess, under the new tax regime. The calculation assumes only the ₹75,000 standard deduction, as most exemptions and deductions are not available under this regime.

The taxable income works out to ₹24.25 lakh, on which tax is calculated according to the new regime’s slab rates. Although taxpayers cannot claim benefits such as HRA, Section 80C investments or Section 80D deductions, the lower tax rates help reduce the overall tax liability.

How much tax do you pay under the old regime?

Under the old tax regime, the same taxpayer can reduce taxable income by claiming eligible deductions and exemptions. The illustration assumes the taxpayer claims an HRA exemption of ₹4 lakh, Section 80C deduction of ₹1.5 lakh, Section 80D deduction of ₹25,000, along with the ₹50,000 standard deduction.

These deductions bring the taxable income down to ₹18.75 lakh. However, despite the lower taxable income, the higher slab rates under the old regime result in a total tax liability of ₹3,90,000, including cess.

In this example, the taxpayer pays ₹70,200 less tax under the new regime, despite claiming deductions worth ₹5.75 lakh under the old regime.

What if you do not claim deductions?

The gap becomes much wider for taxpayers who do not have significant exemptions or deductions to claim.

For a salaried individual earning ₹25 lakh annually, the tax liability under the new regime would be ₹3,43,200, compared with ₹5,85,000 under the old regime if only the standard deduction is considered. This translates into a tax saving of ₹2,41,800 by opting for the new regime.

This is one of the key reasons why the new regime has become the preferred option for many salaried taxpayers, particularly those who do not pay rent, do not have a home loan, or do not make substantial tax-saving investments.

When does the old regime make sense?

The old tax regime can still work in favour of taxpayers who are able to claim sizeable deductions and exemptions. Salaried employees with a substantial HRA exemption, home loan interest deduction under Section 24(b), investments under Section 80C, health insurance premiums under Section 80D and eligible National Pension System (NPS) contributions can significantly reduce their taxable income.

If the cumulative value of these deductions is high enough, the tax savings they generate may outweigh the benefit of lower slab rates under the new regime. As a result, some taxpayers could end up paying less tax under the old regime.

The choice should therefore not be based on income alone. Taxpayers should compare tax liability under both regimes after accounting for all eligible deductions before filing the income tax return. For those with limited deductions, the new regime is generally more tax-efficient, while those with substantial exemptions may still find the old regime more rewarding.