Old or new tax regime: how to work out which one costs you less

Every year the same question arrives with the investment declaration form (Form 12BB), and every year it gets answered by whichever colleague sounds most sure of themselves. Neither regime is cheaper for everyone. Which one costs you less depends on a single number: how much you were claiming in deductions under the old one.

That number has a threshold. Below it, the new regime wins. Above it, the old regime wins. All you have to decide is which side of the line you are on.

What the new regime actually changed

The new regime offers lower slab rates. In exchange, it removes almost everything you could earlier subtract from your income before those rates applied. The list of what goes is longer than most people realise:

• Section 80C: PF, PPF, ELSS, life insurance premiums, children's tuition fees, home loan principal.
• Section 80D: health insurance premiums for yourself and your parents.
• HRA exemption: the part of your house rent allowance that was tax free.
• LTA: leave travel allowance.
• Home loan interest on a self-occupied property.
• Section 80CCD(1B): the additional NPS contribution.

The standard deduction survives, and so does the employer's NPS contribution under 80CCD(2). Nearly everything else that used to reduce your taxable income does not. The Income Tax Department's own FAQs on the new and old regimes confirm both points.

The arithmetic, in one idea

Lower rates on a larger income, or higher rates on a smaller one. That is the trade.

Take someone who claims nothing beyond the standard deduction. They have no 80C investments, they live in their own home, and they pay no health insurance premium of their own. Under the old regime they pay its higher rates on a figure barely smaller than their gross salary. For them the new regime is clearly cheaper, and by a wide margin.

Now take someone paying high rent in a metro, using the full 80C limit, insuring their parents and paying off a home loan. They can subtract a great deal before the old rates ever apply. For them the old regime usually still wins, and the gap widens as the deductions grow.

Between those two people sits a break-even level of deductions where both regimes produce the same tax. It moves with your income. That is why a rule of thumb someone quotes you, such as "the new regime is better under fifteen lakhs", is only true for the salary it was worked out on.

Why the rule of thumb keeps being wrong

The break-even point is not a single figure. It depends on your income, because the slabs and the rebate interact with it, and it depends on which deductions you actually claim rather than which ones you could in principle. Two people on the same salary can land on opposite sides of the line because one of them pays rent and the other does not.

On this point I would be stubborn: the only reliable answer is your own two numbers, worked out from your own figures. Run the old vs new regime comparison with your gross salary and the deductions you really claim. It shows both totals side by side instead of a general recommendation.

Getting your own deduction figure right

Most people overestimate what they claim, because they count the full limit rather than what they actually invested. Check two figures in particular before you compare.

HRA is not the whole allowance. The exempt portion is the smallest of three amounts: the allowance itself, rent paid minus ten per cent of basic salary, and half your basic in a metro or forty per cent elsewhere. It is usually well below the HRA line on your payslip. Work out the real figure with the HRA exemption calculator before putting it into the comparison.

80C is often already partly used. Your own EPF contribution counts towards the limit, and for many salaried people it fills a large part of it before any voluntary investment is made. Adding a full 80C on top of that overstates the old regime's advantage.

What the choice does to your monthly pay

The regime you pick changes the TDS your employer deducts, which changes what reaches your account each month. If you want to see that rather than an annual tax figure, put both regimes through the take-home salary calculator. Seeing the difference per month is usually what makes the decision feel real.

For the underlying slab-by-slab breakdown of either regime on its own, the income tax calculator shows how much tax each slab contributes. It is useful to see this once, even if you never change regime again.

A few things that are true regardless

• Salaried employees can choose their regime every year. The choice you make in the declaration form is not permanent, and a change in rent or a new home loan is a good reason to re-run the comparison.
• Choosing the old regime and then not making the investments is the worst outcome available. It is also common, because the declaration is made in April and the investing is left to March.
• Saving tax and investing well are two separate things. A deduction does not turn a poor 80C product into a good investment. And the fact that the new regime removes the incentive is no reason to stop saving.

Run both numbers, on your own figures, once a year. It takes a few minutes, and it is the only version of this answer that is about you.