Old vs new tax regime: 4 reasons why the old regime might still be best for you

Representative image

Since the government brought the new tax regime into effect in 2020, taxpayers have a choice of opting between two systems: the old regime of deductions and exemptions, and the new regime with reduced tax rates but without most of the benefits. Although the new regime is intended to streamline the tax process, it isn't for everyone—particularly those who regularly avail deductions under different sections of the Income Tax Act.

1. You take claim for most of the deductions and exemptions

The largest benefit of the earlier tax regime is its extensive deductions and exemptions list. If you opt for investments in Section 80C instruments like EPF, PPF, life insurance premia, payment of principal component of your home loan, or tax savings through mutual funds (ELSS), the older regime allows deductions for as much as ₹1.5 lakh. You can also gain from deductions under Sections 80D (health insurance), 24(b) (interest on home loan), and HRA exemptions. If you are already availing of these benefits to the maximum, a shift to the new regime may put you in a worse position, even with lower tax rates.

2. You have a home loan or pay rent

If you’re repaying a home loan or live in a rented house, the old tax regime offers greater tax relief. Homeowners can claim up to ₹2 lakh on home loan interest under Section 24(b) and also deduct principal repayment under Section 80C. Renters can take advantage of HRA exemptions. These key benefits are not available under the new regime, making the old system far more attractive to salaried individuals in metro cities.

3. You're a salaried employee with normal benefits

All salaried staff get elements such as HRA, LTA (leave travel allowance) and conveyance or professional tax allowances. These are exempt to a large or small extent under the old regime, and they decrease taxable income. Under the new regime, these exemptions are not permitted, and your take-home tax burden could actually be higher if you don't avail any of these benefits.

4. You like control and flexibility in tax planning

The old regime provides room for lowering taxes with intelligent planning and investments. It promotes long-term financial prudence with tools such as PPF, ELSS, and NPS. For tax payers who like tailoring their financial plan and enjoy getting maximum benefits from structured investments, the old regime is more suitable. The new regime, although simpler to deal with, is mostly static and does not incentivise tax-saving.

While the new tax regime offers simplicity and lower rates, it may not be ideal for those who actively use deductions and exemptions. If you’ve invested in tax-saving instruments, are repaying a home loan, or receive significant salary components that are exempt under the old system, it’s worth doing the math before making the switch. The old regime still remains a wise selection for taxpayers who prioritise tax planning and prefer to maximise available allowances.