Tax planning plays an important role in managing finances effectively. It involves arranging financial affairs in ways that comply or avoid taxes by taking advantage of tax deductions, credits, and exemptions legally. Beginning April 1, 2020 (FY 2020-21), the Government of India implemented a new optional tax rate system for individuals and Hindu undivided families (HUF). Consequently, Section 115 BAC was added to the Income Tax Act of 1961, which mandated lower tax rates for respective taxpayers and HUFs who did not take certain tax deductions or exemptions. The tax system that existed before the implementation of the new tax system is called the old tax regime with a lot of deductions and exemptions.
Many people still feel confused about the difference between the old and new tax regimes. Let’s understand this better through a short conversation.
Two friends were sitting in a cafeteria, sipping coffee and discussing tax issues with serious expressions. It was quite clear from their discussion that both were working.
Rahul: Ruchita, I’m really confused! I heard the new tax regime has lower rates but with a few deductions. It appears that my deductions don’t apply anymore. Does that mean I’ll pay more tax?
Ruchita: Haha, I was in the same boat last year! That’s why I stuck with the Old Tax Regime — I could claim 80C, 80D, 80 TTA and 80E, home loan interest for my self-occupied property, and other deductions. It reduced my taxable income a lot.
Rahul: Wow! So, the same salary income can end up with very different taxable income depending on deductions?
Ruchita: Exactly! That’s why it’s significant to understand which deductions you can claim and how they affect taxable income. Once you understand this, computing your tax becomes much easier — no more misperception.
In this blog, we’ll compare Rahul and Ruchita to show how deductions work differently under the Old vs New Tax Regime, including actual tax calculations — so you’ll be confident in computing your taxable income.
Meet Ruchita and Rahul
- Gross Income: Rs.15,00,000 each
- Standard Deduction: Old Regime Rs.50,000; New Regime Rs.75,000
Ruchita — Old Regime Follower
- 80C: Rs.1,50,000 (PF, Principal of Loan for housing, life insurance)
- 80D: Rs. 25,000 (health insurance)
- Home Loan Interest: Rs.2,00,000
- Savings bank interest Rs. 8000
- Education loan interest Rs. 70,000
Rahul — New Regime Follower
- No deductions except standard deduction
- Likes simplicity, less paperwork, but higher taxable income
Ruchita (Old tax regime)
| Details | Amount | Amount |
| Gross Income | 15,00,000 | |
| Less: Standard deduction | 50,000 | |
| Less: Interest on loan for self -occupied property | 2,00,000 | 2,50,000 |
| Gross Total Income | 12,50,000 | |
| 80C | 1,50,000 | |
| 80 D | 25,000 | |
| 80 E | 70,000 | |
| 80 TTA | 8,000 | 2,53,000 |
| Taxable Income | 9,97,000 |
Ruchita’s tax calculation (Old Regime Slabs FY 24-25)
- Up to Rs.2,50,000 – Nil
- 2,50,001 – ₹5,00,000 – @5% of Rs. 2,50,000 = Rs.12,500
- Rs. 5,00,001 – Rs.9,97,000 – @20% of Rs.4,97,000 = Rs.99,400
Total tax = 12,500+99,400 = Rs. 1,11,900
Add:Cess: @4% = Rs. 4,476
Total Tax Payable = Rs. 1,16,376
Rounded off u/s 288B Rs. 1,16,380
Rahul (New tax regime)
| Details | Amount | Amount |
| Gross Income | 15,00,000 | |
| Less: Standard deduction | 75,000 | |
| Gross Total Income | 14,25,000 | |
| Less: Deduction | Nil | |
| Taxable Income | 14,25,000 |
Rahul’s tax calculation (New Regime Slabs FY 24-25)
- Up to Rs.3,00,000 – Nil
- 3,00,001 – Rs. 7,00,000 – @5% of Rs. 4,00,000 = Rs.20,000
- Rs. 7,00,001 – Rs.10,00,000 – @10% of Rs.3,00,000 = Rs.30,000
- Rs. 10,00,001 – Rs. 12,00,000 @15% of Rs. 2,00,000 = Rs. 30,000
- On balance Rs. 2,25,000 @20% = Rs. 45,000
Total tax = Rs.1,25,000
Add :Cess @4% = Rs. 5,000
Total Tax Payable = Rs. 1,30,000
Comparison Summary
| Details | Ruchita (Old tax regime) | Rahul (New tax regime) |
| Gross Total Income | 12,50,000 | 14,25,000 |
| Deduction | 2,53,000 | Nil |
| Taxable income | 9,97,000 | 14,25,000 |
| Tax payable | 1,16,380 | 1,30,000 |
| Difference | + 13,620 |
Learning Outcome
- Old Regime → Multiple deductions reduce taxable income and tax payable.
- New Regime → Lower slab rates, no most deductions, leads to higher taxable income.
Understanding deductions is key to mastering taxable income — just like Ruchita and Rahul’s example shows.
Very Lucid way to clear the concept. People from Non Finance Backgrounds will also comprehend easily.
Thank you and keep yourself updated
The way you’ve explained the concept in a storytelling format makes it so easy to grasp. Thank you, sir, for sharing such valuable insights. This really helps us understand the differences between the old and new tax regimes more clearly.
Thank you Mrinmoy for your comment and nice to know that the concept is clear to you.
I was scrolling through the website for quick interesting recap for our exam. These blogs are like flashcards, having all the necessary info in an engaging form! thank you sir!
Thank you Nondita for your comment and I’m very happy to know that it’s really helping you in your study and preparation. Do keep watching for the next one.