Introduction to Income Tax Regime 1 and 2

India’s income tax system has undergone significant transformation in recent years to simplify compliance and offer greater flexibility to taxpayers. One of the major reforms was the introduction of two tax regimes: the Old Tax Regime (Regime 1) and the New Tax Regime (Regime 2) under Section 115BAC of the Income Tax Act, 1961. These regimes coexist, giving taxpayers the option to choose between the two based on their financial preferences and tax planning strategies.

Old Tax Regime (Regime 1):

Old Tax Regime has been in place for several decades and follows a progressive slab system with various deductions, exemptions, and rebates. It allows taxpayers to reduce their taxable income through a variety of provisions provided under the Income Tax Act.

Key Features:

• Tax Slabs (as of AY 2024-25 for individuals below 60 years):

  • ₹0 to ₹2.5 lakh: Nil

  • ₹2.5 lakh to ₹5 lakh: 5%

  • ₹5 lakh to ₹10 lakh: 20%

  • Above ₹10 lakh: 30%

• Deductions Allowed:

  • Section 80C: Investments in PPF, NSC, ELSS, LIC premiums, etc. (up to ₹1.5 lakh)

  • Section 80D: Health insurance premiums

  • Section 24(b): Interest on home loans (up to ₹2 lakh)

  • House Rent Allowance (HRA)

  • Leave Travel Allowance (LTA)

  • Standard Deduction of ₹50,000 for salaried individuals

  • Other deductions under Chapter VI-A

Who Should Opt for Regime 1:

• Taxpayers who claim multiple deductions/exemptions

• Those with investments in tax-saving instruments

• Salaried individuals with HRA, LTA, and home loans

This regime benefits individuals who actively plan their taxes through investments and eligible expenditures.

New Tax Regime (Regime 2)

• Transition from Section 115BAC to Section 202

The provisions of the New Tax Regime, initially outlined under Section 115BAC of the Income Tax Act, 1961, have been relocated to Section 202 in the Income Tax Bill 2025. This change is set to take effect from April 1, 2026, aiming to streamline and simplify the tax code without altering the existing tax slabs and rates.

• Revised Tax Slabs under the New Regime (Effective FY 2025-26)

The Union Budget 2025 introduced new income tax slabs under the New Tax Regime to provide relief to taxpayers, especially the middle class. The revised slabs are as follows:

• Enhanced Tax Rebate under Section 156

A significant feature of the new tax regime is the introduction of a tax rebate under Section 156 of the Income Tax Bill 2025. This rebate ensures that individuals with income up to ₹12 lakh will have zero tax liability. Specifically:

• For incomes up to ₹12,00,000: A rebate of 100% of the income-tax payable or ₹60,000, whichever is lower, is allowed.

This move is designed to boost the spending capacity of the middle class and stimulate economic growth.

• Standard Deduction for Salaried Individuals

Under the new tax regime, salaried individuals are entitled to a standard deduction of ₹50,000, which effectively increases the tax-free income threshold to ₹12.75 lakh for such taxpayers.

Key Features of the New Tax Regime:

• Simplified Tax Structure: Lower tax rates with fewer exemptions and deductions.

• Default Regime: From FY 2023-24 onwards, the new tax regime is the default option.

• Flexibility: Taxpayers can choose between the old and new regimes based on their financial planning.

• No Exemptions/Deductions: Most traditional deductions (like HRA, LTA, 80C, etc.) are not available under this regime.