The higher tax relief announced in Budget 2025 has made the the preferred option for many salaried taxpayers. While lower tax rates and a higher standard deduction have improved its appeal, the choice is not always straightforward for those earning ₹20 lakh a year.
At this income level, taxpayers are no longer eligible for the rebate under Section 87A, making the comparison between the two regimes more nuanced. Instead of relying on a rebate, the decision hinges on whether the lower tax rates under the new regime can outweigh the exemptions and deductions available under the old regime.
These include benefits such as House Rent Allowance (HRA), Leave Travel Allowance (LTA), deductions under Sections 80C and 80D, and additional contributions to the National Pension System (NPS). A comparison of the two regimes shows how these tax breaks stack up against the lower slab rates under the new regime for a salaried individual earning ₹20 lakh annually.
New regime: Lower tax rates reduce the tax burden
Under the new regime, salaried taxpayers are entitled to a standard deduction of ₹75,000. For an individual earning ₹20 lakh a year, this brings the taxable income down to ₹19.25 lakh.
Since taxpayers in this income bracket do not qualify for the rebate under Section 87A, the tax savings under the new regime come solely from its concessional slab rates. According to calculations by ClearTax, the total tax liability, including the 4% health and education cess, works out to ₹1,92,400.
|
Particulars |
Amount ( ₹) |
| Gross salary | 20,00,000 |
| Less: Standard deduction | 75,000 |
| Taxable income | 19,25,000 |
| Tax payable (including 4% cess) | 1,92,400 |
Source: ClearTax tax computation for FY 2025-26.
For taxpayers who do not have substantial deductions to claim, the new regime’s lower tax rates can significantly reduce the overall tax outgo despite the absence of most exemptions.
Can deductions make the old regime more rewarding?
The old regime continues to allow a range of exemptions and deductions that are unavailable under the new regime. These include HRA, LTA, children’s education allowance, deductions under , health insurance premiums under Section 80D and additional NPS contributions under Section 80CCD(1B).
To understand whether these benefits can offset the lower tax rates offered by the new regime, let us see an example explained by ClearTax. It assumes a salaried employee earning ₹20 lakh annually who claims the following tax breaks:
HRA exemption: ₹1 lakh
LTA exemption: ₹20,000
Children’s education allowance: ₹9,600
Professional tax deduction: ₹2,400
Section 80C deduction: ₹1.5 lakh
Additional NPS deduction under Section 80CCD(1B): ₹50,000
Section 80D deduction: ₹25,000
After accounting for these exemptions and deductions, the taxpayer’s income under the head ‘Salary’ falls to ₹18.18 lakh, while the net taxable income is reduced to ₹15.93 lakh.
How much tax is payable under the old regime?
Despite claiming several of the most commonly used deductions and exemptions, the tax liability under the old regime remains higher than under the new regime.
|
Particulars |
Amount ( ₹) |
| Gross salary | 20,00,000 |
| Less: HRA exemption | 1,00,000 |
| Less: LTA exemption | 20,000 |
| Less: Children’s education allowance | 9,600 |
| Less: Standard deduction | 50,000 |
| Less: Professional tax | 2,400 |
| Income under the head ‘Salary’ | 18,18,000 |
| Less: Section 80C deduction | 1,50,000 |
| Less: Section 80CCD(1B) deduction | 50,000 |
| Less: Section 80D deduction | 25,000 |
| Net taxable income | 15,93,000 |
| Tax payable (including 4% cess) | 3,02,016 |
Source: ClearTax tax computation for FY 2025-26.
The calculation shows that even after claiming popular tax-saving deductions worth over ₹2 lakh, along with exemptions such as HRA and LTA, the taxpayer would still pay more than ₹3 lakh in income tax under the old regime.
Which regime works better?
For a salaried individual earning ₹20 lakh annually, the new tax regime emerges as the more tax-efficient option. According to ClearTax’s calculations, the tax liability under the new regime is ₹1,92,400, compared with ₹3,02,016 under the old regime. This translates into a tax saving of ₹1,09,616 by opting for the new regime, even after foregoing deductions such as HRA, LTA, children’s education allowance, Section 80C investments, NPS contributions and premiums.
However, this does not mean the old regime is no longer relevant. The benefit of the old regime increases as the value of deductions and exemptions rises. According to ClearTax’s analysis, a taxpayer would need total deductions and exemptions of more than ₹7,08,330 for the old regime to become more beneficial than the new one. Such a scenario may apply to individuals claiming substantial HRA exemptions, home loan interest deductions, higher NPS contributions and other eligible tax benefits.
For most salaried taxpayers with moderate deductions, however, the lower slab rates under the new regime continue to provide a larger tax advantage, making it the more rewarding option at the ₹20 lakh income level.