The new tax regime myths floating around online have confused thousands of Indian taxpayers. Some people believe the new regime is always better. Others assume it removes all deductions and exemptions available under the old regime. Most of these beliefs are wrong. In this guide, we bust ten of the most common misconceptions so you can make a clear, confident tax decision this financial year.
Whether you are a salaried employee, a self-employed professional, or a first-time taxpayer, understanding the truth behind these myths can help you make better tax decisions and reduce confusion at the time of filing.
Why So Many Myths Exist Around the New Tax Regime
India’s tax system changed significantly when the government introduced the new tax regime in Budget 2020. It was revised further in Budget 2023, making it the default tax regime for most taxpayers. These changes created confusion among taxpayers.
Many people rely on half-read news articles, well-meaning but outdated advice from colleagues, or assumptions based on the old system. As a result, myths have spread quickly. Let us clear up some of the most common misconceptions.
Myth 1: The New Tax Regime Offers No Deductions at All
This is perhaps the most widespread myth. People assume the new regime is a blank slate with zero benefits. That is not true.
The new tax regime does remove many popular deductions and exemptions such as Section 80C, Section 80D, and HRA. However, several deductions and exemptions are still available, including:
- Standard deduction of Rs 75,000 for salaried employees and pensioners.
- Employer’s contribution to NPS under Section 80CCD(2), subject to the prescribed limits.
- Eligible exemption on gratuity under Section 10(10).
- Eligible exemption on leave encashment under Section 10(10AA).
- Deduction for family pension under Section 57(iia), subject to the applicable limit.
- Transport allowance for specially-abled employees, subject to the prescribed conditions.
Therefore, before rejecting the new regime, check which benefits you actually qualify for under it.
Myth 2: The Old Tax Regime Is Always Better If You Have Investments
Many taxpayers assume that because they invest in PPF, ELSS, or pay LIC premiums, the old regime automatically wins. This is not always the case.
The answer depends on your income level and the total value of your eligible deductions and exemptions. For example, if your annual income is Rs 9 lakh and your eligible deductions are limited to Rs 1.5 lakh under Section 80C, you may still find the new regime more beneficial depending on your complete tax position.
Always calculate your tax liability under both regimes before deciding. A comparison based on your actual income, deductions, exemptions, and applicable tax rates is the most reliable way to choose.
Myth 3: You Cannot Switch Between Regimes Every Year
Many salaried employees believe that once they choose a tax regime, they are locked in forever. This is a myth.
If you are a salaried individual without income from business or profession, you can generally choose between the old and new tax regimes each year while filing your ITR, subject to the applicable provisions.
Taxpayers having business or professional income have different rules. They can exercise the option to opt out of the new tax regime subject to the conditions prescribed under the Income-tax Act, and switching back to the new regime is subject to the applicable restrictions.
So if your financial situation changes next year, for example, you take a large home loan or become eligible for significant deductions, you can reassess your tax regime and choose the option that results in the lower tax liability, subject to the applicable rules.
Myth 4: The New Tax Regime Has No Benefit for High Earners
Some high-income professionals assume the new regime is only designed for people earning below Rs 10 lakh. In reality, the new regime can be attractive even for those earning Rs 15 lakh, Rs 20 lakh, or more, depending on their deductions, exemptions, and overall tax position.
The reason is the revised tax structure introduced in Budget 2024 and applicable from FY 2024-25, with further changes applicable from FY 2025-26. Here is a comparison of the tax slab rates applicable for FY 2025-26 (AY 2026-27):
| Income Slab | Old Regime Tax Rate | New Regime Tax Rate |
|---|---|---|
| Up to Rs 4,00,000 | Nil* | Nil |
| Rs 4,00,001 to Rs 8,00,000 | 5%* | 5% |
| Rs 8,00,001 to Rs 12,00,000 | 20%* | 10% |
| Rs 12,00,001 to Rs 16,00,000 | 30%* | 15% |
| Rs 16,00,001 to Rs 20,00,000 | 30%* | 20% |
| Rs 20,00,001 to Rs 24,00,000 | 30%* | 25% |
| Above Rs 24,00,000 | 30% | 30% |
*Old regime slabs shown above apply to individuals below 60 years of age. The old regime also has a Section 87A rebate subject to the applicable conditions.
As the table shows, the new regime offers significantly lower rates across several middle-income slabs. For high earners who do not have substantial deductions and exemptions under the old regime, the new regime can result in a lower overall tax liability. not have large deductions, the new regime can result in lower tax outgo overall.
Myth 5: Home Loan Benefits Are Completely Lost in the New Regime
This myth causes many home loan borrowers to dismiss the new regime without a second thought. Indeed, the deduction under Section 24(b) for interest on a home loan for a self-occupied property is not available under the new regime.
However, there is an important exception. If the property is let out, the interest paid on a home loan can be claimed as a deduction against income from house property under the new regime, subject to the applicable provisions. The resulting loss from house property, however, cannot be set off against income under other heads or carried forward under the new regime.
In addition, the principal repayment deduction under Section 80C is not available under the new regime. However, certain other deductions and benefits continue to be available.
Therefore, having a home loan does not automatically mean the old regime is better. Compare your complete tax position under both regimes before making a decision.
Myth 6: The New Regime Is Only for Salaried Employees
This is another common misunderstanding. The new tax regime applies to individual taxpayers, including:
- Salaried employees
- Freelancers and consultants
- Business owners and professionals, subject to the applicable conditions for switching regimes
- Retired individuals with pension income
- Senior citizens
The suitability of the new regime varies depending on the taxpayer’s income, deductions, exemptions, and financial circumstances. It is certainly not restricted to people who receive a salary. Senior citizens, for example, may find the new regime useful if they have limited deductions and exemptions.
Myth 7: Tax-Saving Investments Like ELSS Are Now Useless
Here is where the new tax regime myths can actually lead to poor financial decisions. Some people say, “Why invest in ELSS or NPS now? They are pointless under the new regime.” That thinking is flawed.
First, taxpayers who are eligible to choose the old regime can still claim applicable tax benefits, such as the Section 80C deduction for eligible ELSS investments and the additional deduction under Section 80CCD(1B) for their own NPS contribution, subject to the applicable conditions.
Second, tax saving should never be the only reason to invest. ELSS funds are equity mutual funds with a statutory three-year lock-in, while NPS is designed primarily for long-term retirement planning. Both have financial purposes beyond their tax benefits.
Investing only to save tax, or avoiding suitable investments simply because a tax benefit is unavailable under one regime, can be a costly mistake. Your financial goals, investment horizon, and risk appetite should drive your investment decisions.
If you are unsure which investments make sense for your goals under either tax regime, speaking with an advisor at VSJ FinMart can help you evaluate your options and build a suitable mutual fund investment plan.
Myth 8: The New Regime Will Be Scrapped Soon, So Avoid It
Some taxpayers avoid the new regime because they believe the government may reverse course and remove it in a future Budget. This is speculation, not fact.
The new regime has undergone several significant changes since its introduction, including becoming the default tax regime and receiving revised tax slabs and a higher standard deduction. However, future tax policy cannot be predicted with certainty.
Avoiding a financially suitable tax regime based on speculation about future policy is not sound tax planning. Evaluate the rules applicable for the current financial year and reassess your choice when future Budgets or tax law changes are announced.
Myth 9: If Your Employer Deducts TDS Under the New Regime, You Are Stuck With It
This causes unnecessary confusion when employers ask employees to submit their tax declarations. Many employees assume that the regime used by their employer for TDS becomes final.
That is not how it works for eligible salaried taxpayers. The tax regime selected for TDS by your employer determines how much tax is deducted from your salary during the year. If you are a salaried individual without income from business or profession, you can generally choose a different regime when filing your ITR.
For example, if your employer deducted TDS under the new regime but you determine at the end of the financial year that the old regime results in lower tax, you can file your ITR under the old regime and claim a refund of excess TDS, subject to the applicable rules.
Always compare your final tax liability under both regimes before filing your ITR.
Myth 10: The New Regime Removes the Benefit of Health Insurance
Section 80D allows a deduction for eligible health insurance premiums under the old tax regime. This deduction is not available under the new tax regime. However, the financial value of health insurance does not disappear simply because the tax deduction is unavailable.
A medical emergency can significantly affect your savings and finances. Therefore, choosing appropriate health insurance should be based on your financial protection needs, not solely on whether the premium qualifies for a tax deduction.
Most importantly, do not choose a tax regime only because of Section 80D. Compare your overall tax liability, including eligible deductions and exemptions under the old regime and the lower tax rates and standard deduction under the new regime. Health insurance is primarily a financial protection decision, while your tax regime is a tax-planning decision. They should be evaluated separately.
How to Choose the Right Tax Regime for You
Now that we have addressed the most common new tax regime myths, here is a simple process to make the right choice:
- List all your eligible deductions under the old regime: 80C investments, 80D premiums, HRA, home loan interest, NPS, and any others.
- Calculate your total tax liability under the old regime after all eligible deductions and exemptions.
- Calculate your total tax liability under the new regime using the revised slabs for FY 2025-26, including the standard deduction of Rs 75,000 if you are salaried or receive a pension.
- Compare the two figures. Choose the regime where you pay less tax.
- Revisit annually. Your income, deductions, and life circumstances can change each year.
This process is simple to follow and can be done using the Income Tax Department’s online tax calculator or with the help of a qualified tax professional.
A Practical Indian Example
Consider Ramesh, a salaried professional in Pune earning Rs 12 lakh per year. He invests Rs 1.5 lakh in ELSS and PPF under Section 80C, pays Rs 25,000 in eligible health insurance premiums under Section 80D, and has no home loan.
Under the old regime, after the standard deduction of Rs 50,000, Section 80C deduction of Rs 1.5 lakh, and Section 80D deduction of Rs 25,000, his taxable income is Rs 9.75 lakh. His income tax is approximately Rs 1.07 lakh before cess.
Under the new regime, after the standard deduction of Rs 75,000, his taxable income is Rs 11.25 lakh. His income tax is approximately Rs 67,500 before cess.
In this case, the new regime is clearly more tax-efficient despite Ramesh having significant deductions under the old regime. If his eligible deductions and exemptions were substantially higher, the old regime could become more attractive.
The numbers vary by individual, which is exactly why a personalised calculation matters.
Final Words: Do Not Let Myths Drive Your Tax Decisions
The new tax regime is not perfect for everyone, but it is also not the threat many people make it out to be. The ten myths we busted in this guide share a common thread: they replace careful calculation with assumptions.
Your tax regime choice is personal. It depends on your income, your eligible deductions and exemptions, your life stage, and your financial goals. No colleague’s advice or social media post can replace a proper comparison based on your specific circumstances.
Most importantly, do not let your tax regime choice derail your investment discipline. Whether you choose the old or new regime, keep investing regularly, stay diversified, and focus on your long-term goals. If you would like a clear, personalised view of how to align your tax planning with your broader mutual fund investment plan, the team at VSJ FinMart is ready to help.
Frequently Asked Questions
Is the new tax regime the default option for everyone in India?
Yes. The new tax regime is the default tax regime for individual taxpayers. However, taxpayers who are eligible to opt for the old regime can choose it while filing their ITR, subject to the applicable rules. For salaried individuals without income from business or profession, the regime can generally be changed each year.
Can I claim HRA under the new tax regime?
No. House Rent Allowance (HRA) exemption under Section 10(13A) is not available under the new tax regime. If HRA is a significant part of your salary structure, this is an important factor when comparing both regimes. Run the numbers for your specific case before deciding.
Does the new tax regime benefit senior citizens?
It can, depending on their income and deductions. Under the new regime, the higher basic exemption limit available to senior citizens under the old regime does not apply. However, the lower slab rates and other benefits under the new regime may still result in lower tax for senior citizens who have limited eligible deductions and exemptions. A calculation based on their actual income profile is the best approach.
Are NPS investments completely useless under the new tax regime?
No. While the deduction for an individual’s own NPS contribution under Section 80CCD(1B) is not available under the new regime, an employer’s contribution to NPS under Section 80CCD(2) remains eligible for deduction, subject to the prescribed limits. For salaried employees whose employers contribute to NPS, this remains a valuable tax benefit under the new regime.
Should I stop investing in ELSS just because I choose the new tax regime?
Not necessarily. ELSS funds are equity mutual funds with a statutory three-year lock-in and can be considered for long-term wealth creation. However, the Section 80C tax deduction for ELSS investments is not available under the new tax regime. Investment decisions should therefore be based on your goals, risk appetite, investment horizon, and overall portfolio, rather than tax benefits alone.
Disclaimer
The information provided in this blog is for educational and informational purposes only and should not be construed as investment advice. Please consult a qualified financial advisor before making any investment decisions. Shashikant Chanderkumar Mudaliar (ARN: 319377), operating under the brand name VSJ FinMart, is an AMFI-registered Mutual Fund Distributor (MFD) and does not provide investment advisory services. Mutual fund investments are subject to market risks. Past performance is not indicative of future results. Please read all scheme-related documents carefully before investing. Registration details can be verified at www.amfiindia.com/locate-distributor.