Finance minister Nirmala Sitharaman may announce a road map for a gradual phasing out of the old personal income tax regime over the next few years in the Budget for FY26. Sitharaman may also tweak the new regime, introduced in FY21, to make it the naturally preferred choice for all taxpayers through the phase-out period.
Over 72% of taxpayers have already adopted the new regime, which allows little exemptions or deductions while the tax rates are more benign.
According to sources, the government will not make any changes to the old regime that provides for investment-linked exemptions and deductions. “Further simplification of the new tax regime, and tweaking the slab structure of tax rates, will automatically push more taxpayers to adopt it,” an official aware of the developments said.
FE had reported earlier that the Budget for FY26 may unveil significant tax giveaways aimed at putting more money in the hands of individual taxpayers, with the target beneficiaries being those who earn up to Rs 15 lakh a year.
The changes being considered now include a hike in basic exemption limit from Rs 3 lakh to Rs 4 lakh, along with a rejig of tax slabs in the exemption-less new tax regime, which was brought in 2020-21. Sources say the first slab can be from Rs 4 lakh to Rs 7 lakh instead of Rs 3 lakh to Rs 6 lakh, and other slabs would get adjusted accordingly.
Experts say that while the new tax regime has gained popularity due to its simplicity, the old tax regime continues to be relevant for some taxpayers, particularly those who claim higher exemptions and deductions. According to the Central Board of Direct Taxes (CBDT), 28% of taxpayers opted for the old tax regime in the assessment year 2024-25.
“The old tax regime remains relevant primarily due to the availability of various exemptions and deductions, which continues to be beneficial for taxpayers with significant tax-saving investments or those claiming exemptions,” an tax expert said.
Under the old tax regime, taxpayers can claim significant deductions, such as house rent allowance, investment linked deduction (Section 80C), home loan interest (Section 24(b)), health insurance premia (Section 80D), and NPS contributions (80CCD). No such facility is available in the new one.
The new regime, on the other hand, offers lower tax rates for individuals, particularly the middle class. Since its introduction, the slabs have been tweaked two times, and are likely to be tweaked again on February 1.
Individuals with lower-to-moderate incomes benefit significantly from reduced tax rates, another expert said. Even high-income taxpayers not having eligible investments, home loans, etc, find the new regime more beneficial due to the decreased surcharge rate from 37% to 25%, she added.
At present, income of up to Rs 3 lakh/annum is exempt from income tax in the new regime. Income of Rs 3 lakh-Rs 6 lakh is taxed at 5%, Rs 6 lakh-Rs 9 lakh at 10%, Rs 9 lakh-Rs 12 lakh at 15%, Rs 12 lakh-Rs 15 lakh at 20%. The 30% rate kicks in for income above Rs 15 lakh.
Also, the I-T Act says that taxpayers with an income of up to Rs 7 lakh won’t have to pay any tax if they opt for the new tax regime. With Rs 75,000 standard deduction, income of up to Rs 7.75 lakh won’t attract any tax.
“While the new tax regime provides fewer exemptions and deductions, it offers greater flexibility in financial management, wherein they are no longer obligated to make specific/eligible investments thus simplifying and reducing the compliance burden,” she said.
Another expert said: “The quantum of deductions available under the old tax regime has not been revised for a long time. Due to inflation, the old tax regime gets less attractive each year.”
