Listen to this article in summarized format
In Budget 2025, one of the key reliefs introduced by the finance minister was the increased Section 87A tax rebate under the new tax regime, which effectively makes income up to Rs 12 lakh (Rs 12.75 lakh for salaried individuals) tax-free.
Income Tax Guide
Income Tax Slabs FY 2025-26Income Tax Calculator 2025New Income Tax Bill 2025
The Finance Act 2025 has really boosted the adoption of the new tax regime under Section 115BAC of the Income-tax Act, 1961. With lower slab rates, a higher rebate under Section 87A, and the new regime now being default by choice, it seems likely that more individual taxpayers, especially salaried employees with few deductions, will opt to switch to this system.
That said, the old tax regime continues to be relevant for a large group of taxpayers. Deductions under Sections 80C, 80D, 24(b), 80CCD(1B) and exemptions for house rent allowance and other allowances continue to benefit individuals with housing loans, insurance commitments, and long-term retirement planning structures.
Many taxpayers probably made multi-year financial commitments based on these incentives, and suddenly getting rid of the old regime could throw a wrench in their established expectations and financial strategies.
This raises the question if Budget 2026 will announce an end date for the old tax regime.
Also read: Married, but paying income tax separately: Why should Budget 2026 introduce a joint taxation mechanism for married couples?According to Surana, from a policy perspective, while announcing a definitive sunset date for the old tax regime may appear administratively attractive, such a move would require adequate transition safeguards. T
The Government has so far adopted a gradual approach, making the new regime more attractive through periodic rate rationalisation rather than mandating an immediate switch.
Surana says: “This is reflected in the steady enhancement of slabs and rebates under Section 115BAC across successive budgets, while continuing to allow taxpayers the option to choose between regimes.”
Sachin Garg, Partner, Nangia & Co LLP says that an immediate withdrawal of the old tax regime would be premature as it still serves certain taxpayers like those claiming allowances such as House Rent Allowance (HRA), Leave Travel Allowance (LTA), deductions on interest paid for housing loans, deductions under Chapter VIA like like 80C, 80D etc.
According to Garg, therefore, a more pragmatic approach would be to consider gradual phasing out the old tax regime, rather than abolishing it outright.
Garg says that the new tax regime can be made more tax efficient by including certain exemptions or deductions that were available in the old tax regime.
Garg says: “This would give Taxpayers adequate time to realign the financial planning, while signalling the Government’s clear intent to move to a single, simplified tax regime.”
Old tax regime may gradually cut-off with time
Surana says that at present, having both the regimes helps taxpayers transition at their own pace. Many individuals are still using deductions linked to home loans, insurance, and long-term savings, while newer taxpayers often enter the system without relying on these exemptions.
Surana says: “As these deduction-based incentives gradually become less relevant, the old tax regime may naturally see fewer takers over time, without the need for a formal cut-off.”
While the overall direction favours a simpler, lower-rate tax structure, bringing the old regime to an end would need to be handled carefully.
Surana says that any such move should ideally give taxpayers enough time to adjust their financial plans and avoid sudden disruption.
Surana says: “A gradual or consultative transition, rather than an abrupt announcement, would likely be a more comfortable approach if the Government decides to move in that direction.”
Is it worth continuing with the dual practice of two tax regimes? What should India do? Isn’t it more confusing?
Garg says that the coexistence of two income tax regimes has lead to increased complexity for taxpayers whereby they are required to undertake annual tax computations and comparative scenario analyses on a recurring basis to identify the beneficial tax regime. While the legislative intent was to provide choice, flexibility, and simplicity, in practice it has led to revising the income tax calculations repeatedly.
Going forward, India should adopt a balanced approach by progressively positioning the new tax regime as the primary framework, while encouraging taxpayers to park their savings into instruments that receive recognition within the new regime. Thus, a gradual transition towards a single, simplified tax regime would help reduce compliance, improve clarity and enhance the taxpayer’s confidence, leading to fewer disputes and a more efficient tax system.
Is there any use case or need left for the old tax regime?
According to Surana, the old tax regime continues to make sense primarily for a specific set of taxpayers who are able to meaningfully utilise multiple deductions and exemptions.
For individuals with large housing loans (eligible for deduction under Section 24(b)), significant investments in tax-saving instruments such as PF, PPF, ELSS, life insurance, and NPS (under Sections 80C, 80CCD(1B)), and those receiving HRA or other salary-linked exemptions, the cumulative tax benefit can still outweigh the lower slab rates offered under the new regime.
Surana says: “This is particularly relevant for taxpayers in higher income brackets with long-term financial commitments and disciplined investment behaviour.”
However, the practical relevance of the old regime has been steadily declining.
According to Surana, the new tax regime under Section 115BAC now offers higher basic exemption limits, lower slab rates, and a simpler structure with minimal compliance.
Shubham Jain, Director, SVAS Business Advisors, says that the old regime still has relevance for a limited, transitional set of taxpayers—mainly those with legacy home loans or substantial deductions under Chapter VI-A.
For instance, individuals servicing older housing loans may still benefit marginally. However, these cases are declining and do not constitute a long-term policy rationale.
Jain says: “As debt obligations wind down and savings patterns evolve, the economic relevance of the old regime will continue to fade.”
Surana says that for new entrants to the workforce, individuals without housing loans, or taxpayers who do not actively plan around deductions, the new regime is typically more efficient and easier to comply with.
In effect, the old tax regime today serves more as a transitional option. Surana says that the old tax regime allows taxpayers with long-term investments and existing financial commitments to continue without disruption, while the system gradually nudges most individuals towards the new regime.
Surana says: “Over time, as investment-linked deductions lose relevance and taxpayer behaviour adapts, the need for the old regime may diminish without requiring an abrupt withdrawal.”
aniltikotekar4sme.com 