With Finance Minister Nirmala Sitharaman announcing significant rebates for taxpayers in the middle-income group under the new tax regime, many are left wondering whether the government plans to scrap the old tax regime altogether. The Finance Minister did not mention the old tax regime, and the Budget document is also silent on it. However, the document specifies that the revised tax slabs apply only to those opting for the new tax regime.
What Is The Old Tax Regime?
The old tax regime primarily benefits taxpayers who claim exemptions and tax deductions on House Rent Allowance (HRA), life insurance premiums, investments in the Public Provident Fund, and medical insurance policies. For those who opt for the old regime, taxable income is calculated after deducting exemptions.
Once the taxable income is determined, it is taxed according to the prescribed slabs:
No tax for income up to Rs 2.5 lakh
5% tax for income between Rs 2.5 lakh and Rs 3 lakh
5% tax for income between Rs 3 lakh and Rs 5 lakh
20% tax for income between Rs 5 lakh and Rs 10 lakh
30% tax for income above Rs 10 lakh
Government’s push for the new regime
The Narendra Modi government introduced the new tax regime in the 2020-21 fiscal year, with the aim of eventually eliminating all tax exemptions. Despite this, a majority of taxpayers continued opting for the old regime to take advantage of deductions.
To encourage the adoption of the new tax regime, the government has now made it the default, requiring taxpayers to explicitly choose the old regime if they wish to stick with it. With the new Budget focusing only on the new regime, speculation is rife that the new Income Tax law, expected soon, might completely eliminate the old regime.
Old regime vs new regime: A comparison
For a better understanding, let’s take an annual income of Rs 16 lakh as an example:
New Regime:
No tax for income up to Rs 4 lakh
5% tax on Rs 4 lakh – Rs 8 lakh = Rs 20,000
10% tax on Rs 8 lakh – Rs 12 lakh = Rs 40,000
15% tax on Rs 12 lakh – Rs 16 lakh = Rs 60,000
Total tax payable: Rs 1,20,000
The revised tax slabs reduce tax by Rs 50,000 compared to earlier.
Old Regime:
If Rs 4 lakh exemptions are claimed on a Rs 16 lakh income, the taxable income reduces to Rs 12 lakh.
Tax payable under the old slabs would be Rs 1,72,500—Rs 52,000 more than under the new regime.
Since the introduction of the new tax regime, the old regime has not received any benefits, while the new regime continues to offer attractive rebates. Additionally, the new tax regime requires significantly less paperwork.
The new income tax bill: What to expect
Finance Minister Nirmala Sitharaman, while presenting the Union Budget 2025, announced a new income tax bill—a direct tax code aimed at simplifying compliance for individual taxpayers. She stated that the new law would be “simple to understand” and reduce tax litigation. Many speculate that this might mark the end of the old tax regime altogether.