Will Budget 2025 bid farewell to the Old Tax Regime?

A day ahead of Budget 2025, speculation is high on whether the old tax regime will be discontinued, making way for the new tax regime as the sole option—potentially with greater flexibility and lower tax liabilities for taxpayers.

Since the introduction of the new tax regime in the Union Budget 2020, India’s tax landscape has been undergoing a significant transformation. While the old tax regime, with its deductions and exemptions, has been a longstanding feature, the government’s push for the new tax regime has sparked debate about its future.

As Budget 2025 approaches, salaried taxpayers are left wondering: Will the old tax regime finally be phased out?

Old vs. New Tax Regime

The old tax regime, which has been in place for decades, allows taxpayers to claim deductions and exemptions under sections like 80C, 80D, and HRA, among others. These benefits have made it a preferred choice for many, especially those with significant investments in tax-saving instruments or those availing home loan benefits. However, the regime has its complexity.

On the other hand, the new tax regime, introduced in Budget 2020, offers lower tax rates but comes at the cost of foregoing most deductions and exemptions. Initially, the new regime failed to gain widespread acceptance, as taxpayers found the old regime more beneficial due to the savings from deductions. However, the government has been steadily making efforts to make the new regime more attractive. The data shows that over 70% taxpayers have already shifted to the new tax regime.

Also Read: Budget 2025: Key expectations of the common man from FM Nirmala Sitharaman

Budget 2024: A Push for the New Regime

Budget 2024 marked a significant shift in the government’s approach to personal taxation. Finance Minister Nirmala Sitharaman announced several measures to incentivise taxpayers to adopt the new tax regime. These included increasing the basic exemption limit to Rs 3 lakh (from Rs 2.5 lakh), reducing tax slabs, and increasing the standard deduction for salaried class from Rs 50,000 to Rs 75,000 under the new regime. Additionally, the budget introduced a rebate under Section 87A, ensuring that individuals with an income of up to Rs 7.75 lakh would pay no tax under the new regime.

Despite these efforts, the old tax regime was not abolished. Taxpayers were still given the choice to continue with the old system if it proved more beneficial for them. This dual system has created a unique situation where taxpayers must carefully evaluate their financial circumstances to determine which regime works best for them.

Will Budget 2025 Phase Out the Old Regime?

As Budget 2025 approaches, speculation is rife about whether the government will finally do away with the old tax regime. Several factors suggest that this could be a possibility.

First, the government’s consistent efforts to promote the new regime indicate a long-term vision to simplify the tax structure and reduce compliance burdens. Secondly, the new regime aligns with the government’s broader goal of increasing tax compliance and expanding the tax base. With lower tax rates and fewer exemptions, the new regime is designed to make taxation more straightforward and less prone to evasion.

However, many taxpayers, particularly those with significant investments in tax-saving instruments, may not want the discontinuation of the old tax regime. For instance, data from the Central Board of Direct Taxes (CBDT) shows that a significant portion of taxpayers still claims deductions under Section 80C, which includes investments in Provident Funds, life insurance, and equity-linked savings schemes (ELSS).

Adhil Shetty, CEO of Bankbazaar.com, says, “One of the key benefits of the new regime is the absence of deductions and exemptions. But five years later, we’re also seeing some troubling trends emerge. Life insurance penetration is dropping. ELSS inflows are falling during some tremendous years for equity. Traditionally, tax deductions have been linked to insurance and savings. The absence of one may be hurting the other.”

Shetty explains, “While the new regime had no deductions to start with, a few have now been added. More are needed. In the interest of simplification, a flat deduction of 30% of the gross income should be provided to include long-term savings, essential insurance, healthcare and education costs, and loan payments without confusing caps and sub-limits. The deduction can be capped at Rs 15 lakh to ensure equity among income levels.”

What Should Taxpayers Expect?

While it is unclear whether Budget 2025 will completely eliminate the old tax regime, taxpayers should prepare for the possibility of further changes. The government may introduce additional incentives to make the new regime more appealing, such as expanding the scope of exemptions or introducing new rebates. Alternatively, it could gradually phase out the old regime by limiting the availability of certain deductions.