With less than three weeks to go for Union Budget 2026–27, tax proposals are once again at the centre of attention. Among the biggest questions doing the rounds is whether the government will finally scrap the old income tax regime altogether or quietly allow it to fade into irrelevance as more taxpayers move to the newer system.
The speculation isn’t without reason. Over the last few years, the government has consistently sweetened the new tax regime, while keeping the old one largely unchanged. The result: a steady migration of taxpayers towards a simpler, deduction-free structure that promises lower rates and easier compliance.
Why the old tax regime is losing its sheen
The new tax regime has seen two major slab revamps in quick succession. These changes have significantly narrowed — and in many cases eliminated — the tax advantage that the old regime once offered.
As Richa Sawhney, Partner – Tax, Grant Thornton Bharat, explains, “Changes in the slab rates in the new tax regime have provided a gentle nudge to taxpayers to move voluntarily to this regime. As per last data available, around 75% of the taxpayers had already moved to the new tax regime. While the latest figures are not yet available, this number is expected to have gone up sizably, post the slab rate rejig carried out last year.”
That shift is also visible in the data. Around 9.19 crore income tax returns were filed in FY 2024–25, and filings are expected to touch nearly 10 crore in FY 2025–26. After the last Budget made income up to ₹12 lakh effectively tax-free under the new regime, it is widely believed that more than 80% of taxpayers may now be using the new system.
Simpler taxes, fewer deductions — a policy choice
Beyond lower rates, simplicity has emerged as the new regime’s biggest selling point. Taxpayers opting for it don’t need to worry about tracking multiple exemptions, preserving documents, or facing scrutiny over deductions.
Sawhney notes that “Considering these changes benefit a large section of taxpayers in monetary terms, coupled with the fact that tax filing exercise under the new tax regime is relatively less cumbersome, it is expected that old regime, even if not withdrawn, will gradually lose its sheen.”
This approach also aligns with the government’s broader policy direction. “The new tax regime is in line with the government’s policy of phasing out exemptions and deductions, making taxation laws simpler to comply with by taxpayers and easier to administer by tax authorities,” she says.
From the tax department’s perspective, fewer deductions mean fewer documents to verify, reduced paperwork during assessments, and a lower risk of disputes arising from inflated or bogus claims.
Why the old tax regime may not be scrapped just yet
Despite the strong push towards the new regime, scrapping the old one outright may not be easy — or even desirable — in the short term.
India’s household savings ecosystem has been built around tax-linked incentives for decades. Instruments like provident funds, life insurance, health insurance, pension products and home loans are deeply embedded in financial planning for millions of households. A sudden removal of deductions could disrupt long-term savings behaviour and retirement planning, especially for middle-income families.
For many salaried taxpayers, monthly cash flows are structured around tax-saving investments. Even if the new regime works out cheaper on paper, the absence of deductions can feel like a loss — both financially and psychologically — particularly for those already locked into long-term commitments.
There is also the question of stability. A dual tax system allows the government to encourage consumption through lower rates under the new regime, while still supporting disciplined savings via the old one. Abruptly ending the old regime could lead to behavioural shocks, compliance confusion, and legal challenges from taxpayers who planned their finances under existing rules.
From an administrative standpoint, the tax department is already processing returns under both regimes smoothly. Phasing out the old regime would require extensive amendments to the Income Tax Act and could open the door to disputes and transitional issues.
A gradual exit, not a sudden switch-off
So far, the government’s strategy has been clear: nudge, not force. Making the new tax regime the default option, cutting rates, and expanding rebates have all been part of a phased transition that allows taxpayers to adjust over time.
That approach suggests Budget 2026 may stop short of formally scrapping the old tax regime. Instead, the focus is likely to remain on making the new regime even more attractive — to a point where the old one becomes largely irrelevant for most taxpayers.
As Sawhney puts it, with simpler compliance, lower rates and administrative ease, the direction of travel is already clear. Even if the old regime survives on paper, its role in India’s tax system may continue to shrink with each passing Budget.