Budget 2026: Taxpayers Await Clarity on Income Tax Regimes
Finance Minister Nirmala Sitharaman will present the Union Budget for 2026 on February 1, 2026. Like every year, common people and taxpayers, especially salaried individuals, are watching closely for possible changes on the income tax front. One major question dominates discussions: will the government eventually phase out the old income tax regime?
Survey Reveals Expert Predictions
In a pre-Budget 2026 survey conducted by Times of India Online, most tax experts expressed a clear view. They believe the government may eventually eliminate the old income tax regime. However, this transition will likely happen in a phased manner rather than abruptly.
Understanding the Fundamental Differences
The new and old income tax regimes differ on one basic principle. The new regime offers lower tax rates at higher income levels compared to the old regime. It also provides fewer deductions and exemptions.
For example, the basic exemption limit under the new tax regime is higher. With the Section 87A rebate, the level of tax-free income for salaried taxpayers reaches Rs 12.75 lakh, including the standard deduction. Simply put, an individual earning Rs 1 lakh per month needs to pay zero tax under certain conditions.
Why the New Regime Was Introduced
To understand the future of the old income tax regime, we must first understand why the government introduced the new regime. Fundamentally, the government wants to move toward an income tax return system with minimal deductions and exemptions. This approach simplifies the filing process and reduces the need for maintaining extensive records and paperwork.
In her Budget 2020 speech, Finance Minister Nirmala Sitharaman explained the rationale. She stated that the Income Tax Act contained various exemptions and deductions that made compliance burdensome for taxpayers and administration difficult for tax authorities. She proposed the new simplified personal income tax regime to provide significant relief to individual taxpayers and simplify the Income-tax law.
Parizad Sirwalla, Partner and Head of Global Mobility Services, Tax at KPMG in India, provides additional context. She notes that when the new tax regime was first introduced for FY 2020-21, the government indicated a long-term intent to phase out numerous exemptions and deductions. Over the years, the government has indeed made the new tax regime increasingly attractive for individual taxpayers.
The Growing Popularity of the New Regime
Surabhi Marwah, Tax Partner at EY India, points to recent data. For Assessment Year 2024-25, approximately 72% of filers opted for the new tax regime. This indicates broad acceptance of the simplified framework.
"Given this trajectory, any move to retire the old regime, if considered, would likely be phased," she tells TOI. "This would allow a cooling-off period to support a smooth transition for taxpayers."
The past two Budgets have reinforced this trend. The government has made the new income tax regime more popular through favorable changes. These include higher basic exemption and rebate limits in 2025, and increased standard deduction and NPS employer-contribution benefits in 2024.
What's particularly interesting is this: if 72% of taxpayers had opted for the new income tax regime by FY2025, the number will likely increase for FY 2025-26. Finance Minister Nirmala Sitharaman tweaked tax slabs under the new regime in last year's Union Budget. She also made income up to Rs 12 lakh tax-free under certain conditions.
Will the Old Tax Regime Be Phased Out?
Some experts believe exemptions and deductions remain important. They encourage savings and provide home loan related tax benefits. However, most experts see a gradual phasing out of the old tax regime, with stagnation becoming evident.
Preeti Sharma, Partner at Tax and Regulatory Services, BDO India, told TOI, "The government has clearly shown its preference for the new income tax regime and has made it the default tax regime. However, an immediate abolition of the old income tax regime is unlikely."
Why the Old Regime Still Matters
The old tax regime continues to benefit certain groups of taxpayers. These include individuals who claim deductions such as House Rent Allowance (HRA), home-loan interest, and benefits under Sections 80C and 80D. Salaried taxpayers who claim deductions under Chapter VI-A also find value in the old regime.
"As a result, the government is expected to follow a gradual approach," Preeti Sharma explains. "They will likely continue with both tax regimes while nudging taxpayers toward the new tax regime."
Parizad Sirwalla of KPMG highlights another important consideration. Many deductions allowed under the old regime require long-term commitments. Examples include renting a house, buying a house, PPF contributions, and Life Insurance premium payments. Complete deletion of the old tax regime could impact these long-term savings, investments, and expenditures by common people.
"Additionally, prior to the New Income Tax Act being published, there was expectation that the new Act might signal the end of the old regime," she says. "However, the final Act that has been passed continues the old tax regime as optional."
Expert Perspectives on Flexibility and Transition
Chander Talreja, Partner at Vialto Partners, emphasizes the government's approach. The government has given taxpayers flexibility to choose the best regime applicable to their personal situation and individual circumstances.
"Few may find the old regime beneficial as many deductions and exemptions help them save tax," he tells TOI. "These provisions also ensure they don't hit the income ceiling where surcharge becomes applicable."
"Moreover, the government would also factor in that there is a huge market for housing loans and various investments that qualify for section 80C benefit," he adds. "Not allowing tax benefits for these may hamper their market demand. Hence, the flexibility to opt between regimes would continue for some time."
The Case for Ending the Old Regime
Tanu Gupta, Partner at Mainstay Tax Advisors LLP, finds merit in ending the old income tax regime to avoid confusion. She notes that while the government may not completely eliminate the old tax regime from the law, it is already moving toward making the new regime so attractive that the old regime could automatically become redundant.
"Although the old regime still finds a place in the newly enacted Income Tax Act 2025, the changes introduced in last year's budget represent a significant step," she told TOI. "These include tweaking the slabs, raising the Section 87A rebate to Rs 12 lakh, and capping the surcharge at 25% for incomes above Rs 5 crore, while leaving the old regime unchanged."
"For FY 2023-24, 72% of taxpayers opted for the new regime," she adds. "This percentage is expected to be significantly higher for FY 2025-26."
Tanu Gupta believes two income tax regimes cause confusion, defeating the purpose of simplifying tax filing. "Evaluating options by comparing the old and new regimes adds to the confusion," she says. "For business income taxpayers being allowed to switch only once in a lifetime only complicates matters further."
"There have even been instances where tax officers, while processing returns under Section 143, inadvertently applied the old regime despite the taxpayer choosing the new regime," she explains. "This causes inconvenience and additional administrative burden. Therefore, there is merit in putting a final end to the old tax regime rather than letting it fade naturally by becoming redundant."
Gradual Stagnation Expected
Radhika Viswanathan, Executive Director at Deloitte India, sees a gradual stagnation of the old income tax regime. This is evident from several factors. Taxpayers must explicitly opt for the old income tax regime, and it has not seen periodic updates to its slab rates and standard deduction.
"The introduction of the Income Tax Act 2025 aims for simplicity," she tells TOI. "Keeping two parallel systems forever contradicts the goal of simplification. Hence, we may expect the old regime to remain for another 2-3 years to allow long-term investors to transition smoothly. However, it is increasingly becoming a legacy option unattractive for most taxpayers."
Akhil Chandna, Partner and Global People Solutions Leader at Grant Thornton Bharat, anticipates a gradual phase-out of the old regime over time. "Recent budget announcements have consistently enhanced the attractiveness of the new regime," he says. "These enhancements include higher rebate limits and inclusion of standard deductions, while leaving the old regime unchanged. Consequently, the old tax regime is expected to become redundant in the coming years."
