With Finance Minister Nirmala Sitharaman announcing big rebates for taxpayers in the middle-income group under the new tax regime, many were left wondering if the government plans to scrap the old tax regime. The Finance Minister did not mention the old tax regime during her speech and the Budget document, too, is silent on it. The document, however, specifies that the revised tax slabs apply to those opting for the new tax regime.
Ms Sitharaman clarified this during her interaction with the media this evening. Asked if the old regime is being discontinued, she replied in the negative and said she would have announced if this was the case. Top government officials then said nearly 75 per cent taxpayers have moved to the new regime. This means the government won't scrap the regime but let it fade away as people move to the new regime. She also said the new income tax law will have to go through the Parliament. Follow Union Budget 2025-26 LIVE UPDATES here
What Is The Old Tax Regime?
The old tax regime primarily is for taxpayers who claim exemptions and tax deductions against 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, the taxable income is calculated after deducting exemptions.
This taxable income is then taxed according to the slabs. There is zero tax for income up to Rs 2.5 lakh, 5 per cent for income between Rs Rs 2.5 lakh to Rs 3 lakh, 5 per cent for Rs 3 lakh to Rs 5 lakh, 20 per cent from Rs 5 lakh to Rs 10 lakh and 30 per cent for Rs 10 lakh and above.
Government's Push For New Regime
The Narendra Modi government introduced the new tax regime in the 2020-21 fiscal. Finance Minister Sitharaman had said the government planned to do away with all tax exemptions in the long run. The financial years following the new regime's introduction saw a majority of taxpayers sticking to the old regime and claiming deductions. The government has now made the new regime the default and taxpayers must specifically choose the old regime if they want to be taxed under it. With the new Budget silent on the old regime while announcing benefits under the new regime, there is speculation on whether the new Income Tax law, expected to be announced soon, will do away with the old regime altogether.
In August last year, the government said that about 72 per cent of income tax returns filed for income in 2023-24 opted for the new regime, with the remaining sticking to the old regime. More people are likely to switch over after the new rebates.
Old Regime vs New Regime: A Comparison
To compare the tax payable between the two regimes, we can take an annual income of Rs 16 lakh as an example. Under the new regime, for annual income of Rs 16 lakh, there will be zero tax up to Rs 4 lakh. Then, in the Rs 4 lakh-Rs 8 lakh bracket, a 5 per cent tax will be levied - Rs 20,000. In the Rs 8 lakh-Rs 12 lakh bracket, there will be a 10 per cent tax - Rs 40,000. And in the Rs 12 lakh - Rs 16 lakh slab, the rate is 15 per cent -- meaning Rs 60,000. So, you will pay a total tax of Rs 1,20,000. With the rebates and revised tax slabs introduced in this Budget, the tax payable is Rs 50,000 less than what you are paying now.
Now if you are opting for the old regime and claiming exemptions worth Rs 4 lakh on an annual income of Rs 16 lakh, your taxable income will be Rs 12 lakh. Under the old tax regime slabs, you would pay a total income tax of Rs 1,72,500 -- Rs 52,000 more than what you will pay under the new regime.
Should You Switch From Old Regime To New?
The decision on whether you should opt for the new regime would depend on your financial profile and how much exemption you can claim under the old regime.
Divya Baweja, Partner, Deloitte India, told NDTV, "To decide whether to opt for the old regime or the new regime, one would need to see that if a taxpayer were to follow the old regime, what kind of deductions or exemptions he/she should be looking at to claim benefit akin to the new regime. That comparison factor would be based on the specific individual scenario. Basis the same, one would need to evaluate the regime which is more beneficial With the widening of the slabs in the new regime, the taxpayer would need to have higher deductions or exemptions to equate the tax under the new regime."
Old vs New Regime: The Larger Picture
Opting for the new regime would free up taxpayers from the compulsion to invest in tax benefit measures such as PPF and guaranteed return insurance policies. This would leave more money in their hands and provide more flexibility in where they invest their money. From the government's perspective, more money in the hands of people is likely to boost consumption and contribute to economic growth. It also eases the government's burden of paying interest on schemes such as PPF.
There is, however, a flipside. A shift to the new tax regime effectively disincentivises investments in social security measures such as mediclaim and savings schemes with a lock-in period like PPF. While this would provide more flexibility to taxpayer and put more money in hand, it can create tall challenges if he/she does not find ways to save for rainy days and boost the social security net.
