As the Indian government prepares for Budget 2025, discussions surrounding the fate of the income tax regimes have gained momentum. The key question being raised is whether to scrap the old tax regime entirely or to continue offering both tax options to taxpayers. While there has been significant advocacy for the simpler, newer tax regime due to its lower tax rates, tax experts are making a strong case for preserving the old tax regime, particularly for taxpayers who benefit from its wide range of exemptions and deductions.
The dilemma faced by Indian taxpayers is similar to choosing between two restaurants, one offering a fixed menu at a lower price, and the other having a slightly higher base price but providing additional customizable options, such as sides, drinks, and desserts. In the context of tax regimes, the fixed-price menu represents the new regime, with its lower tax rates but no scope for claiming deductions, while the other represents the old tax regime, offering the potential for significant tax-saving benefits, especially for those with specific financial commitments.
For instance, take Rohit, a 28-year-old software engineer who recently moved to Bangalore from Pune. He rents an apartment at Rs 25,000 per month and makes regular investments in his provident fund (PF). Under the old tax regime, he can claim deductions on his rent through House Rent Allowance (HRA) and benefit from deductions for his PF investments, thus reducing his taxable income significantly. However, under the new tax regime, he would lose these deductions despite the lower tax rates, which means his overall tax burden could increase.
Dipesh Jain, a Partner at Economic Laws Practice, argues that the old tax regime should not be eliminated as it still provides significant benefits for taxpayers who can claim deductions that are not available in the new tax system. He explains, "The old tax regime should not be scrapped because it still provides benefits for taxpayers who claim deductions up to a certain level of income, which are unavailable under the new tax regime." This is especially relevant for individuals like Rohit, who, despite the allure of lower tax rates in the new regime, would stand to lose a significant portion of his tax-saving benefits under the simplified system.
The old tax regime continues to be particularly advantageous for individuals with specific financial obligations that qualify for deductions. Consider Priya, a 35-year-old teacher who recently purchased her first home with a loan. Under the old tax regime, she can claim deductions on both the interest paid on her home loan and her children’s education loan. These deductions could result in substantial savings, potentially making the old regime far more beneficial than the new system, especially when considering that the tax rates in the new regime are lower but without these deductions.
Jain emphasizes that the old regime remains crucial for taxpayers with high financial commitments, particularly for individuals who work outside their hometowns and incur substantial rent payments. “Taxpayers who have high rent expenses, especially in cities like Mumbai and Delhi, where rents can account for 30-40% of their monthly income, will benefit from the old tax regime's exemptions,” he notes. This makes the old system especially attractive for those in urban areas where living costs are often inflated.
When deciding whether to stick with the old tax regime, the choice largely depends on an individual’s personal financial situation and how much they can take advantage of various deductions. Jain advises that taxpayers should consider both the available deductions under the old regime and the lower tax brackets under the new regime before making a choice. He further explains, “Taxpayers who can avail the deductions or exemptions allowed under the old tax regime but not available in the new tax regime may opt for the old tax regime after considering the savings on account of lower tax rate brackets under the new tax regime.”
To further illustrate this point, take Meera, a 40-year-old entrepreneur who maximizes her tax savings through various financial instruments. Meera has a home loan, contributes to her Employees' Provident Fund (EPF), invests in Equity-Linked Savings Schemes (ELSS), and also pays for her parent's medical insurance. All of these financial strategies allow her to reduce her tax burden significantly under the old tax regime. These are deductions that are not available under the new tax system, which makes the old tax regime far more beneficial for someone like Meera. While the new regime offers lower tax rates, it cannot match the comprehensive savings strategy that the old regime facilitates.
As Budget 2025 approaches, the government faces an important decision. The debate should not solely be about whether to eliminate the old tax regime, but about whether taxpayers should be forced to abandon the benefits that the old system offers. As Jain suggests, there is no one-size-fits-all solution to the tax situation in India. "The tax regime should accommodate the diverse needs of taxpayers," he says. Just as families have different spending patterns and priorities, each taxpayer has a unique set of financial commitments and goals. As a result, a single tax regime may not adequately serve the needs of all Indian taxpayers.
The solution, then, may lie in preserving both tax regimes so that taxpayers can choose the one that best suits their financial situation. By allowing for such flexibility, the government would provide taxpayers with the tools they need to optimize their tax liabilities based on their specific circumstances. This would ensure that both low-income earners and those with higher financial obligations, like home loans, medical expenses, and education costs, can continue to make the most of the tax-saving opportunities available under the old regime.
Ultimately, the debate isn't about whether the old regime should be scrapped, but about maintaining options that cater to the varying financial lifestyles of India's diverse population. There is no need for a one-size-fits-all approach. As long as taxpayers have the choice, they can make informed decisions that align with their specific financial needs, resulting in a more equitable tax system that recognizes the complexities of individual financial lives.
