The sweeping changes introduced in the Union Budget 2025-26, particularly with regard to income tax reforms, have generated significant discussion among taxpayers and financial experts alike. The most prominent announcement in this year's budget is the tax exemption for salaried individuals earning up to Rs 12.75 lakh under the new income tax regime. While this is seen as a massive relief for middle-class taxpayers, it comes with a catch—the exemption applies exclusively to those opting for the new tax regime, which means the old tax system, with its various exemptions and deductions, is no longer as beneficial as it once was.
For the past five years, the government has been subtly nudging taxpayers towards the new regime, which offers lower tax rates in exchange for fewer deductions and exemptions. This has been a gradual shift in policy, but the Budget 2025-26 seems to be a decisive push that could finally signal the end of the old tax regime. Under the new system, taxpayers are offered simpler tax slabs with less paperwork and no requirement to submit proofs for tax-saving investments. In contrast, the old system, while offering more room for deductions, requires substantial documentation, making it less appealing for many individuals.
Sitharaman's announcement that individuals earning up to Rs 12.75 lakh will now be tax-free under the new regime has been received with mixed reactions. For those with relatively modest incomes or who have struggled with tax-saving investments in the past, the new system is a welcome relief. However, high-income earners, especially those who have significant investments in tax-saving instruments like PPF, NSC, and health insurance, may find it harder to adapt to the new system. These individuals are used to benefiting from the numerous deductions available under the old tax regime, but the new system offers no such deductions. While the government has raised the tax rebate under section 87A, offering up to Rs 60,000 for taxpayers earning up to Rs 12 lakh, many taxpayers are left wondering if the trade-off between lower rates and fewer deductions is worth it.
One of the primary advantages of the new tax regime is its simplicity. The old tax structure, with its multiple slabs and numerous deductions, often confused taxpayers and required them to keep track of various investment receipts and documents. In contrast, the new regime is straightforward, with lower tax rates and fewer bureaucratic hurdles. This simplicity makes it particularly appealing for salaried individuals, freelancers, and small business owners who might not have the time or inclination to dive into complex tax planning and paperwork.
However, for high-net-worth individuals (HNWIs) and those with substantial investments in tax-saving schemes, the shift to the new regime might not be so seamless. As experts point out, the kind of savings that were possible under the old system—through deductions under 80C, HRA, LTA, and other exemptions—are hard to replicate under the new regime. As such, individuals with large portfolios may still prefer to stick with the old system, at least for now. But with the government pushing for the new regime and offering attractive rebates and exemptions, the question arises: is the old tax regime on its way out?
There is a growing sense among tax professionals that the government might eventually phase out the old tax system, making the new tax regime the default for most taxpayers. This idea has been circulating for some time, but Budget 2025-26 has significantly accelerated this conversation. Whether or not the government officially announces the discontinuation of the old system in future budgets remains to be seen, but the clear trend is that the government is making it increasingly difficult for taxpayers to stick with the old system.
The focus on the new regime could also have broader implications for investment behavior in India. The old tax regime incentivized people to invest in long-term saving schemes like PPF, NSC, and ELSS to claim deductions, which helped channel investments into these instruments and supported the country's financial markets. If the old tax system is gradually phased out, it may reduce the popularity of these investment products, which could have ripple effects on the savings and financial markets landscape. Instead, taxpayers might shift their focus to other forms of savings that don't require tax deductions, such as mutual funds or direct equity investments.
Moreover, the changes in tax slabs in the new regime are also worth noting. The new tax slabs, with the lowest rate starting at Rs 0-4 lakh, represent a significant improvement over the previous structure, where the income tax exemption limit was capped at Rs 2.5 lakh. For those with incomes above Rs 12 lakh, the tax burden will still be relatively light compared to the old system, with the highest rate of 30% starting only after an income of Rs 24 lakh. This change is likely to encourage higher earners to opt for the new regime, even if they still qualify for deductions under the old system.
The decision to move towards a simplified tax regime is likely to have long-term consequences on India's financial ecosystem. While the government's goal of creating a more efficient and taxpayer-friendly system is commendable, there are still questions about the potential side effects. For instance, will the new tax regime encourage more people to save and invest in financial instruments that contribute to India's capital markets, or will it discourage long-term savings altogether?
In conclusion, Budget 2025-26 is a pivotal moment in India's tax history. By significantly enhancing the attractiveness of the new income tax regime and reducing the benefits of the old system, the government is likely hoping to simplify tax administration and encourage more tax compliance. However, the move could have broader implications for savings behavior, investment choices, and the financial markets. While the government has not officially scrapped the old tax system, it is clear that the new regime is poised to dominate in the coming years. As the debate continues, taxpayers will have to carefully consider which regime suits them best, balancing the immediate benefits of tax exemptions with the long-term impact on their financial planning.
