With Budget 2025 just around the corner, speculation is high about whether Finance Minister Nirmala Sitharaman will discontinue the old income tax regime. Over the past few years, the Indian government has actively promoted the new tax regime, encouraging taxpayers to shift to a simplified tax structure with lower base rates but fewer exemptions.
As the budget announcement on February 1, 2025, nears, many experts believe that the government may take a decisive step toward phasing out the old tax system. The question remains: Is India ready for a single, streamlined tax regime?
The Two Tax Regimes: A Brief Overview
Currently, India operates under a dual tax system, allowing taxpayers to choose between the old and new tax regimes:
1. Old Tax Regime
- Allows taxpayers to claim various deductions and exemptions under sections like 80C (investments), 80D (health insurance), and HRA (house rent allowance).
- Encourages savings and investments in financial instruments such as PPF, ELSS, and insurance policies.
- Offers tax rebates on incomes up to ₹5 lakh.
2. New Tax Regime
- Introduced in Budget 2020 to simplify the tax structure.
- Offers lower tax rates but removes most exemptions and deductions.
- Provides a higher standard deduction of ₹75,000 compared to ₹50,000 in the old regime.
- Tax rebate available on incomes up to ₹7 lakh.
Why Might the Government Scrap the Old Tax Regime?
Several factors indicate that the government might phase out the old tax system:
Government’s Push for Simplification
The primary reason for introducing the new tax regime was to make taxation simpler. The old regime, with its multiple deductions and exemptions, often led to complex tax calculations and paperwork for both taxpayers and the Income Tax Department. A single tax system could reduce confusion and improve tax compliance.
Increasing Adoption of the New Tax Regime
Data suggests that more taxpayers are now choosing the new tax regime. The government has been promoting it aggressively, and many salaried individuals are finding it beneficial, especially those who do not have significant investments in tax-saving instruments.
Unchanged Deduction Limits in the Old Regime
The old tax system’s deduction limits, such as ₹1.5 lakh under 80C, have remained unchanged for years. With inflation and rising incomes, these deductions have lost their relevance. Experts argue that instead of updating these limits, the government might eliminate the old regime altogether.
Potential Revenue Gains for the Government
The removal of deductions in the new tax regime means higher taxable income, leading to increased government revenue. If the old tax regime is removed, taxpayers who previously claimed multiple deductions will have to pay taxes on their full income under the new system.
Global Trends in Taxation
Many developed nations have simplified their tax systems by reducing exemptions and lowering tax rates. India’s shift towards a deduction-free tax regime aligns with international best practices.
Experts’ Views on the Possible Merger of Tax Systems
Balwant Jain, Tax and Investment Expert
Balwant Jain, a Mumbai-based tax expert, believes that the government’s preference for the new tax regime is evident. He points out that since the introduction of the new system, deductions under the old regime have not been revised, signaling an eventual transition.
Gaurav Kansal, Director of KBP Group
Gaurav Kansal suggests that the 2025 budget could mark the beginning of a mandatory shift towards the new tax regime. He predicts that the government might merge both systems into a single, streamlined tax structure, eliminating traditional deductions and exemptions.
Read Also: How Much Gold Can You Keep at Home as Per Income Tax Rules?
Comparing the Old and New Tax Regimes
| Feature | Old Tax Regime | New Tax Regime |
|---|---|---|
| Tax Rebate | Up to ₹5 lakh | Up to ₹7 lakh |
| Standard Deduction | ₹50,000 | ₹75,000 |
| 80C Deductions (PPF, ELSS, etc.) | Available | Not Available |
| HRA & Other Exemptions | Available | Not Available |
| Tax Calculation | Complex due to multiple deductions | Simple due to fixed tax rates |
Possible Scenarios in Budget 2025
1. Gradual Phase-Out of the Old Tax Regime
Instead of scrapping the old tax system immediately, the government might reduce available deductions or limit eligibility for the old regime in phases. This would give taxpayers time to adjust.
2. Making the New Tax Regime Mandatory
Another possibility is that the government removes the option of choosing between the two regimes and mandates the new system for all taxpayers. This would align India’s tax system with global standards.
3. Higher Standard Deduction in the New Tax Regime
To make the new tax regime more attractive, the government might increase the standard deduction further from ₹75,000 to ₹1 lakh. This would help salaried taxpayers compensate for the removal of exemptions.
What Should Taxpayers Do?
1. Assess Personal Tax Benefits
If the old tax regime is removed, taxpayers should evaluate how the new system will impact their overall tax liability. Those who rely on deductions should plan alternative investment and savings strategies.
2. Stay Updated with Budget 2025 Announcements
The final decision will be revealed on February 1, 2025, when the Union Budget is presented in Parliament. Taxpayers should follow the announcements closely and consult financial experts for guidance.
3. Plan Investments Accordingly
If deductions under 80C, 80D, and HRA are eliminated, taxpayers might need to restructure their investment portfolios, focusing on returns rather than tax benefits.
The debate over the future of the old tax regime has intensified as Budget 2025 approaches. While no official confirmation has been made, the government’s focus on simplifying taxation and boosting compliance indicates a potential shift towards a single tax structure.
If the old regime is scrapped, it will mark a historic change in India’s tax system, affecting millions of taxpayers. The 1st February Budget speech by Finance Minister Nirmala Sitharaman will be crucial in determining the next steps in this evolving tax landscape.
