Union Budget 2025: Government plans to slowly phase out the Old Tax Regime

Finance Minister Nirmala Sitharaman is expected to present a plan for the gradual phase-out of the old personal income tax regime in the upcoming Union Budget. The move is intended to be in line with the government’s larger goal of simplifying tax structures and making the new tax regime, implemented in FY21, the default option for taxpayers.

As of now, more than 72% of taxpayers have adopted the new regime, which provides reduced tax rates but fewer exemptions and deductions. This change shows an increasing preference for a simpler, more efficient system.

According to sources close to the developments, the government will not make significant changes to the old regime, which allows for a variety of investment-related exemptions and deductions. Experts said that the old regime remains relevant for some taxpayers, particularly those who benefit from exemptions like the house rent allowance, Section 80C deductions, home loan interest, premiums of health insurance, and NPS contributions. The Central Board of Direct Taxes (CBDT) indicated that 28% of taxpayers chose the old regime in the financial year 2024-25.

In order to further encourage the new tax regime, the government is considering adjusting the existing tax brackets. The first slab might be raised from Rs.3 lakh to Rs.4 lakh, and the remaining slabs would be adjusted correspondingly. Furthermore, the basic exemption limit may be raised from Rs.3 lakh to Rs.4 lakh, thereby helping taxpayers earning up to Rs.15 lakh annually.

Experts feel that these changes will encourage taxpayers to adopt the new tax regime. The lower tax rates, particularly for lower and middle-income groups, combined with the simpler structure, are expected to attract more taxpayers to the new regime.

The new tax regime exempts income up to Rs.3 lakh from taxation. Income between Rs.3 lakh and Rs.6 lakh is taxed at 5%, followed by 10% for Rs.6 lakh to Rs.9 lakh, 15% for Rs.9 lakh to Rs.12 lakh, and 20% for Rs.12 lakh to Rs.15 lakh. Income beyond Rs.15 lakh is taxed at 30%. Furthermore, taxpayers who choose the new tax regime can claim a standard deduction of Rs.75,000, raising the income threshold for tax exemption to Rs.7.75 lakh.

One of the primary benefits of the new tax regime is its flexibility. Taxpayers are no longer compelled to make specified investments in order to claim deductions, which reduces compliance burdens and increases financial management flexibility. In contrast, the old tax regime, while providing more deductions, necessitated careful tax planning and adherence to investment requirements, which could be difficult for some people.

As the government works to make the new tax regime more appealing, the upcoming Budget might be a key step towards a more simpler, exemption-free tax system. With continuous efforts to strike a balance between simplicity and justice, the government hopes that the new tax regime will become the naturally favoured option for all taxpayers in the coming years.

The proposed changes to tax slabs and exemptions are projected to provide much-needed assistance to middle-class taxpayers while gradually encouraging more individuals to join the new tax regime, so establishing the government’s long-term tax reform strategy.