Budget 2025 income tax: Will FM Nirmala Sitharaman scrap the old income tax regime?

By Ishita Sengupta

Budget 2025 income tax expectations: As we all gear up for the Union Budget later this week, the big question for individual taxpayers is whether the Hon’ble Finance Minister will completely scrap the old tax regime? Well, time will only give the answer but the moot question is – would it be prudent to do so?

Let’s step back for a bit of analysis! The new income tax regime was introduced in 2020 as an optional regime for individual taxpayers. The primary objective was to introduce a more simplified tax structure by removing the plethora of deductions and exemptions. The Government also provided significant relief to taxpayers by reducing income-tax rates, thus nudging them to adopt the new income tax regime. It was quite apparent that the Government intended to phase out the old income tax regime in due course. As per media reports, there were very few takers of the new income tax regime in the initial years.

Also See: Budget 2025

To give a further push, vide Finance Act, 2023, the Government made the new income tax regime as the default regime and brought more attractive changes related to the new income tax regime, by reducing the income-tax rates further, capping the maximum marginal rate (MMR) at 39%, introducing the standard deduction of ₹50,000 for salaried individuals, increasing the income level for 100% tax rebate etc. The trend even continued for the subsequent year wherein vide Finance (No. 2) Act, 2024, the slab rates were further tweaked for better, standard deduction for salaried individuals was hiked, deduction for employer’s NPS contribution increased by 4% etc. This seems to have worked its magic. As per Press Release issued by the Ministry of Finance on August 2, 2024, 72% taxpayers opted for the new income tax regime in FY 2023-24 ITRs filed until July 31, 2024.

Also Read | Budget 2025 income tax expectations: Top personal tax changes on the wishlist

While this appears to be a large percentage, one cannot disregard the fact that the 28% taxpayers opting for the old income tax regime in FY 2023-24 is still a considerable number. Furthermore, while we do not have the necessary data to understand clearly which section of taxpayers are still in favour of the old income tax regime, it is not difficult to guess. From salaried taxpayers’ perspective, the ones benefiting from popular tax exemptions and deductions such as, HRA, LTA, home loan interest, 80C deductions, insurance premia, charitable donations etc. would be still opting for old income tax regime.

Also See: Income Tax Slab

Given this, is it worth evaluating if the lower tax rates under the new income tax regime really offset the tax deductions/ exemptions which taxpayers have to forego?

We have categorised individual taxpayers in four general baskets as per their annual gross income – (A) individuals having income up to ₹15 lakh, (B) individuals having income between ₹15 lakh - ₹1 Cr, (C) HNIs having income between ₹1 - ₹5 Cr and (D) ultra-HNIs having income beyond ₹5 Cr.

Also Read | Budget 2025 income tax: Why standard deduction should be hiked under new tax regime

Category A represents the largest filing population, possibly young salaried taxpayers, many of them millennials, who may not have invested in long term assets like house properties and other savings schemes. Hence, they would typically prefer hassle-free filing and less burden of documentation proof, etc. At the other end of the spectrum are the ultra-HNIs who would prefer the MMR currently capped at 39% in the new income tax regime due to surcharge cap vis-à-vis 42.74% in the old income tax regime. For both these categories, new income tax regime seems to be the clear winner.

It is the people in between who seem to make up the largest group as the old income tax regime filers. These individuals generally spend a significant part of their earnings and savings on rising house rent and home loan EMIs, children’s education, medical expenditure especially for their aged dependents and towards their own retirement savings. They also tend to donate to help a social cause. HNIs would comparatively spend, invest and donate more.

The available standard deduction against salary income is definitely not commensurate with the rising YoY expenses. The continuity of existing tax benefits under the old income tax regime hence becomes a critical part of their financial planning to meet their cash budgets. As more consequential tax savings would be available to individuals in Categories B and C and their MMR in both the regimes is the same, they would generally find the old income tax regime more attractive. It is also important to remember that many of these tax deductions, e.g., for home loan interest, insurance premia, savings schemes, etc. were originally introduced to give a boost to the related industry, by incentivising taxpayers to spend on them.

If discontinued, this could also have an adverse impact on such payee organisations and investee entities in meeting their objectives, fund requirements etc. In view of these, the Government should not rush to scrap the old income tax regime entirely, either in the existing income-tax law or the probable new Direct Tax Code, at least for a few more years till the average taxpayer develops the habit of prudent financial planning.

In the interim, the Government could consider announcing its roadmap of phasing out the old income tax regime coupled with an additional carrot of lower tax rates to encourage this middle-income group to voluntarily adopt the new income tax regime.

(Authored by Ishita Sengupta, Partner and India Leader, Vialto Partners. Shaishav Shah, Director, Vialto Partners contributed to the article. Views are personal)

Budget 2025 income tax: Top 10 expectations of salaried taxpayers

Budget 2025 income tax expectations: What will the income tax slabs and income tax rates after Union Budget 2025? Will FM Nirmala Sitharaman raise the standard deduction further under the new income tax regime and include popular exemptions like Section 80C, HRA, Section 80D? With the new income tax regime becoming the default tax regime, tax experts believe that no major changes in the old tax regime should be expected. Any rationalisation in income tax slabs, rates and changes in basic exemption limit, rebate etc. can only be expected under the new income tax regime. With that in mind, we take a look at the top 10 income tax expectations of salaried taxpayers and common man from Budget 2025:

Budget 2025 Income Tax Rates & Slabs: The latest income tax slabs under the new income tax regime for FY 2024-25 announced by FM Sitharaman in Budget 2024 were aimed at lowering the tax burden of the common man. With that in mind, experts expect further rationalisation of income tax slabs and rates, with particular focus on shifting the 30% tax slab to income levels above Rs 20 lakh instead of Rs 15 lakh at present. (AI image)

Budget 2025 income tax expectations: Standard deduction under the new income tax regime was hiked to Rs 75,000 from Rs 50,000 last year. Experts are of the view that in the absence of major tax exemptions and deductions in the new tax regime, FM Sitharaman should hike standard deduction further to at least Rs 1 lakh to encourage switch to the new regime. (AI image)

Budget 2025 income tax expectations: Experts predict that due to the government's focus on promoting the new tax regime, the old income tax regime might remain unchanged. Currently, the new tax regime offers a basic exemption threshold of Rs 3 lakh. There are expectations that this threshold could be raised to Rs 5 lakh, which would allow individuals greater disposable income for consumption or savings, consequently stimulating economic growth. (Image source: Freepik)

Budget 2025 income tax expectations: Currently, individuals with taxable income up to Rs 7 lakh are eligible for a complete tax rebate. This fiscal year, there are anticipations of the rebate threshold being raised to Rs 10 lakh. Such a revision under the new income tax regime would offer substantial financial relief to middle-income taxpayers, feel experts. (AI image)

Budget 2025 income tax expectations: Experts advocate for inclusion of the Section 80C exemption under the new income tax regime to encourage savings. Currently the Section 80C exemption limit of up to Rs 1.5 lakh is available under the old income tax regime. (AI image)

Budget 2025 income tax expectations: Tax experts believe that to encourage National Pension System (NPS) adoption, the government should consider making it an EEE product (Exempt-Exempt-Exempt). Additionally, they see a case to include the additional tax benefit of Rs 50,000 for NPS under the old tax regime in the new tax regime as well. (AI image)

Budget 2025 income tax expectations: The House Rent Allowance (HRA) exemption calculation should be revised to include prominent tier 2 cities alongside existing metropolitan areas. Cities such as Hyderabad, Pune, Bengaluru, Ahmedabad and Gurgaon merit an increase in HRA exemption from the current 40% to 50% of basic salary, say experts. (AI image)

Budget 2025 income tax expectations: Talking about the importance of health insurance amidst rising healthcare costs, experts say that FM Sitharaman should allow for the Section 80D exemption towards health insurance premium under the new income tax regime. (Image source: Freepik)

Budget 2025 income tax expectations: With an intent to promote charity and encourage savings with banks, tax experts say the government should consider allowing Section 80G and Section 80TTA benefits under the new income tax regime. (AI image)