Tax-Budget 2025 LIVE: Since the introduction of the New Tax Regime by the Narendra Modi government in the 2020 Budget, there has been much debate among taxpayers regarding which tax regime is more advantageous. Currently, taxpayers have the option to choose between two tax systems - the Old Tax Regime and the New Tax Regime. Following the Union Budget 2023, the New Tax Regime is now the default option. Individuals are allowed by the Income Tax Department to select their preferred income tax regime for each financial year.
The old tax regime, which includes deductions and exemptions, has been a longstanding feature. However, the government has been making adjustments to the new tax regime to make it more user-friendly for taxpayers.
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The 2024 budget represented a significant change in the government's approach to personal taxation. Finance Minister Nirmala Sitharaman introduced various measures to encourage taxpayers to adopt the new tax regime. This included raising the basic exemption limit to Rs 3 lakh (up from Rs 2.5 lakh), lowering tax slabs, and increasing the standard deduction for salaried individuals to Rs 75,000 in the new regime. Additionally, a rebate under Section 87A was introduced in the budget, ensuring that those earning up to Rs 7.75 lakh would be exempt from tax under the new regime.
Despite attempts to make the new tax system more attractive, Old Tax Regime remains in place with taxpayers still having the option to stick with it if it better suits their needs. Experts suggest that the gradual removal of the old tax regime is not probable at this point. Many taxpayers still favor the old system due to its numerous tax advantages, including deductions for house rent allowance (HRA) and home loan interest.
During an interview with a TV channel in February 2024, Finance Minister Sitharaman emphasized the importance of allowing Indian citizens to make their own decisions regarding their tax structure. She highlighted the government's commitment to offering a simplified and fair taxation system for all income levels. Additionally, she pointed out the existing tax exemptions that promote savings through insurance, medical coverage, and interest earnings.
Sitharaman's remarks indicate that the government's approach is to empower taxpayers to select the tax regime that best aligns with their financial preferences, rather than coercing them into a specific framework.
Adhil Shetty, CEO of Bankbazaar.com, explained that while the new tax regime offers significant advantages in terms of eliminating deductions and exemptions, there are concerning developments that have emerged over the past five years. A decline in life insurance coverage and reduced inflows into ELSS funds during strong equity market periods are indicating potential negative impacts. Historically, tax deductions have been closely tied to insurance and savings, and the removal of one element may be negatively affecting the other.
Shetty said: “While the new regime had no deductions to start with, a few have now been added. More are needed. In the interest of simplification, a flat deduction of 30% of the gross income should be provided to include long-term savings, essential insurance, healthcare and education costs, and loan payments without confusing caps and sub-limits. The deduction can be capped at Rs 15 lakh to ensure equity among income levels.”
CA Dr Suresh Surana said removing most exemptions could adversely affect individuals who rely on traditional deductions for tax relief. Additionally, transitioning taxpayers entirely to the New Tax Regime may pose some operational challenges.