Unified tax regime: Can a new system merging old and new income tax regimes work?  Experts share inputs

Finance Minister Nirmala Sitharaman is set to unveil the Union Budget for fiscal year 2026 on February 1st, marking her eighth Budget presentation to date. This year's priorities include streamlining taxation, boosting capital expenditure, and implementing measures to stimulate demand, all aimed at addressing India's slowing domestic growth and the prevailing global uncertainties. 

Much like previous years, experts predict that the government is unlikely to introduce any major changes to the old income tax regime. But there has been a buzz that like last year, FM Sitharaman may introduce some changes to the New Tax Regime, which is now the default tax regime. 

How much tax do I have to pay? Calculate now

Tax regimes

India's current tax system for individual taxpayers features two personal tax regimes: the old tax regime and the new tax regime. The new tax regime is the default option, but taxpayers can choose to switch to the old tax regime if they prefer. While the old regime allows for a range of exemptions and deductions, the new regime offers lower tax rates with restrictions on claiming most exemptions or deductions. Despite providing flexibility, these two tax regimes have created complexity for taxpayers, requiring careful comparisons to determine the most beneficial option.

Merging the old and new tax regimes 

Experts noted that the current old tax system is intricate and requires simplification and rationalization. A proposed solution is to implement a unified tax system that combines the advantages of both the old and new tax regimes. This streamlined system would make compliance easier for taxpayers while still allowing them to retain benefits. By retaining deductions from the old regime and benefiting from the higher tax slabs of the new regime, eligible individuals could experience substantial tax savings.

“The cost of compliance under the old tax regime is significantly higher. Merging the two would mean additional compliance burdens for taxpayers, companies, and the tax administration,” said Kumarmanglam Vijay, Partner at JSA Advocates & Solicitors.

Subhash Chand Aggarwal, Chairman and Managing Director of SMC Global Securities Limited, said: “The old tax regime charges higher tax rates but provides more exemption and deduction benefits, while the new tax regime offers the opposite. Merging the two can simplify the tax structure but could disadvantage those who don’t invest enough to claim deductions under the old regime.” 

Combining the two systems may appear to streamline processes, but it could result in unforeseen ramifications. Individuals who heavily utilize deductions may experience diminished benefits, and there is a potential for the government to see a decrease in tax revenue.

"The intention of Government is very clear to gradually weed out the old regime totally. It is unlikely that both regimes are merged, however what is anticipated in this budget or the next one, is that the old regime of taxation may be totally scrapped and resultantly all the old deductions and exemptions which were specific to the old regime shall also find its way out from the Statute. As per the press release issued by CBDT, in returns filed for Assessment Year 2024-25, approximately 72% tax-payers have opted for the New Tax Regime. For converting the rest 22%, the government may extend the slab limits and bring reduced tax rates, thereby making the tax-gap between old regime and new regime almost negligible. This shall enable majority of taxpayers to convert their taxation regimes. Since, the Indian taxation system doesn’t specifically provide for any medical or retirement benefits to its tax-payers, it is certainly expected that certain basic deductions like section 80D for medical premium paid and Section 80CCD under National Pension Scheme should be allowed from the New Tax regime," said Kinjal Bhuta, Secretary, Bombay Chartered Accountants' Society (BCAS).

Tax tweaks expected

The new tax structure introduced in the Union Budget 2020 was designed to streamline the taxation system by simplifying it. With reduced tax rates and fewer deductions, the government's objective was to promote increased tax compliance and improve efficiency within the tax department.

There are discussions regarding the possibility of the government adjusting the income tax brackets in the upcoming tax system.

According to Kumarmanglam Vijay, the government has placed high importance on the new tax regime to make tax processes simpler and enhance compliance. This reform also aims to eliminate the need for individuals to make mandatory investments or donations for tax savings, thereby allowing them to have more disposable income.

"To make the regime more progressive and more in line with the state of the economy, the government should apply the 30% tax rate to income levels above Rs 20 lakh, keeping in view the inflation," said tax expert Balwant Jain.

Vijay emphasized the importance of increasing tax brackets and reducing deductions to simplify tax compliance for everyone. He cautioned against merging tax systems, as it could potentially bring back the complexities that the new regime aimed to remove.