Budget 2026: Will the old income tax system be scrapped? About 80% migrated to the new system
The new income tax system was introduced in the Union Budget FY21. Since then more than 80% of the taxpayers have migrated to the new system, tax professionals point out. They also refer to the constant emphasis of the government to encourage taxpayers to move from the old to the new system.
Kolkata: One of the significant questions on many minds just about a fortnight away from Budget 2026 is whether finance minister Nirmala Sitharaman will announce the scrapping of the old tax system. The new income tax system was unveiled in FY21 and more than 80% of the taxpayers could have moved to the new system already. It is also clear that the policy emphasis of the finance ministry has been directed at the new tax system.
Many also pint out that the old system is gradually fading into irrelevance and the government will continue to allow it to die a natural extinction. This point of view might not be an exaggeration -- over the past few years, the government has kept incentivising the new tax regime and has left the old one untouched. This has already pushed four out of every five taxpayer towards the new system.
Incentivising the new tax system
Himadri Mukhopadhyay, secretary, Income Tax Bar Association Calcutta is of the opinion that the inclination of the government has not been left to imagination. When one sees the government sweetening the new tax system consistently, it becomes clear that it wants the people to abandon the old one and migrate to that system. However, he does not think that the government will abruptly close the old system completely.
As a result of the incentives favouring the new system as with the new slab systems in the 2025 budget, the number of taxpayers in the new system must have gone up significantly, thinks Richa Sawhney, partner – tax, Grant Thornton Bharat. In Budget 2025, an annual income of Rs 12 lakh (12.75 lakh for salaried people) was made tax free. The significantly altered rebates and tax slabs were implemented exclusively for those in the old tax regime and tax consultants point out that after this step it would carry little meaning for most people to stick to the old system.
Simplicity and administrative ease
Apart from lower tax rates, the new system has another big USP -- a simple approach. Beyond lower rates, it consists of a simple approach and calculation. Since the new system provides for almost no exemptions and3 deductions, the calculations are straightforward, simple and easy to understand. Since there are almost no deduction, there is no apprehension of facing scrutiny over deductions too. Also there is little paperwork and compliance is far easier compared to the old tax syste. Therefore, it also offers peace of mind. All these factors will help to push the old tax system more and more to the fringes, thinks Mukhopadhyay too.
Old tax system: many still avail of deductions
Though the numbers are dwindling, the old tax system might resonate with some taxpayers, especially who are in their middle ages. There are reasons. Traditionally, families have tended to make savings which are also tax deductible and these are available in the old tax system. Instruments such as PPF, life insurance, health insurance, pension products and home loans are an integral part of the financial planning of lakh of families. Many of them continue to stay in the old system to take advantage of the tax deductibility.
Tax experts also point out that the simultaneous operation of both systems allows the government to encourage consumption via the new system through lower rates as well as support disciplined savings through the old one. Therefore in practice, the old tax system could keep shrinking with each year.