Budget 2025: Will FM Sitharaman Phase Out the Old Regime?
As Budget 2025 approaches, the question on everyone’s mind is whether Finance Minister Nirmala Sitharaman will phase out the old income tax regime in favor of the new one. Ever since the introduction of the new income tax regime as an optional tax regime from FY 2020-21, salaried taxpayers have been pondering the future of their tax burden. The new regime offers reduced tax rates, almost no deductions, and exemptions, simplifying the tax compliance process for individuals.
New vs Old Tax Regime: Latest Income Tax Slabs & Rates
Under the new income tax regime, popular exemptions like Section 80C, medical insurance premiums, and house rent allowances are not included. The new regime boasts lower tax rates, beneficial income tax slabs, and a relief from the headache of compliance burden associated with deductions and exemptions. Changes have been made to the new tax regime over the years to make it more attractive for taxpayers. For instance, the standard deduction from taxable salary saw an increase to Rs 75,000 from Rs 50,000 in Budget 2024.
Additionally, the employer’s contribution to the NPS is allowed as a deduction up to 14% of the specified salary, compared to 10% in the old tax regime. Most personal tax experts believe that the government will eventually phase out the old income tax regime, but opinions differ on the timeline. While some experts suggest that the old regime may still be available as an option for a few more years, others anticipate a swift transition.
Will Old Regime Be Phased Out Soon?
From FY 2023-24, the new tax regime became the default option for taxpayers unless they explicitly opted for the old regime. This move resulted in an increasing number of taxpayers adopting the new regime. Approximately 72% of taxpayers opted for the new regime by July 2024, as per the Central Board of Direct Taxes. Parizad Sirwalla, Partner and Head of Global Mobility Services at KPMG in India, notes this trend, indicating a shift towards the new tax regime.
Tax experts like Surabhi Marwah from EY India believe that the government is unlikely to completely phase out the old tax regime in the upcoming Budget. While the new regime’s simplicity has garnered popularity, the old regime still has advantages with higher exemptions and deductions. The focus may be on encouraging the adoption of the new regime while maintaining both regimes for a transition period.
Looking ahead, experts like Kuldip Kumar from Mainstay Tax Advisors LLP suggest that the old regime could be phased out through a new tax code. Aarti Raote from Deloitte India predicts that with the hike in standard deduction and NPS benefits under the new regime, more individuals will transition to it, leading to the eventual phasing out of the old regime. Sundeep Agarwal from Vialto Partners envisions a gradual approach to phasing out the old regime, possibly under the proposed Direct Tax Code, for a more streamlined and uniform tax regime.
As Budget 2025 looms, the fate of the old income tax regime remains uncertain. With various perspectives and predictions, all eyes are on Finance Minister Nirmala Sitharaman to unveil the future of the tax landscape in the upcoming budget presentation on February 1, 2025.
