Union Budget 2026: Will FM Nirmala Sitharaman further sweeten new tax regime to push over old system?
The Budget 2026 is not expected to scrap the old tax regime outright, but the government is likely to sweeten the new regime further, offering a clear, if quiet, nudge in policy direction.
- Jan 24, 2026,
- Updated Jan 24, 2026 3:44 PM IST
Finance Minister Nirmala Sitharaman is set to present the Union Budget 2026–27 next week, with taxpayers closely tracking the government’s approach to the old and new personal income tax regimes. While a complete overhaul is unlikely, policy signals suggest a continued shift in favour of the new regime, even as the old one remains in place.
The Budget 2026 is not expected to scrap the old tax regime outright, but the government is likely to sweeten the new regime further, offering a clear, if quiet, nudge in policy direction. “Rather than enforcing a sudden shift, the government is expected to continue nudging taxpayers towards the new regime by incentivising it further,” CA Dr Suresh Surana told NDTV. He added that a full phase-out of the old regime is not on the table, but incremental changes could steadily increase the appeal of the new structure.
The new tax regime, introduced in Budget 2020–21 as an alternative to the existing system, offers lower slab rates in exchange for giving up most exemptions and deductions. Five years on, adoption has risen, but the old regime continues to hold ground among a sizeable section of salaried taxpayers. For many, lower rates alone have not been enough to offset the loss of deductions linked to retirement savings, health insurance and housing—expenses closely tied to long-term financial security.
How the new regime is being strengthened
Budget 2025 marked a turning point with the expansion of the Section 87A rebate. Under the current framework, income up to Rs 12 lakh is effectively tax-free under the new regime, rising to Rs 12.75 lakh for salaried individuals once the standard deduction is factored in. The standard deduction under the new regime was raised to Rs 75,000, while the old regime remains capped at ₹50,000.
Surana said future incentives could include a further hike in the standard deduction, optional joint filing for married couples, and selective restoration of limited deductions for essential expenses such as medical costs or disability care. Tax experts believe any further increase in the standard deduction is likely to apply only to the new regime, reinforcing the government’s preference.
Rising inflation and higher day-to-day expenses have also reduced disposable incomes, strengthening the case for relief through a higher standard deduction. Government data suggests this strategy is already working. In FY 2023–24, about 72 per cent of taxpayers, roughly 5.27 crore, opted for the new regime, a share expected to rise further in AY 2025–26.
Why the old regime still matters
Despite the momentum, nearly 28 per cent of taxpayers—around 2 crore—continue to opt for the old regime, largely because of its extensive deductions. These include exemptions for House Rent Allowance, health insurance premiums, home loan interest and education loans.
“The old tax regime under the Income-tax Act, 1961 continues to be beneficial for taxpayers with structured investments, housing loans, and eligible deductions,” said Akshay Jain, Direct Tax Partner, NPV & Associates LLP. He noted that taxpayers claiming deductions under Sections 80C, 80D, 80CCD(1B) and exemptions such as HRA, LTA and home loan interest often achieve lower taxable income under the old regime.
Jain pointed out that taxpayers can claim up to Rs 2 lakh as a deduction for home loan interest, up to Rs 1.5 lakh under Section 80C for investments such as PF, PPF, ELSS and life insurance, and an additional Rs 50,000 for National Pension System contributions. “Considering the increased rentals in metro cities like Mumbai, Delhi and Bangalore, HRA exemption is much beneficial for salaried employees,” he said, adding that a year-wise comparison is essential before choosing a regime.
What taxpayers want from Budget 2026
Currently, the new regime offers lower rates but almost no deductions beyond the Rs 75,000 standard deduction. In contrast, the old regime allows deductions of up to Rs 2 lakh on home loan interest and up to Rs 25,000 on health insurance premiums, rising to Rs 50,000 for senior citizens.
Experts argue that allowing limited deductions, such as home loan interest or health insurance, within the new regime could combine lower rates with meaningful relief. A Rs 2 lakh home loan interest deduction could save up to ₹60,000 for someone in the 30 per cent slab, while a ₹25,000 health insurance deduction could add savings of Rs 7,500.
As Budget day approaches, expectations are building around a calibrated approach, one that keeps the old regime intact for those who need it, while steadily enhancing the new regime to make it the default choice for a broader base of taxpayers.
Finance Minister Nirmala Sitharaman is set to present the Union Budget 2026–27 next week, with taxpayers closely tracking the government’s approach to the old and new personal income tax regimes. While a complete overhaul is unlikely, policy signals suggest a continued shift in favour of the new regime, even as the old one remains in place.
The Budget 2026 is not expected to scrap the old tax regime outright, but the government is likely to sweeten the new regime further, offering a clear, if quiet, nudge in policy direction. “Rather than enforcing a sudden shift, the government is expected to continue nudging taxpayers towards the new regime by incentivising it further,” CA Dr Suresh Surana told NDTV. He added that a full phase-out of the old regime is not on the table, but incremental changes could steadily increase the appeal of the new structure.
The new tax regime, introduced in Budget 2020–21 as an alternative to the existing system, offers lower slab rates in exchange for giving up most exemptions and deductions. Five years on, adoption has risen, but the old regime continues to hold ground among a sizeable section of salaried taxpayers. For many, lower rates alone have not been enough to offset the loss of deductions linked to retirement savings, health insurance and housing—expenses closely tied to long-term financial security.
How the new regime is being strengthened
Budget 2025 marked a turning point with the expansion of the Section 87A rebate. Under the current framework, income up to Rs 12 lakh is effectively tax-free under the new regime, rising to Rs 12.75 lakh for salaried individuals once the standard deduction is factored in. The standard deduction under the new regime was raised to Rs 75,000, while the old regime remains capped at ₹50,000.
Surana said future incentives could include a further hike in the standard deduction, optional joint filing for married couples, and selective restoration of limited deductions for essential expenses such as medical costs or disability care. Tax experts believe any further increase in the standard deduction is likely to apply only to the new regime, reinforcing the government’s preference.
Rising inflation and higher day-to-day expenses have also reduced disposable incomes, strengthening the case for relief through a higher standard deduction. Government data suggests this strategy is already working. In FY 2023–24, about 72 per cent of taxpayers, roughly 5.27 crore, opted for the new regime, a share expected to rise further in AY 2025–26.
Why the old regime still matters
Despite the momentum, nearly 28 per cent of taxpayers—around 2 crore—continue to opt for the old regime, largely because of its extensive deductions. These include exemptions for House Rent Allowance, health insurance premiums, home loan interest and education loans.
“The old tax regime under the Income-tax Act, 1961 continues to be beneficial for taxpayers with structured investments, housing loans, and eligible deductions,” said Akshay Jain, Direct Tax Partner, NPV & Associates LLP. He noted that taxpayers claiming deductions under Sections 80C, 80D, 80CCD(1B) and exemptions such as HRA, LTA and home loan interest often achieve lower taxable income under the old regime.
Jain pointed out that taxpayers can claim up to Rs 2 lakh as a deduction for home loan interest, up to Rs 1.5 lakh under Section 80C for investments such as PF, PPF, ELSS and life insurance, and an additional Rs 50,000 for National Pension System contributions. “Considering the increased rentals in metro cities like Mumbai, Delhi and Bangalore, HRA exemption is much beneficial for salaried employees,” he said, adding that a year-wise comparison is essential before choosing a regime.
What taxpayers want from Budget 2026
Currently, the new regime offers lower rates but almost no deductions beyond the Rs 75,000 standard deduction. In contrast, the old regime allows deductions of up to Rs 2 lakh on home loan interest and up to Rs 25,000 on health insurance premiums, rising to Rs 50,000 for senior citizens.
Experts argue that allowing limited deductions, such as home loan interest or health insurance, within the new regime could combine lower rates with meaningful relief. A Rs 2 lakh home loan interest deduction could save up to ₹60,000 for someone in the 30 per cent slab, while a ₹25,000 health insurance deduction could add savings of Rs 7,500.
As Budget day approaches, expectations are building around a calibrated approach, one that keeps the old regime intact for those who need it, while steadily enhancing the new regime to make it the default choice for a broader base of taxpayers.