Union Budget 2026: Old Tax vs New Tax Regimes -- are taxpayers being nudged towards simplicity?

As Finance Minister Nirmala Sitharaman prepares to present the Union Budget 2026 on February 1, income tax has once again moved to the forefront of public attention. For salaried employees and middle-class households, the debate is no longer limited to possible changes in tax rates. Instead, a larger and more consequential question is taking shape: is the government steadily moving away from the old, deduction-driven tax regime towards a simpler, low-friction system under the new regime?

Why the new tax regime was introduced

The new income tax regime was unveiled in Budget 2020 as an alternative to the traditional framework built around exemptions and deductions. The objective was to simplify tax filing by offering lower rates in exchange for giving up most tax benefits. Over the years, the government has consistently refined this regime—eventually making it the default option—and expanded its appeal through slab rationalisation and generous rebates.

This steady evolution suggests a clear policy direction: reducing complexity while encouraging voluntary compliance.

New tax slabs and the zero-tax promise

Under the new tax regime for FY 2025–26, income up to Rs 4 lakh is exempt from tax. Income between Rs 4 lakh and Rs 8 lakh is taxed at 5%, Rs 8–12 lakh at 10%, Rs 12–16 lakh at 15%, Rs 16–20 lakh at 20%, Rs 20–24 lakh at 25%, and income above Rs 24 lakh at 30%.

The real game-changer is the enhanced Section 87A rebate of up to ₹60,000. This rebate effectively reduces tax liability to zero for individuals earning up to Rs 12 lakh. When combined with the standard deduction, many salaried taxpayers can earn close to Rs 12.75 lakh annually without paying any income tax. For those without substantial deductions, this has significantly tilted the balance in favour of the new regime.

What keeps the old tax regime relevant

Despite the growing appeal of the new regime, the old tax regime continues to attract taxpayers who actively use deductions. Under this system, income up to ₹2.5 lakh is tax-free, followed by a 5% rate up to ₹5 lakh, 20% between ₹5 lakh and ₹10 lakh, and 30% above that.

Its strength lies in deductions such as Section 80C (up to ₹1.5 lakh), health insurance premiums under Section 80D, house rent allowance, leave travel allowance, home loan interest, and National Pension Scheme contributions. Senior and super senior citizens also benefit from higher basic exemption limits.

For taxpayers with home loans, insurance cover and disciplined long-term investments, the old regime can still deliver lower tax outgo—albeit with higher paperwork.

Simplicity versus scrutiny

A key factor driving the shift towards the new regime is ease of compliance. Tax experts note that returns filed under the old regime increasingly attract scrutiny, particularly where deduction claims are high or poorly documented. Refund delays and verification requests have become more common.

In contrast, the new regime involves fewer claims to examine, leading to faster processing and fewer queries. This has made it especially attractive to younger taxpayers and professionals who prefer simplicity over tax optimisation.

Behavioural shift

The numbers reflect this change in mindset. By FY2025, more than 70% of taxpayers had opted for the new tax regime. The preference for predictable outcomes and minimal compliance appears to be outweighing the appeal of tax-saving strategies that require careful planning and documentation.

What Budget 2026 may signal

Most experts do not expect the government to scrap the old tax regime in one stroke. However, Budget 2026 could offer important signals, through tweaks in rebates, slab structures or compliance norms, about the future role of the old system.

For taxpayers, the message is becoming increasingly clear. The government’s direction of travel favours simplicity, stability and wider participation, suggesting that while the old tax regime may not disappear immediately, it could gradually fade into the background as the new regime becomes the dominant framework for personal taxation.