Why the old tax regime may still survive the new tax era

For a while, the story seemed settled. The new tax regime had become the default, promised lower rates with less paperwork, and after Budget 2025 effectively ensured no tax liability up to Rs 12 lakh of annual income, or Rs 12.75 lakh for many salaried taxpayers after standard deduction. It looked as though the old tax regime was quietly being pushed toward irrelevance.

The Draft Income-tax Rules, 2026 may force a rethink. Several exemption and perquisite thresholds that had become outdated over the years are now proposed to be revised sharply upward.

Children’s education allowance is proposed to rise from Rs 100 per month per child to Rs 3,000. Hostel allowance is proposed to move from Rs 300 to Rs 9,000 per month per child.

Likewise, the tax-free value of employer-provided meals during office hours is proposed to increase from Rs 50 per meal to Rs 200, and the annual threshold for gifts, vouchers or tokens is proposed to move from Rs 5,000 to Rs 15,000. Bengaluru, Hyderabad, Pune and Ahmedabad are also proposed to be brought into the 50% salary category for HRA purposes.

These are not cosmetic changes. For some salaried taxpayers, they could materially alter the tax calculation under the old regime. These proposals are still in draft form, but if notified broadly in the present shape, they would apply from April 1, 2026.

The new regime will continue to be the simpler and often more tax-efficient option for taxpayers with limited deductions or exemptions. But for employees with meaningful rent, housing-loan interest, section 80C investments and salary-linked exemptions, the old regime may still produce a lower tax outgo.

That is why the choice of regime should not be treated as a routine payroll formality. Before declaring a preference to the employer, salaried taxpayers should make a realistic estimate of the deductions and exemptions they are likely to claim during the year. If the old regime appears more beneficial, it is sensible to communicate that position to the employer so that TDS is computed on a more realistic basis.

This is relevant not only for the future, but even for FY 2025–26. A salaried taxpayer may still opt for the old regime while filing the return, even if payroll was processed under the new regime. But that legal flexibility should not be mistaken for practical convenience. Once salary is processed under the new regime, the employee may later have to independently compile rent records, housing-loan interest certificates, investment proofs and other deduction documents, and work out the claim outside payroll records.

The due date therefore assumes particular importance. For Assessment Year 2026–27, the return must ordinarily be filed on or before July 31, 2026 if the taxpayer wishes to validly opt for the old regime. If that deadline is missed, the taxpayer may effectively be left with the default new regime. In cases where higher deductions or exemptions had already been factored into the TDS workings during the year, that could result in a higher final tax outgo, along with interest for the shortfall.

The new regime may still dominate the headlines. Yet, if the draft rules are notified broadly in their present form the old regime may survive not as a relic of the past, but as a practical option for taxpayers willing to do the arithmetic.