Taxpayers await clarity on continuation of old income tax regime

On February 1, the Finance Minister is all set to present India’s eightieth and her consecutive ninth Union Budget. As the Central government unveils its major policy announcement on that day, it will try to reaffirm its ambition to elevate India to the third-largest economy by 2031 and a developed economy by 2047. A much-needed bold statement is required in the unprecedented, volatile global order that exists today. As far as individual common taxpayers, including salaried employees, self-employed professionals, and freelancers, are concerned, all have their own set of expectations, though very little scope for change.

Old tax regime

Due to the more attractive default new tax regime, about 80% of taxpayers have already opted out of the less lucrative old tax regime. To nudge remaining taxpayers, there may not be any groundbreaking changes in the tax slab and tax rate fronts. However, to address 20% taxpayers’ serious concerns, there may be upward adjustments expected in tax-free allowances and deductions-related provisions.     

Section 80C tax relief on life insurance premiums, etc, is one of the most favourite deductions among others, and was last increased from Rs 1 lakh to Rs 1.5 lakh in 2014. Section 80D tax relief on health insurance premiums aggregate sums were last revised to Rs 25,000 in 2015 and Rs 50,000 in 2018. Section 80DDB tax relief on medical treatment’s maximum deduction of Rs 40,000 for individuals up to 60 years may be revised at par with the senior citizens cap of Rs 1 lakh or actual amount spent, whichever is lower. Section 80EEB tax relief on the interest portion of the loan availed between April 1, 2019 and March 31, 2023, for purchasing electric vehicles, lapsed three years ago. Section 80GG tax relief on rent paid was last revised in 2016. Thus, the finance ministry can adequately revise and extend these tax reliefs through suitable amendments. They will absorb the inflation effect and encourage the adoption of electric vehicles by a wider section.   

New default tax regime

The last two Union Budgets have made the new default tax regime more attractive. There were substantial changes carried to the tax slabs, basic exemption limit, enhanced rebate, higher standard deduction and reduction in surcharge. Given the revenue implications and expected failure in meeting tax collection targets, there may be a few tweaks to the new default tax regime, or the status quo may be continued.

Waiver of old tax demands- Post September 2025, hundreds of taxpayers were surprised that their tax refunds were withheld to adjust against 10-20-year-old tax demands. How to trace and provide documentary evidence for the taxes paid in 2005-2015, which is not their fault in the first place. Since India is moving to a new income tax regime soon, the finance ministry is expected to waive off old tax demands of up to Rs 25,000 per assessment year, till March 2026. It will avoid futile exercise of recovering small tax demands, save the department’s precious time, energy and protracted tax litigations.

Simplified compliance: In November 2022, there was a proposal to introduce ‘Common ITR’ by merging all existing ITRs, except ITR Form-7, applicable to charitable trusts. However, thereafter, no developments have been reported as such. The finance ministry may introduce it on a trial basis from the tax year 2026-27 to file returns under the new Income Tax Act, 2025. It will ensure faster refunds, reduce time consumption, compliance burden, and catch up with the best international standards.

Before parting, one of the compelling reasons for those 20% taxpayers still with the optional tax regime is availing tax benefits on housing loans, house rent, and leave travel allowances exclusively thereunder. Thus, it is widely expected that the finance ministry may clear the doubts of its continuity, and if it intends to continue, then how long? Its crystal clear clarification on continuation or ending with a sunset clause will help taxpayers to plan their tax outgo for the near future more efficiently.

(The writer is Founder & CEO, Shree Tax Chambers)