Budget 2025 Expectations: Old Tax Regime To Permanently Go?

The Indian tax landscape is on the brink of transformation as Finance Minister Nirmala Sitharaman prepares to unveil Budget 2025. While the government has emphasized the need to simplify the tax system, the big question remains unanswered: Will the old income tax regime be discontinued this year?

Is India Ready for a Single Tax Regime?
Speaking after Budget 2024, Sitharaman stated: "The government's intention is to make the income tax regime simpler. Cannot say whether there will be a sunset on the old income tax regime. Decision after a review."

Introduced in 2020, the new tax regime simplifies the structure by lowering tax rates and removing exemptions. While over 72% of individual taxpayers have already transitioned to the new regime for Assessment Year 2024-25, the move to phase out the old system altogether remains a contentious issue.

The Debate: Old vs. New
The new tax regime has been touted for its simplicity and reduced compliance burden. Taxpayers no longer need to maintain detailed records or file deductions, making it a hassle-free option. However, critics argue that it disadvantages those relying on exemptions like house rent allowance (HRA) or investments under Section 80C.

Rahul Charkha, Partner at Economic Laws Practice, explained "The government is encouraging the transition by reducing tax rates under the new regime while maintaining the status quo for the old regime. There is a strong likelihood that the government may discontinue the old tax regime in the near future."

Amit Gupta, Tax Partner at Saraf and Partners, elaborated on the rationale behind the new regime, “The new tax regime simplifies compliance by removing the need for documentation for deductions and exemptions. However, it only provides definitive tax savings for a small section of taxpayers, as others still benefit more from the exemptions offered under the old regime."

What Middle-Class Taxpayers Need to Know
The middle class forms the backbone of India’s taxpayer base, and any change in tax policies has significant implications for their financial planning. Many salaried individuals rely on deductions like HRA, education loans, and home loan interest to lower their taxable income.

Gaurav Makhijani (Head of Tax, North India and Gujarat) at Roedl and Partner India, highlighted these implications: "For individual taxpayers who rely heavily on exemptions and deductions, such as house rent allowance (HRA) and Section 80C investments, the shift might result in higher taxable income and consequently, higher tax liability. It could also lead to a need for re-evaluating their investment strategies to optimize tax savings under the new regime."

The Compliance Advantage
From a compliance perspective, the new tax regime has been widely praised. Businesses, in particular, benefit from reduced administrative burdens.
Gupta remarked "The increased adoption of the new tax regime is a move towards a simpler tax regime and compliance, wherein taxpayers offer their gross income to tax, ring-fencing themselves from tax scrutiny that may arise from excessive deductions or exemptions."

From an employer’s perspective, the new system simplifies payroll processing by removing the need to verify extensive documentation. Charkha noted "The new tax regime makes computing taxable income and tax liability not only simple but also straightforward. Businesses and employers need to carefully assess how the phase-out of the old tax regime will impact their compensation and salary structure. They would be required to consider all such elements that benefitted the taxpayers under the old regime and give corresponding benefit under the new regime to ensure parity."

Budget 2025: What to Expect?
While a complete phase-out of the old regime in Budget 2025 seems unlikely, the government is expected to take further steps to incentivize the adoption of the new tax system. Potential announcements could include adjustments to tax slabs, the introduction of selective deductions, or enhanced pre-filled tax forms to simplify filing.

Charkha concluded "With its simplified structure and reduced scope for litigation, the new tax regime could lead to higher compliance and improved tax collection in the long run. However, fairness and transparency will be crucial to its success."

Lessons from Global Reforms
India can learn from countries like Italy, which successfully transitioned to a simplified tax structure by gradually reducing tax brackets over several years. This approach allowed taxpayers to adapt while ensuring continued compliance.

Charkha highlighted the importance of a phased transition: “Italy has been taking conscious efforts of moving to a simplified tax regime. In 2020, Italy introduced a major tax reform, which included the reduction of income tax brackets. The reform aimed to lower the tax burden on individuals, increase disposable income, and simplify the process of tax filing. Before the reform, Italy had 5 tax brackets for individual income tax. With the reform, the number of tax brackets was reduced to 4 for 2023 and thereafter to 3 for the year 2024. The reform aims to encourage greater tax compliance, as simpler systems tend to be less prone to evasion.”

Looking Ahead to Budget 2025
With less than two months to go, anticipation is building for Sitharaman’s announcements. While experts agree that the government is moving towards a unified tax regime, they stress the need for careful planning and consumer-friendly reforms.

As Makhijani aptly put it "Simplification is the future, but it must not come at the cost of fairness. The government has an opportunity to create a system that is both efficient and equitable."

For now, taxpayers await Budget 2025 with bated breath, hopeful that the reforms will strike the right balance between simplicity and savings. Whether the old regime will finally sunset remains to be seen, but the push for a streamlined system is undeniable.