The old income tax regime is not set for withdrawal in the near term. Ravi Agrawal, chairman of the Central Board of Direct Taxes, has clarified that the government is not considering a sunset clause for the old regime at present.
This clarification comes despite a sharp shift by individual taxpayers towards the new income tax regime. The option to choose between the two regimes will continue, allowing taxpayers to decide based on their financial profile and deduction structure.
Strong Adoption of the New Tax Regime
The new income tax regime has gained significant acceptance among individual taxpayers. About 88 per cent of individuals are now filing income tax returns under the new regime, reflecting preference for lower slab rates, higher basic exemption limits and a simpler tax structure.
The tax administration views this transition as positive but organic. There is no intent to force migration by withdrawing the old regime abruptly.
Why the Old Tax Regime Still Matters
Tax experts have consistently pointed out that an immediate withdrawal of the old tax regime would be premature. The old regime continues to serve taxpayers who legitimately benefit from exemptions and deductions such as House Rent Allowance, Leave Travel Allowance, interest on housing loans under Section 24(b), and deductions under Chapter VI-A, including Sections 80C, 80D and 80CCD.
For such taxpayers, the cumulative value of deductions can still result in a lower tax liability compared to the new regime.
Taxpayer Profiles Where the Old Regime Remains Relevant
The old tax regime continues to make sense for a limited but identifiable group of taxpayers. This includes individuals with large or long-term housing loans, substantial investments in tax-saving instruments like provident fund, public provident fund, equity-linked savings schemes, life insurance and National Pension System, and salaried employees receiving HRA or other exemption-linked benefits.
This relevance is more pronounced among higher-income taxpayers with structured savings habits and long-term financial commitments, where deductions meaningfully offset taxable income.
Gradual Decline in Practical Relevance
While still useful for some, the practical relevance of the old regime is steadily declining. The new tax regime offers a cleaner structure with fewer conditions, reduced documentation and minimal scope for disputes.
Experts note that the old regime increasingly caters to transitional cases, such as taxpayers servicing legacy housing loans or holding investments made primarily for tax efficiency in earlier years. These cases are expected to reduce naturally over time.
New Regime Better Suited for Simpler Profiles
For new entrants to the workforce, individuals without housing loans, and taxpayers who do not actively plan around deductions, the new tax regime is generally more efficient. Its simplicity and predictability make compliance easier and reduce the need for ongoing tax planning.
Old Regime as a Transitional Choice
In effect, the old tax regime now operates as a transitional option. It allows continuity for taxpayers with existing financial commitments, while the system gradually nudges most individuals towards the new regime through design rather than compulsion.
As debt obligations reduce and savings behaviour evolves, the relevance of deduction-heavy structures is likely to diminish, making a formal sunset clause unnecessary in the near term.
Policy Direction and Clarity
Retaining both tax regimes preserves flexibility and avoids disruption for taxpayers with existing commitments. However, the absence of a clear long-term roadmap may create uncertainty. Running parallel regimes adds complexity for policy communication and requires taxpayers to reassess their choice each financial year. With the new regime already dominant, the old regime’s relevance is steadily shrinking. Clearer signalling on its future direction, even without a formal sunset clause, would help taxpayers plan their investments and tax liabilities with greater confidence.
Conclusion
The government’s approach reflects policy stability and gradual transition. Although the new tax regime has emerged as the preferred option for a majority of taxpayers, the old regime will continue to coexist for now. Its eventual decline, if any, is expected to be driven by changing taxpayer behaviour rather than an abrupt legislative withdrawal.
Source: Adapted from EconomicTimes