Shocking Tax Move Brewing? India's Old Tax Regime on the Brink in Modi 3.0 Budget – Find Out Why Experts Say NOT YET!

The Modi 3.0 government's upcoming Union Budget 2026–27 is generating significant speculation regarding potential changes to India's tax system, with a primary focus on whether the existing old tax regime will be completely abolished.

As the government gears up to present its third budget, official data reveals that over 9.19 crore income tax returns were filed in Financial Year 2024–25, with projections suggesting this number could surpass 10 crore in FY 2025–26. Following the previous budget's substantial relief measures, which made income up to Rs 12 lakh effectively tax-free under the new regime, it's estimated that approximately 75% of taxpayers had already transitioned. This figure is believed to have now crossed the 80% mark.

Why the Old Tax Regime May Persist

Despite the high migration to the new system, tax experts believe the government is unlikely to scrap the old regime in the upcoming budget for several key reasons:

• Foundation of Household Savings: The old tax regime, through deductions like Section 80C, 80D, and 24(b), has long been a cornerstone of India's household savings strategy. These provisions encourage investments in instruments such as Public Provident Fund (PPF), Employees' Provident Fund (EPF), life insurance policies, and home ownership. Experts warn that abruptly removing these incentives could weaken the national savings rate and jeopardise the retirement planning of millions.
• Middle-Class Financial Architecture: A significant portion of India's middle class has structured their financial lives, including long-term commitments like home loans and insurance policies, around the tax benefits offered by the old regime. A sudden withdrawal could disrupt these established financial arrangements, leading to dissatisfaction.
• Maintaining Economic Stability: A dual tax system offers a balance, with the new regime stimulating consumption while the old regime promotes disciplined savings. Retaining both systems helps prevent sudden behavioural shocks within the economy and provides a sense of continuity for businesses and financial institutions.
• Administrative and Legal Hurdles: Scrapping the old regime would necessitate substantial amendments to various sections of the Income Tax Act. This could also lead to legal disputes from taxpayers whose financial plans were based on existing deductions. The government appears to be favouring a gradual decline of the old regime, making the new one more appealing each year.

Path to a Single Tax Regime

Experts suggest that a complete phase-out would require specific conditions to be met. These include a migration rate of 90–95% to the new regime, ensuring that benefits like standard deduction and rebates under the new system fully compensate for the loss of 80C or HRA benefits, and the introduction of non-tax incentives for long-term savings. A grandfathering window for existing investments and home loans, along with a multi-year sunset clause, would also be crucial for a practical and acceptable transition.

Conclusion for Budget 2026

Given these factors—the need to protect household savings, the structured financial lives of the middle class, long-term economic commitments, and the preference for a smooth, non-coercive transition—experts believe the old tax regime is likely to continue in the Union Budget 2026–27. A complete phase-out is considered premature and could be perceived as a regressive step, especially in an election-sensitive environment.

Impact

This news directly impacts individual taxpayers by influencing their financial planning and investment decisions related to tax-saving instruments. It has broader implications for household savings rates, demand for financial products like insurance and mutual funds, and overall capital formation within the Indian economy.
Impact Rating: 7/10

Difficult Terms Explained

• Union Budget: The annual financial statement presented by the government detailing its income and expenditure for the upcoming fiscal year.
• Tax Regime: A set of rules, rates, and provisions governing the assessment and collection of taxes.
• Old Tax Regime: The traditional income tax system offering a wide array of deductions and exemptions on investments and expenses.
• New Tax Regime: A simplified tax structure with lower tax rates but significantly fewer deductions and exemptions.
• Section 80C: A section of the Income Tax Act that allows deductions up to Rs 1.5 lakh for specified investments and expenses, such as PPF, EPF, ELSS mutual funds, life insurance premiums, and principal repayment of home loans.
• Section 80D: Allows deductions for health insurance premiums and medical expenses.
• Section 24(b): Provides deductions for interest paid on home loans.
• PPF (Public Provident Fund): A government-backed, long-term savings scheme offering tax benefits.
• EPF (Employees' Provident Fund): A mandatory retirement savings scheme for salaried employees.
• HRA (House Rent Allowance): A component of salary that compensates employees for rent paid.
• Capital Formation: The process of creating new capital assets, such as machinery, buildings, and infrastructure, which contributes to economic growth.
• Grandfathering: A provision that allows existing arrangements or individuals to continue under old rules, even after new rules have been implemented.
• Sunset Clause: A legal provision that automatically terminates a law or regulation after a specified period.