Budget 2026: Old Tax Regime Set To Be Abolished?

As Budget 2026 approaches, speculation is rife about whether the Old Tax Regime will be abolished. According to tax experts, a complete phase-out appears less likely, though it cannot be entirely ruled out unless the finance minister chooses to spring a surprise in her Budget speech. The New Tax Regime is now the default regime, and taxpayers are required to specifically opt for the old regime if they wish to be governed by it - clearly indicating the policy direction.

Return-filing data underscores this shift. For AY 2024-25, official statistics show that over 72 per cent of individual taxpayers opted for the New Tax Regime, with less than 30 per cent continuing under the Old Tax Regime. The migration is expected to accelerate in AY 2025-26, as income up to Rs 12 lakh is effectively tax-free under the new regime due to enhanced rebates and rationalised slab rates.

Significantly, the Income Tax Act, 2025 has retained the Old Tax Regime. “Had abolition been the intent, the old regime would not have found place in the new legislation. This suggests coexistence rather than removal. That said, the old regime faces higher scrutiny and disclosure requirements, increasing compliance and litigation risks. It may, therefore, be allowed to die its natural death, while remaining on the statute book in the near future,” says Dipesh Jain, Partner, Economic Laws Practice.

According to Taxmann, the AY 2025-26 ITR season may have delivered a quiet but telling signal: the Old Tax Regime is becoming a liability. Taxpayers opting for the old regime faced intensified scrutiny as inflated and unsupported deduction claims triggered system-based alerts. Refunds were withheld, verifications multiplied, and in many cases, taxpayers actually withdrew the bogus deductions by filing a revised return.

In contrast, the New Tax Regime under Section 202 of the ITA 2025 (Corresponding to Section 115BAC of the ITA 1961) provides fewer deductions, which means fewer disputes, faster processing, and greater certainty. With simplified slabs and lower rates, the new regime continued to attract a rising share of individual taxpayers in AY 2025-26.

“For the tax administration, the message is clear. Running two parallel regimes, one deduction-heavy and dispute-prone, the other streamlined and automation-friendly, may no longer be efficient. The old regime strains verification systems and invites misuse; the new regime aligns with a data-driven, non-intrusive tax framework,” observes CA Naveen Wadhwa, Vice-President, Taxmann.

It is expected that the government may eventually abolish the old tax regime. “However, this need not necessarily take effect from the very next assessment year; the government may instead prescribe a sunset date for its final adoption,” adds Wadhwa.