As the new income tax regime cements its dominance, speculation has been building over whether the government might eventually phase out the old tax system altogether.
With 88 per cent of individual taxpayers now opting for the new regime, the question of a possible ‘sunset clause’ for the old structure has gained traction.
Speaking to PTI in a post-Budget interaction, CBDT Chairman Ravi Agrawal dismissed suggestions that the government is considering ending the old tax regime.
He emphasised that the choice of tax regime remains entirely with taxpayers. “Selecting a particular tax regime is the choice of the taxpayers, but the response to the new regime has been very good,” Agrawal said.
Backing this with data, he revealed that when income tax return forms ITR-1, ITR-2, ITR-3 and ITR-4, all used by individuals, are taken together, about 88 per cent of taxpayers have shifted to the new tax regime.
The transition is even more pronounced among presumptive taxation cases. “Insofar as presumptive tax cases, about 97 per cent of the taxpayers have moved to the new tax regime,” he said.
For corporates, the shift has also been significant, with around 60 per cent of income now reflected under the new regime, Agrawal added.
Why Are Taxpayers Choosing the New Regime?
Introduced in 2020, the new tax regime offers lower slab rates while doing away with most deductions and exemptions available under the old system. The older regime, in contrast, features higher tax rates but allows taxpayers to claim deductions such as those under Section 80C, 80D and others.
Under the new structure, individuals earning up to Rs 15 lakh annually can avail of full exemption, making it particularly attractive to salaried taxpayers who may not have extensive investments or deductible expenses.
The numbers suggest that simplicity and lower headline rates are proving persuasive.
Agrawal expressed confidence that recent changes proposed in the FY27 Budget could accelerate this migration further.
MAT Tweaks May Nudge Corporates Further
One of the key measures announced in the Budget relates to Minimum Alternate Tax (MAT), which applies only to companies.
MAT is calculated at 15 per cent of book profit and becomes chargeable when it exceeds the regular tax liability. The Budget proposes that MAT will now be treated as the final tax and reduces the rate from 15 per cent to 14 per cent for companies under the old regime.
“We believe, with the new MAT provisions coming in the FY27 Budget, it will also persuade people to move to the new tax regime,” Agrawal said.
The government appears to be signalling that while it is not withdrawing the old system, it is steadily strengthening the case for the new one.
STT Hike: A Move to Cool Retail Frenzy?
Beyond income tax reforms, the Budget also proposed an increase in Securities Transaction Tax (STT), particularly targeting derivatives trading.
The STT on futures contracts is set to rise to 0.05 per cent from 0.02 per cent. Meanwhile, STT on options premium and exercise of options will increase to 0.15 per cent from 0.1 per cent and 0.125 per cent, respectively.
When asked about the rationale behind the hike, Agrawal suggested it was intended to temper aggressive retail participation in derivatives markets.
“It is hoped that this will certainly dissuade retail investors from very aggressively taking up this exercise. Only time would tell how much it would curb, but this is an attempt from the department and the government to actually at least address this issue and flag this issue,” he said.
The move reflects broader regulatory concerns over rising retail involvement in high-risk segments of the market.
Direct Tax Targets and Revenue Confidence
Despite the structural shifts in tax preferences, the government remains confident about revenue mobilisation.
Agrawal said he was confident of meeting the revised direct tax collection target of Rs 24.21 lakh crore for the 2025-26 fiscal, as set out in the Budget.
The transition to the new regime has not dented revenue momentum so far, suggesting that lower rates coupled with higher compliance may be working in tandem.
Old vs New: What It Means for Taxpayers
For now, taxpayers continue to have the flexibility to choose between the two systems while filing returns.
The old regime still appeals to individuals who have substantial deductions and exemptions to claim. The new regime, on the other hand, is designed for simplicity and lower rates, appealing to those seeking a streamlined filing process.
With 88 per cent of individual taxpayers and 97 per cent of presumptive cases already on the new regime, the trend is unmistakable. Yet, the government has made it clear that the old regime is not being phased out, at least not through any formal sunset clause.
For taxpayers, the message is straightforward: the choice remains yours, but the tide is clearly turning.
