Budget 2026: Why old income tax regime still appeals to salaried taxpayers

As the Finance Minister readies Budget 2026, salaried taxpayers remain split on whether lower rates can truly replace deductions

Finance Minister Nirmala Sitharaman will present the Union Budget 2026-27 next week, with taxpayers closely watching what the government does with the old and new personal income tax regimes.

 

The new tax regime was introduced in Budget 2020-21 as an alternative to the existing system, offering lower slab rates in exchange for giving up most exemptions and deductions. Five years on, the old regime continues to hold ground among a large section of salaried taxpayers.

 

“Lower tax rates alone do not drive taxpayer behaviour, which explains why adoption of the new tax regime has been uneven. For many salaried taxpayers, the loss of familiar deductions for retirement savings, health insurance and housing continues to outweigh the benefit of reduced rates. These provisions are closely tied to long-term financial security, not merely tax savings,” said Ketan Mukhija, Partner and Co-head of PE and VC at Kochhar & Co.

 

 

Relief under the new regime so far: what has changed?

 

Budget 2025 marked a turning point for the new tax regime with the expansion of the Section 87A rebate. Under the revised structure, income up to ₹12 lakh is effectively tax-free, rising to ₹12.75 lakh for salaried individuals after accounting for the standard deduction.

 

The Finance Act 2025 also reinforced the new system by retaining lower slab rates and making the new regime the default option under Section 115BAC of the Income-tax Act, 1961. This has nudged many taxpayers, particularly salaried employees with limited deductions, to reassess their tax planning.

 

Even so, several long-standing deductions remain available only under the old regime, continuing to influence decision-making for households with structured financial commitments.

 

 

Why does the old regime still work for many taxpayers?

 

Deductions under Sections 80C, 80D, 24(b) and 80CCD(1B), along with exemptions such as house rent allowance and other allowances, remain exclusive to the old regime. These provisions continue to matter for taxpayers with home loans, insurance policies and retirement savings plans.

 

“For many salaried individuals, remaining with the traditional system, even at the cost of marginally higher taxes, appears to be a more prudent choice, safeguarding their established financial plans,” said Dinkar Sharma, Company Secretary and Partner at Jotwani Associates.

 

What do taxpayers miss after shifting to the new regime?

 

Taxpayers who move to the new regime give up several deductions and exemptions that have long shaped household financial planning.

 

According to Sharma, the most commonly missed benefits include:

 

• The Section 80C deduction, which covers retirement savings instruments, life insurance and principal repayment on home loans

• Deduction for home loan interest under Section 24(b)

• Exemptions such as Leave Travel Allowance and certain work-related allowances

 

“Among the various benefits forfeited under the new regime, the absence of the Section 80C deduction is particularly felt. These incentives are not merely tax-saving measures; they actively promote sound financial behaviour and foster long-term security,” Sharma said.

 

 

Is further rate rationalisation enough to change behaviour?

 

Some experts caution that further cuts in tax rates may not address the core concerns of salaried households.

 

“Merely reducing tax rates does not address the core concerns of taxpayers. Such an approach overlooks the unavoidable expenditures inherent to every household,” Sharma said.

 

He added that bringing back a limited set of well-defined deductions could offer more clarity and predictability. “Well-structured and clearly defined deductions not only minimise disputes but also encourage savings and home ownership,” he said.

 

What would make the new regime work better for the middle class?

 

Experts say the new regime will need more than lower rates to appeal to middle-income salaried taxpayers.

 

“The new regime can become more attractive to middle-income taxpayers if it delivers visibly higher take-home income, either through a stronger standard deduction or limited targeted reliefs. Inflation further weakens the impact of the current slabs,” said Mukhija.

 

Sharma said allowing deductions for essential expenses could shift sentiment. “To genuinely appeal to the middle class, the government must accommodate essential expenditures such as home loan interest and retirement savings within the new tax regime,” he said.

 

He also flagged the lack of certainty created by annual switching. “Permitting taxpayers to commit to a chosen regime for a fixed period would provide the stability that is often more valued than marginal reductions in tax rates,” Sharma said.

 

How inflation and bracket creep dilute tax relief

 

Sharma pointed to inflation as a quiet factor reducing the real benefit of lower tax rates when slabs remain unchanged.

 

An individual earning ₹10 lakh in 2021 who receives a 6% annual increment to keep pace with inflation would earn about ₹12.6 lakh after five years. If tax slabs are not revised, a larger share of this inflation-adjusted income falls into higher tax brackets, raising tax liability without any real increase in purchasing power.

 

This effect, known as bracket creep, gradually erodes tax relief and often goes unnoticed.

 

“The most critical reform that Budget 2026 could introduce is the indexation of tax slabs to inflation. Linking tax brackets to inflation would preserve the real value of tax relief, prevent covert tax increases, and enhance the fairness and transparency of the entire system,” Sharma said.