Why Does the Government Still Keep the Old Tax Regime, While Pushing Everyone Towards New One

Every Budget season brings the same question back into circulation. If the government wants taxpayers to move to the New Tax Regime, why does it keep extending the deadline for the Old one instead of phasing it out altogether? The official explanation is straightforward: choice. Taxpayers with genuine long-term deductions, such as home loan interest or insurance premiums, may still find the Old Regime more suitable, so it continues to exist as an option rather than being withdrawn outright. But the full picture involves several overlapping reasons, financial, administrative, and structural, that go beyond this single line of reasoning.

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A Large Base of Taxpayers Still Depend on It

The New Tax Regime, introduced under Section 115BAC by the Finance Act of 2020, offers lower slab rates in exchange for giving up most exemptions and deductions. For someone with no home loan, no insurance-linked tax planning, and no HRA claim, this trade-off usually works out favourably. But a significant number of taxpayers built their financial commitments around the Old Regime long before the New one existed. 

Home loans taken specifically to claim interest deduction under Section 24(b), insurance policies bought partly for the Section 80C benefit, and Public Provident Fund contributions locked in for 15 years are examples of decisions that cannot be unwound overnight. According to the Income Tax Department's own FAQs on its portal, taxpayers are permitted to switch between regimes each year in non-business cases, precisely so that those with such existing commitments are not forced into a less favourable outcome.

The Exemption Under Section 10(17)

Buried within the tax code is a narrower point worth noting, even if it is not the main driver of policy. Section 10(17) of the Income Tax Act grants full tax exemption on two specific allowances, the daily allowance and the constituency allowance, received by Members of Parliament and Members of Legislative Assemblies. As per Section 115BAC(2), this exemption is among those explicitly withdrawn under the New Regime, alongside HRA, LTA, and other Section 10 clauses. 

This means a legislator who opts into the New Regime would see these allowances become taxable, in the same way a salaried employee loses HRA exemption on switching. It is a minor structural detail rather than evidence of intent, but it does illustrate that the people voting on tax law are themselves subject to the provisions they debate, and are not entirely insulated from the choices being legislated.

Administrative Caution Rather Than a Hard Switch

Introduction of New Tax Regime was done in a way that it was first offered as an option in FY21 before being made the default one in FY24. Instead of scrapping the Old Tax Regime, the government has allowed taxpayers to keep using it as an alternative. It has provided enough time for taxpayers to determine which regime fits them more while giving the government the chance to improve the new one via budgets.

Weighing the Two Regimes in Practice

None of the above factors would take precedence over a basic personal evaluation for an ordinary tax payer. Those who have high claims under the sections 80C, 80D or home loan interest, may still have a better option with the Old Regime. For others who have less deductions, the New Regime with its low slabs and rebate slab is better. The calculator of the Income Tax Department on the internet enables one to make a direct comparison.

Conclusion

The continued availability of the Old Tax Regime reflects a combination of factors: a large base of taxpayers with existing financial commitments built around it, a deliberate, gradual approach to reform rather than an abrupt withdrawal, and a fiscal interest in not disturbing long-term savings flows too quickly. A smaller detail, the tax treatment of MP and MLA allowances under Section 10(17), adds an additional layer to the picture, though it should be read as one data point among many rather than the central explanation. For individual taxpayers, the decision is best made through a straightforward comparison of income and eligible deductions under both regimes, rather than by relying on any single provision in isolation.