An overwhelming 88% of individual taxpayers have chosen India's simplified new tax regime over the traditional system with deductions and exemptions, according to Central Board of Direct Taxes (CBDT) Chairman Ravi Agrawal, signaling a fundamental shift in how middle-class Indians engage with the tax system.
The new regime, introduced in Budget 2020 and made the default option in Budget 2023, offers lower tax rates in exchange for eliminating most deductions and exemptions. The policy aimed to simplify compliance and reduce the complexity that characterized India's tax code, where taxpayers spent significant time calculating optimal combinations of investments and expenses to minimize liability.
"The adoption rate demonstrates that taxpayers value simplicity and clarity over the complexity of tracking multiple deductions throughout the year," Agrawal stated at a tax conference in New Delhi. The 88% figure represents individual taxpayers filing returns for Assessment Year 2025-26, covering income earned during the 2024-25 financial year.
In India, as across the subcontinent, scale and diversity make simple narratives impossible—and fascinating. The country's formal taxpayer base of approximately 80 million individuals represents only about 6% of the total population, reflecting the massive informal economy where cash transactions and agricultural income dominate economic activity outside the tax net.
The new tax regime offers tax rates starting at 0% for income up to ₹3 lakh ($3,600), 5% for income between ₹3-6 lakh, 10% for ₹6-9 lakh, 15% for ₹9-12 lakh, 20% for ₹12-15 lakh, and 30% for income above ₹15 lakh ($18,000). The old regime offered similar rates but allowed deductions for home loan interest, insurance premiums, certain investments, and various other expenses that could substantially reduce taxable income.
For the government, the mass migration to the new regime creates revenue certainty and administrative simplification. Tax officials no longer scrutinize extensive deduction claims, reducing compliance costs for both taxpayers and the tax department. The CBDT estimates that processing times for tax returns have decreased by approximately 30% since the new regime became the default option.
However, the policy shift disadvantages certain taxpayer categories. Salaried employees with home loans previously claimed substantial interest deductions under Section 24(b), often reducing taxable income by ₹2 lakh annually. Similarly, those making regular investments in instruments like Provident Fund, insurance, and tax-saving mutual funds benefited from ₹1.5 lakh deductions under Section 80C.
Tax policy experts note that the high adoption rate may reflect default bias as much as informed choice. "The new regime is the default option—taxpayers must actively select the old regime," explained Dr. Kavita Rao, a tax economist. "Many filers simply accept the default, particularly if they use online filing portals that pre-select the new regime."
The revenue implications remain complex. While the new regime eliminates deductions that reduced taxable income, it also offers lower rates. Government projections suggested the two effects would roughly balance for most taxpayers at current income levels, creating neutrality from the revenue perspective. The actual impact depends on income distribution patterns among the 88% who chose the new system.
India's tax-to-GDP ratio remains low by global standards at approximately 11%, constraining government resources for infrastructure, social programs, and development spending. Expanding the tax base beyond the current 80 million individual filers represents a long-term policy priority, with the simplified regime aimed partly at encouraging voluntary compliance by reducing complexity barriers.
The dramatic simplification reflects lessons from behavioral economics—that complexity itself deters compliance and that most taxpayers value predictability over optimization opportunities. The old regime's multitude of deductions created industry around tax planning, with middle-class families making investment decisions driven by tax savings rather than financial returns or actual insurance needs.
Critics argue the policy favors taxpayers without home loans or major deductible investments while disadvantaging those who made long-term financial commitments based on previous tax incentives. "People who bought homes assuming they would get tax benefits for 20 years find the rules changed mid-stream," noted consumer advocate Bejon Misra.
The government maintains that taxpayers retain the option to choose the old regime, preserving flexibility. Yet the 88% adoption figure suggests most find the new system advantageous or at least acceptable—a remarkable consensus given India's diverse economic circumstances across regions, income levels, and employment sectors.
Internationally, the move aligns India with simplified tax approaches adopted by several countries that found complex deduction systems created compliance burdens outweighing their policy benefits. The trade-off between using tax incentives to encourage specific behaviors (home ownership, insurance, retirement savings) versus maintaining simple, transparent systems represents an enduring debate in tax policy.
The CBDT's disclosure of the 88% figure serves political purposes beyond administrative reporting. The government seeks to demonstrate that its tax reforms enjoy broad acceptance, countering opposition claims that policy changes hurt the middle class. High adoption rates provide evidence that simplification resonates with actual taxpayers rather than just policy theorists.
