New Delhi: The shift is undeniable. Over the last two years, the government has aggressively pushed the “New Tax Regime”—a simplified, low-rate structure devoid of exemptions. While this puts more cash in hand today, financial experts are sounding a critical alarm ahead of the Union Budget on February 1: India’s long-term savings culture is under threat.
With the “forced savings” of the Old Regime vanishing, analysts argue it is time to “reboot” tax incentives to ensure the middle class doesn’t walk into a retirement crisis.
The “NPS Parity” Demand
The loudest request for Budget 2026 is to bring the National Pension System (NPS) benefits to the New Tax Regime.
- The Current Gap: Under the Old Regime, Section 80CCD(1B) offers an exclusive ₹50,000 deduction for NPS voluntary contributions. This is missing in the New Regime.
- The Proposal: Experts want this ₹50,000 deduction introduced in the New Regime. “If the government wants a pensioned society, they must incentivize it. A flat ₹50,000 deduction for NPS under the New Regime ensures people save for their 60s while enjoying lower rates today,” says a senior chartered accountant from Deloitte India.
Section 80C: The “Crowded” Limit Needs Space
Section 80C has been capped at ₹1.5 lakh since 2014. In 2026, this limit is practically suffocating.
- The Problem: It is too crowded. Provident Fund (EPF), PPF, Life Insurance premiums, School Fees, and Home Loan Principal repayment all fight for the same ₹1.5 lakh space.
- The Reboot: The expectation is to “unbundle” this section.
- Home Loans: Move principal repayment to a separate section.
- Insurance: Create a dedicated deduction for life insurance to ensure families don’t under-insure themselves just to save tax.
- The Number: If not unbundled, the limit should arguably be raised to ₹2.5 lakh to account for 12 years of inflation.
The “Lump Sum” Confusion
Another critical fix needed involves the NPS withdrawal rules for small corpuses.
- The Glitch: While the PFRDA recently raised the full withdrawal limit to ₹8 Lakh (up from ₹5 Lakh), many middle-class retirees still find themselves stuck. For corpuses slightly above this limit, the mandatory annuity rule kicks in, locking up small sums for meager returns.
- The Demand: Experts urge the government to align the Tax Act with PFRDA rules and potentially push the “No-Annuity” threshold to ₹12 Lakh, allowing retirees full access to their money if the pension amount would be negligible.
Impact on Your Wallet
Why does this “reboot” matter? Without tax breaks, the natural tendency is to spend, not save. “The New Regime is great for consumption, but dangerous for capital formation,” warns a leading personal finance expert. “A rebooted tax structure would balance current consumption with future security.”
Quick Look: Old vs. New Tax Regime (FY 2025-26)
A snapshot of where your tax breaks stand today.
| Feature | Old Tax Regime | New Tax Regime |
| Standard Deduction | ₹50,000 | ₹75,000 (Hiked in July ’24) |
| Section 80C Limit | ₹1.5 Lakh (Available) | Not Available |
| NPS Self-Contribution | ₹50,000 [u/s 80CCD(1B)] | Not Available |
| NPS Employer Contrib. | Allowed [u/s 80CCD(2)] | Allowed [u/s 80CCD(2)] |
| Home Loan Interest | Up to ₹2 Lakh (Self-occupied) | Not Available |
| Tax-Free Income | Up to ₹5.5 Lakh (approx) | Up to ₹7.75 Lakh (approx) |
Key Highlights
- Top Demand: ₹50,000 NPS deduction in New Tax Regime.
- Section 80C: Needs hike to ₹2.5 Lakh or unbundling.
- Risk: Without incentives, retirement savings may plummet.
FAQ Section
A1: It is uncertain. While the demand is strong to raise it from ₹1.5 lakh, the government’s focus is on the New Tax Regime, which generally discourages deductions. However, a “carve-out” for retirement products is possible.
A2: Yes, but very few. It allows a Standard Deduction (currently ₹75,000) and employer contributions to NPS (Section 80CCD(2)). It does not allow the standard 80C or 80D (Health Insurance) deductions yet.
A3: No, not for a self-occupied property. The deduction of up to ₹2 lakh for interest payment (Section 24b) is available only under the Old Tax Regime.
Read Also:
