As Budget 2026 approaches, pressure is mounting on the government to address perceived shortcomings in the new income tax regime, which was implemented to simplify the tax structure and offer lower rates. Finance Minister Nirmala Sitharaman is scheduled to present the Union Budget on February 1, 2026, and expectations are high for revisions that could ease the burden on the middle class and encourage greater adoption of the new system.
The new income tax regime, made the default option from FY 2023-24, offers reduced tax rates but requires taxpayers to forgo most exemptions and deductions available under the old regime. While the new regime aimed to simplify tax calculations, it has faced criticism for not adequately addressing the needs of all taxpayers.
Several key areas are under scrutiny as potential targets for reform in Budget 2026. One major expectation is an increase in the standard deduction, which would provide immediate relief to salaried individuals. Experts have suggested raising the standard deduction from the current ₹75,000 to ₹1 lakh.
Another area of focus is the widening of tax slabs, particularly for those earning between ₹12 lakh and ₹20 lakh. There is a proposal to shift the 30% tax slab to ₹30 lakh from ₹24 lakh, which could reduce the tax burden on middle-income earners. Some propose increasing the threshold for the 30% tax slab.
The current limit of ₹1.5 lakh for tax-saving investments under Section 123 of the Income Tax Act 2025 is viewed as insufficient, with calls to increase it to at least ₹2.5 lakh to account for inflation. Experts suggest that such a move would encourage more savings and provide taxpayers with greater tax benefits.
Another expectation is an increased rebate under Section 87A, potentially making income up to ₹15 lakh effectively tax-free. Under the new regime, resident individuals with taxable income up to Rs 12 lakh are eligible for a rebate of up to Rs 60,000.
Simplifying compliance and streamlining administrative processes are also high on the agenda. This includes standardizing Tax Deduction at Source (TDS) rates and clarifying the treatment of existing incentives to reduce disputes and litigation. The introduction of a "tax year" system, aligning income earning with reporting and assessment, is expected to simplify compliance.
While major changes to income tax slabs are considered less likely, there is anticipation for a possible increase in standard deduction and further simplification of compliance requirements. The government may also focus on faster dispute resolution and refund processing. Despite the shift towards the new regime, the old regime is expected to continue, recognizing that many taxpayers still prefer it due to available deductions.
Budget 2026 will need to balance these demands with broader economic objectives, including sustaining long-term growth and attracting foreign investment. The government is likely to expand the Production-Linked Incentive (PLI) scheme to emerging technology sectors and provide targeted incentives for sunrise industries. Overall, the focus is expected to be on economic stability, encouraging public consumption, and ensuring a smooth transition to the new Income Tax Act.
