As Budget 2026 approaches, income tax remains a central focus for Indian taxpayers. The upcoming financial year marks a significant shift with the introduction of the Income-tax Act, 2025 (ITA 2025), effective April 1, 2026. This overhaul aims to simplify the tax structure, reduce litigation, and promote transparency. Taxpayers are keenly observing the budget for clarity and stability during this transition. A key aspect of income tax planning involves understanding the differences between the old and new tax regimes, available deductions, and how to optimize tax liabilities.

Old vs. New Regime: A choice for taxpayers

The Indian income tax system offers taxpayers a choice between two regimes: the old regime with exemptions and deductions, and the new regime with lower tax rates but fewer exemptions. The new tax regime has become the default structure, with reduced slab rates and fewer exemptions.

• Old Regime: This regime allows taxpayers to claim various deductions and exemptions, such as those under Section 80C (investments like PPF, ELSS), Section 80D (health insurance premiums), and HRA (House Rent Allowance). It also offers age-based exemption limits. For individuals below 60 years, the exemption limit is ₹2.5 lakh. For senior citizens (60-79 years), it is ₹3 lakh, and for super senior citizens (80 years and above), it is ₹5 lakh.

• New Regime: The new regime offers simplified tax slabs with lower rates but removes most traditional exemptions. Under this regime, individuals with income up to ₹4 lakh effectively remain tax-free. For FY 2025-26 (AY 2026-27), the new regime tax slabs are:

  • ₹0 to ₹4 lakh: Nil
  • ₹4 lakh to ₹8 lakh: 5%
  • ₹8 lakh to ₹12 lakh: 10%
  • ₹12 lakh to ₹16 lakh: 15%
  • ₹16 lakh to ₹20 lakh: 20%
  • ₹20 lakh to ₹24 lakh: 25%
  • Above ₹24 lakh: 30%

The standard deduction for salaried employees and pensioners has risen to ₹75,000. The rebate under Section 87A has been increased to ₹60,000, meaning individuals with taxable income up to ₹12 lakh will have no tax liability under the new regime. The standard deduction of ₹75,000 effectively extends this relief to those with gross income up to ₹12.75 lakh.

Deductions and Exemptions

Under the old regime, taxpayers can reduce their taxable income by claiming deductions under various sections of the Income Tax Act. Some of the popular deductions include:

• Section 80C: This allows deductions for investments in instruments like Public Provident Fund (PPF), Equity Linked Savings Scheme (ELSS), and National Savings Certificate (NSC), with a maximum limit of ₹1.5 lakh.
• Section 80D: This provides deductions for health insurance premiums paid for self, family, and parents.
• House Rent Allowance (HRA): Salaried individuals who live in rented accommodation can claim HRA exemption to reduce their taxable income.
• Section 24: This section allows deduction on home loan interest. The 2026 rules increase the deduction on home loan interest under Section 24 to ₹3 lakh for self-occupied property.

The new regime offers a standard deduction of ₹75,000. However, most other deductions are not allowed.

What Taxpayers Should Know

• Choose the Right Regime: Taxpayers should carefully evaluate both regimes, considering their income level, investment patterns, and eligibility for deductions. The new regime may benefit those who do not have many deductions to claim, while the old regime may be more advantageous for those who make significant tax-saving investments.
• Understand the ITA 2025: The Income-tax Act, 2025, which will be effective from April 1, 2026, introduces significant changes to the income tax framework. Taxpayers should familiarize themselves with the new provisions to ensure compliance and optimize their tax planning.
• Plan Investments Strategically: To make informed decisions, individuals should align their investments with their financial goals and tax planning strategies.
• Keep Accurate Records: Maintaining accurate records of income, investments, and expenses is essential for accurate tax filing and claiming eligible deductions.
• File Returns on Time: Taxpayers should file their income tax returns before the due date to avoid penalties and interest.
• Seek Expert Advice: Consulting a tax advisor can help navigate the complexities of income tax laws and make informed decisions.

The Union Budget 2026 is expected to focus on simplifying the tax system and easing the transition to the new Income-tax Act, 2025. While major changes in tax slabs are unlikely, some rationalization to account for inflation is expected. Taxpayers should stay informed about the latest updates and plan their finances accordingly to optimize their tax outcomes.