Income Tax Expectations for Budget 2026: Will the New Regime Become More Attractive?
The Indian government is gearing up for the 2026 budget, with expectations running high among salaried and middle-class taxpayers. Following significant reforms in 2025, including a major overhaul of the income tax regime and adjustments to GST rates, many are curious about what changes might be introduced this year. The new income tax regime, which has been nudged as the default option for taxpayers, is under scrutiny as citizens hope for further enhancements that could increase their disposable income.
Recent Changes to the Income Tax Regime
In the previous budget, Finance Minister Nirmala Sitharaman announced several key changes to the new income tax regime. Notably, taxpayers with an income of up to Rs 12 lakh are now exempt from income tax, which translates to an effective monthly income of Rs 1 lakh. For salaried individuals, this limit is slightly higher at Rs 12.75 lakh, factoring in a standard deduction of Rs 75,000. Additionally, the basic tax exemption limit was raised from Rs 3 lakh to Rs 4 lakh, providing further relief to taxpayers.
The revised tax slabs under the new regime have made it more appealing. For instance, a taxpayer earning Rs 12 lakh can benefit from a tax reduction of Rs 80,000, while those with incomes of Rs 18 lakh and Rs 25 lakh can expect benefits of Rs 70,000 and Rs 1,10,000, respectively. Despite these changes, there remains a question of whether the new regime can be made even more attractive to encourage a broader switch from the old tax structure.
Expectations for the Upcoming Budget
As the 2026 budget approaches, tax experts are weighing in on the likelihood of further changes to the income tax regime. Many believe that significant alterations are unlikely this year, given the substantial reforms introduced in 2025. Preeti Sharma, a tax partner at BDO India, noted that the new regime has already become more favorable for taxpayers who do not claim many deductions. The adoption rate of the new regime has surged, with 72% of the 7.28 crore income tax returns filed for the assessment year 2024-25 falling under this category.
Surabhi Marwah, a tax partner at EY India, echoed this sentiment, stating that the government has already simplified the personal income tax regime with lower slabs and higher rebates. She emphasized that the focus may now shift towards stability and a smooth transition rather than introducing additional reforms. Experts suggest that any future changes would likely be incremental, aimed at enhancing compliance and simplifying the tax process.
Potential Improvements to the New Tax Regime
While the new income tax regime has seen significant improvements, some taxpayers still prefer the old system due to the availability of various deductions. Experts suggest that the government could consider minor adjustments to make the new regime even more appealing, particularly for middle-class taxpayers. For instance, increasing the standard deduction limit from Rs 75,000 to Rs 90,000 could provide additional relief.
Moreover, there are calls for allowing deductions for individual contributions to the National Pension System (NPS) under the new regime, which currently only permits deductions for employer contributions. This change could benefit both salaried and non-salaried individuals. Additionally, introducing limited deductions for health insurance premiums and home loan interest could further enhance the attractiveness of the new tax regime.
Radhika Viswanathan from Deloitte India highlighted the need for targeted measures to bridge the gap between the two regimes. She suggested that allowing deductions for interest on self-occupied properties and medical insurance could significantly improve the appeal of the new regime for many taxpayers. As the government prepares for the upcoming budget, these discussions will likely shape the future of income tax policies in India.
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