Income Tax in Budget 2026: Will a GST-Inspired Simplification of Tax Slabs Be Introduced?
Taxpayers in India are eagerly awaiting Finance Minister Nirmala Sitharaman’s upcoming budget speech, hoping for significant changes to the income tax regime. With two existing tax structures—the old and the new—many are seeking simplification of the complex tax slabs and compliance processes. While the new regime offers lower rates, it has been criticized for its confusing multiple slabs. Experts suggest that a streamlined approach, akin to the recent Goods and Services Tax (GST) reforms, could enhance clarity and ease for taxpayers.
Current Income Tax Regimes
India’s income tax system comprises two primary regimes: the old and the new. The old regime, which has remained largely unchanged, features fewer tax slabs and allows for more deductions and exemptions. In contrast, the new regime, introduced in the Union Budget of 2020, boasts lower tax rates and higher income thresholds for tax brackets but offers limited deductions. Currently, the new regime includes seven tax slabs, starting from a nil rate and progressing through 5%, 10%, 15%, 20%, 25%, and up to 30%. This complexity has led to confusion among taxpayers, prompting calls for a more straightforward structure. Last year, the government made income up to Rs 12 lakh tax-free, a limit that extends to Rs 12.75 lakh for salaried individuals when accounting for standard deductions.
Need for Simplification
Tax experts have voiced a strong consensus on the necessity for simplifying the income tax structure. They argue that the existing multi-rate system complicates compliance and increases litigation risks. While immediate changes may not be feasible due to fiscal constraints, experts advocate for a gradual shift towards a more streamlined tax regime. Surabhi Marwah, a tax partner at EY India, highlights the government’s recent efforts to simplify tax laws, including the reduction of the Income-tax Act’s sections from 819 to 536. This indicates a commitment to creating a more user-friendly tax framework. Experts suggest that reducing the number of tax slabs could enhance clarity and compliance, drawing parallels with the successful GST reform, which consolidated multiple indirect taxes into fewer categories.
Future of Income Tax Slabs
As the budget approaches, tax professionals are divided on the likelihood of a reduction in the number of income tax slabs. While some believe that a simplified 2-3 slab structure could be beneficial, they acknowledge that the current economic landscape may not allow for such changes immediately. Radhika Viswanathan from Deloitte India emphasizes that achieving a simpler tax structure requires a mature market and balanced tax collections. Experts like Richa Sawhney from Grant Thornton Bharat agree that while a streamlined structure would ease compliance, the government may not be ready to implement such changes this year due to previous adjustments in tax provisions and revenue considerations.
Long-Term Perspectives
Looking ahead, some tax experts suggest that the government may gradually transition to a personal income tax regime with fewer slabs. Recent budgets have focused on adjusting rates and income thresholds rather than making structural changes. This gradual approach could allow for a more manageable tax system over time. Tanu Gupta from Mainstay Tax Advisors LLP points out the importance of maintaining progressivity in tax incidence, especially in a diverse economy like India. She advocates for a balance between simplicity and fairness, ensuring that taxpayers do not face higher tax burdens without justification. As the government continues to refine its tax policies, the hope remains that future reforms will lead to a clearer and more equitable tax landscape for all.
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