Budget 2026 Expectations of Taxpayers on Income Tax
- Dipali Waghmode
- 1 day ago
- 10 min read
Updated: 9 hours ago
As India moves closer to the Union Budget 2026, expectations around income tax reforms are once again gaining momentum. For salaried employees, professionals, senior citizens, and investors, income tax policy plays a direct role in monthly cash flow, long-term savings, and financial planning decisions. Over the past few budgets, the government has focused on simplifying tax structures, improving compliance efficiency, and gradually shifting taxpayers towards a streamlined tax regime.
Budget 2026 is not expected to introduce sweeping or disruptive changes to income tax laws. Instead, the focus is likely to remain on stability, simplicity, and targeted relief. Taxpayers are hoping for fine-tuning of existing provisions, better alignment with inflation realities, and smoother compliance processes rather than a complete overhaul of the tax system.
Table of Contents
Budget 2026: Top 12 Expectations of Taxpayers
1. Increase in Standard Deduction for Salaried Taxpayers
One of the most widely discussed expectations is an increase in the standard deduction, currently set at ₹75,000 under the new tax regime. There is strong demand to raise this limit to ₹1,00,000, aligning it better with inflation and rising living costs.
An increase of ₹25,000 could result in tax savings of up to ₹7,500–₹10,000 per year, depending on the applicable slab, offering direct relief without complicating compliance.
2. No Major Change in Income Tax Slabs, But Fine-Tuning Possible
Large-scale restructuring of income tax slabs is considered unlikely. The current slab structure under the new tax regime already provides relief up to ₹12 lakh of taxable income (excluding surcharge and cess benefits).
However, limited fine-tuning, such as widening slab ranges or adjusting marginal rates, may be considered to offset inflation and prevent bracket creep for middle-income earners.
3. Further Push Towards the New Tax Regime
The new tax regime is expected to remain the government’s preferred framework. While the old tax regime may continue, Budget 2026 could introduce procedural nudges, such as making the new regime the default option with clearer comparison tools.
The objective would be to increase adoption without eliminating deductions overnight, especially for taxpayers currently benefiting from housing and insurance-linked exemptions.
4. Rationalisation of Deductions Under the New Tax Regime
Instead of reintroducing multiple exemptions, Budget 2026 may selectively allow deductions for retirement-linked contributions, such as employer-funded pension or NPS components, within defined monetary caps.
Any such move would aim to balance simplicity with long-term savings discipline, without reopening the full exemption framework of the old regime.
5. Higher Deduction Limits for Home Loan Interest
Currently, interest paid on a self-occupied home loan is deductible up to ₹2 lakh per year. Given higher property prices and increased borrowing costs, there is demand to raise this limit to ₹3 lakh or ₹4 lakh.
Such an enhancement could provide meaningful relief to first-time homebuyers and long-term borrowers servicing high-value loans.
6. Increase in Section 80C Overall Limit
The Section 80C deduction limit of ₹1.5 lakh has remained unchanged for several years. Taxpayers and financial planners have long advocated for raising this cap to at least ₹2.5 lakh.
An increased limit would better reflect current education costs, insurance premiums, and retirement contributions, while encouraging structured long-term savings.
7. Enhanced Tax Benefits for Senior Citizens
Senior citizens currently enjoy higher exemption limits on interest income, but rising healthcare and living costs have intensified calls for further relief.
Budget 2026 may consider:
Increasing the interest income exemption threshold
Simplifying return filing and verification for elderly taxpayers
Introducing age-based compliance relaxations
These measures would support financial stability for retirees dependent on fixed-income instruments.
8. Capital Gains Tax Relief and Higher Exemption Thresholds
Under existing provisions, long-term capital gains on listed equity are taxed beyond ₹1 lakh per year. Investors are seeking an increase in this exemption threshold to ₹2 lakh, especially in the context of inflation and increased retail participation.
A calibrated revision could provide relief to small and medium investors without significantly impacting revenue collections.
9. TDS and TCS Rate Rationalisation
Multiple TDS and TCS rates, ranging from 0.1% to 30% across sections, often lead to mismatches and compliance issues.
Budget 2026 is expected to simplify this structure by:
Reducing the number of applicable rates
Aligning similar transaction categories
Minimising reconciliation errors in Form 26AS and AIS
This would ease compliance for both deductors and taxpayers.
10. Foreign Tax Credit Relief at Source Level
Taxpayers earning foreign income currently claim foreign tax credit only at the return-filing stage, leading to cash flow blockages during the year.
There is growing expectation that Budget 2026 may allow foreign tax credit consideration at the TDS stage, at least in specific cases, to reduce liquidity strain for global income earners.
11. Simplified Income Tax Compliance and Faster Refunds
Despite improvements, refund delays and processing mismatches remain a concern. Budget 2026 is expected to focus on:
Faster ITR processing timelines
Quicker refund issuance
More responsive grievance redressal mechanisms
Technology-driven compliance improvements are likely to remain a key policy priority.
12. Greater Certainty in Tax Laws and Dispute Resolution
Beyond numerical relief, taxpayers increasingly seek stability in tax interpretation. Budget 2026 is expected to:
Reduce retrospective disputes
Strengthen appeal and dispute resolution mechanisms
Improve consistency in assessments
Greater certainty lowers litigation, improves voluntary compliance, and builds long-term trust.
Income Tax Slabs: What Taxpayers Should Realistically Expect
A major reshuffle of income tax slabs in Budget 2026 is considered unlikely. Over the last few years, the government has already reworked slab structures, especially under the new tax regime, introducing lower rates and broader income ranges. These changes were designed to simplify taxation and reduce dependence on exemptions.
Instead of dramatic slab changes, Budget 2026 is more likely to focus on incremental relief mechanisms. This could include widening existing slab ranges, improving rebate thresholds, or adjusting deduction limits to offset inflation. For instance, taxpayers earning marginally higher salaries due to annual increments often move into higher slabs without a real increase in purchasing power. Addressing this through deductions or rebates is seen as more fiscally sustainable than revising slab rates themselves.
In short, slab stability ensures predictability for taxpayers and revenue certainty for the government, while relief is expected to come through smarter adjustments rather than headline slab announcements.
Old vs New Tax Regime: Expected Direction in Budget 2026
Budget 2026 is expected to reinforce the coexistence of the old and new tax regimes, rather than force a sudden transition. While the new tax regime is clearly being positioned as the long-term framework, a large section of taxpayers still finds value in the old regime due to housing loans, insurance premiums, education costs, and retirement savings.
The likely direction is simplification rather than elimination. This could include:
Making the new tax regime the default option during return filing
Offering clearer comparisons between the two regimes at the time of filing
Reducing confusion around regime selection and switching rules
Instead of adding back numerous exemptions to the new regime, the government may focus on procedural ease and clarity, allowing taxpayers to make informed choices without complex calculations. The old regime is expected to continue for the foreseeable future, especially for middle-income households that rely heavily on deductions.
Deductions and Exemptions: Areas Under Watch
Deductions remain one of the most closely watched areas in every Union Budget, and Budget 2026 is no exception.
Standard Deduction: Currently set at ₹75,000, there is strong expectation of an increase to around ₹1,00,000. This would directly reduce taxable income for salaried employees without requiring any investment or proof.
Section 80C: The existing limit of ₹1.5 lakh is widely viewed as outdated. With higher education costs, insurance premiums, and retirement contributions, a revision to ₹2–2.5 lakh is often discussed as a more realistic threshold.
Home Loan Interest: The ₹2 lakh deduction limit for interest on self-occupied property has remained unchanged despite rising property prices and higher EMIs. A higher limit could provide meaningful relief to first-time homebuyers and long-term borrowers.
Retirement Savings: There is growing focus on encouraging retirement planning, particularly through structured and regulated instruments. Budget 2026 may explore targeted incentives rather than blanket exemptions.
Senior Citizens: Higher exemptions on interest income, age-based compliance relaxations, and simplified filing procedures are expected to remain a policy focus given rising healthcare and living costs.
Overall, the emphasis is likely to be on updating existing limits rather than introducing entirely new deduction categories.
Capital Gains and Investment-Linked Expectations
Capital gains taxation has become increasingly relevant as more individuals invest in equities, mutual funds, and digital assets. Budget 2026 is expected to balance two competing objectives, maintaining tax revenues while supporting investor confidence.
One key area of discussion is the long-term capital gains exemption threshold, currently set at ₹1 lakh for listed equity. With inflation and higher retail participation, a revision to ₹2 lakh is often cited as a reasonable adjustment. Such a move would primarily benefit small and medium investors rather than large institutional participants.
Additionally, clarity and consistency in capital gains rules, including holding periods and tax rates, are seen as equally important as numerical relief. Predictable rules help investors plan better and reduce disputes during assessments.
TDS Reforms and Compliance Simplification
The complexity of TDS and TCS provisions remains a major compliance pain point for both individuals and businesses. Multiple rates, overlapping sections, and inconsistent applicability often result in mismatches between tax deducted, tax deposited, and credits reflected in AIS or Form 26AS.
Budget 2026 is expected to focus on:
Rationalising TDS rates across similar transaction categories
Reducing unnecessary high-rate deductions in routine cases
Improving real-time credit reflection in tax records
Simplification in this area would significantly reduce the need for rectifications, revised returns, and follow-ups with deductors, improving overall compliance efficiency.
Impact on Salaried Employees, Professionals, and Middle-Class Taxpayers
For salaried employees, higher standard deduction and smoother regime selection could directly improve monthly cash flow.
For professionals and freelancers, rationalised TDS provisions and clearer compliance processes would reduce working capital pressure and administrative effort.
For the middle class, expectations are centred around inflation-adjusted relief, higher deduction limits, housing-related benefits, and predictable tax rules, rather than aggressive tax cuts.
Budget 2026 is likely to address these segments through calibrated changes that improve affordability without significantly expanding the fiscal deficit.
Broader Policy Signals Behind Income Tax Expectations
Income tax reforms in Budget 2026 are expected to align closely with broader economic objectives. Encouraging consumption, supporting household savings, and improving investment confidence are all linked to how disposable income is taxed.
Stability in tax policy signals long-term confidence to investors and businesses, while predictable compliance rules improve voluntary participation in the tax system. Incremental reforms, rather than abrupt changes, are seen as essential to sustaining economic momentum.
What Taxpayers Should Do Before and After Budget 2026
Instead of waiting for last-minute announcements, taxpayers should focus on robust financial planning based on existing laws. Budget-related changes often apply prospectively and may not drastically alter personal tax positions.
Before the Budget:
Review current deductions and exemptions
Evaluate old vs new tax regime suitability
Plan investments based on long-term goals, not expectations
After the Budget:
Reassess tax planning in light of confirmed changes
Avoid rushed investment decisions driven by headlines
Focus on compliance accuracy to prevent future disputes
A measured, informed approach remains far more effective than speculative tax planning around Budget announcements.
Conclusion
The expectations from Union Budget 2026 on income tax reflect a clear shift in taxpayer mindset. Rather than demanding radical tax cuts or dramatic slab overhauls, individuals and businesses are increasingly looking for measured, predictable, and inflation-adjusted relief. Over the past few years, the government has already undertaken structural reforms by introducing the new tax regime, digitising compliance, and strengthening data-driven assessments. Budget 2026 is expected to build on this foundation rather than reset it.
FAQs
1. Will income tax slabs change in Budget 2026?
Major changes to income tax slabs are not widely expected in Budget 2026. The government has already restructured slabs in recent years, especially under the new tax regime. Any changes, if introduced, are likely to be marginal, such as fine-tuning slab ranges or addressing inflation-related bracket creep rather than altering tax rates entirely.
2. Is an increase in standard deduction likely in Budget 2026?
Yes, an increase in the standard deduction is one of the strongest expectations. The current standard deduction of ₹75,000 is widely considered inadequate given rising living costs. Many expect this limit to be increased to around ₹1,00,000, which would provide direct tax relief to salaried taxpayers without adding compliance complexity.
3. Will the old tax regime be discontinued?
The old tax regime is unlikely to be removed in Budget 2026. While the government continues to promote the new tax regime as the long-term framework, the old regime is expected to coexist for the foreseeable future, especially for taxpayers who rely heavily on deductions such as home loan interest, insurance premiums, and education expenses.
4. What changes are expected in the new tax regime?
Rather than reintroducing multiple exemptions, Budget 2026 may focus on making the new tax regime more attractive through procedural ease and selective incentives. This could include limited deductions linked to retirement savings or employer benefits, clearer comparison tools during ITR filing, and making regime selection simpler and more transparent.
5. Will Section 80C deduction limit be increased?
There is a long-standing demand to increase the Section 80C limit from ₹1.5 lakh, as the cap has not been revised for many years despite higher costs of education, insurance, and retirement planning. While no confirmation exists, Budget 2026 may consider revising this limit to better reflect present-day financial needs.
6. Is home loan interest deduction expected to increase?
Currently, the deduction for interest on a self-occupied house property is capped at ₹2 lakh per year. Given higher property prices and rising EMIs, taxpayers expect this limit to be increased. Budget 2026 may revisit this provision to provide meaningful relief to homebuyers, particularly first-time borrowers.
7. What income tax relief is expected for senior citizens?
Senior citizens are likely to remain a focus area. Possible measures include higher exemption limits on interest income, simplified filing and verification processes, and age-based compliance relaxations. These steps would help address the financial and administrative challenges faced by elderly taxpayers.
8. Are any changes expected in capital gains taxation?
Capital gains taxation is under close watch due to increasing retail participation in equity and mutual fund investments. One expectation is a revision in the long-term capital gains exemption threshold, currently set at ₹1 lakh. Any increase would primarily benefit small and medium investors while keeping the overall tax structure intact.
9. Will TDS and TCS rules be simplified in Budget 2026?
Yes, simplification of TDS and TCS provisions is a key expectation. Multiple rates and overlapping sections often cause mismatches and compliance issues. Budget 2026 may rationalise rates, align similar transactions, and improve credit reflection in tax records, reducing the need for rectifications and follow-ups.
10. What changes are expected for taxpayers earning foreign income?
Taxpayers with foreign income currently face cash-flow challenges since foreign tax credit can be claimed only at the return-filing stage. Budget 2026 may explore mechanisms to factor in foreign tax credit at the deduction stage itself, easing liquidity pressure and reducing refund dependency.
11. Will income tax refunds become faster after Budget 2026?
Faster refunds remain a major expectation. Budget 2026 is expected to further improve processing timelines, reduce mismatches, and strengthen grievance redressal systems. Continued investment in technology and automation is likely to play a key role in achieving quicker and more reliable refunds.
12. Should taxpayers wait for Budget 2026 before planning their taxes?
It is generally not advisable to delay tax planning solely in anticipation of Budget announcements. Most changes, if introduced, tend to be incremental and prospective. Taxpayers should continue planning based on existing laws and make adjustments only after confirmed provisions are notified following Budget 2026.
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