Budget 2026: New Income Tax Slabs and Key Changes to Watch

Introduction to Union Budget 2026

Finance Minister Nirmala Sitharaman is scheduled to present the Union Budget for the financial year 2026-27 on Sunday, February 1, 2026. This will be her ninth consecutive budget presentation. As the date approaches, individual taxpayers, salaried professionals, and the broader market are focused on potential announcements related to income tax. The central point of discussion is whether the government will introduce further changes to the New Tax Regime, offer additional relief to the middle class, or signal the phasing out of the Old Tax Regime.

The Old vs. New Tax Regime Debate

The Indian income tax system currently offers taxpayers a choice between two frameworks: the old regime and the new regime. The old tax regime allows for a wide range of exemptions and deductions, including those under Section 80C for investments, House Rent Allowance (HRA), Leave Travel Allowance (LTA), and interest on home loans. While its slab rates are higher, it remains beneficial for individuals who make significant investments and have expenses that qualify for deductions.

In contrast, the new tax regime, which is now the default option, offers lower tax rates but forgoes most of the popular deductions and exemptions. Its primary appeal is simplicity and a lower tax outgo for those who do not or cannot claim extensive deductions. Taxpayers, especially salaried individuals, can still opt for the old regime when filing their returns if it proves more advantageous for them.

Key Changes from the Previous Budget

To understand the expectations for Budget 2026, it is useful to recall the significant changes introduced in the previous budget. The government made the new tax regime more attractive by increasing the tax rebate under Section 87A. This effectively made income up to ₹12 lakh tax-free for individuals under the new regime. Additionally, a standard deduction of ₹75,000 was introduced for salaried employees and pensioners under the new framework, a notable increase from the ₹50,000 available in the old regime. These measures were aimed at encouraging a gradual shift of taxpayers towards the simplified new system.

Taxpayer Expectations for FY 2026-27

As households grapple with rising costs, expectations for further tax relief are high. A key point of speculation is whether the government will take steps to phase out the old tax regime entirely to streamline the tax system. However, experts note that a significant portion of taxpayers still benefit from the old framework's deduction-led savings.

There are also calls to enhance existing deduction limits. For instance, with medical inflation on the rise, industry leaders have proposed doubling the deduction limit under Section 80D for health insurance premiums. The current limits of ₹25,000 for individuals and ₹50,000 for senior citizens are seen as insufficient. Another area of focus is the potential simplification of capital gains tax, with suggestions for a uniform tax treatment across different financial products to reduce complexity for investors.

A Comparison of Tax Slabs

To provide clarity, here is a summary of the income tax slabs under both regimes as they currently stand.

Old Tax Regime Slabs

New Tax Regime Slabs (FY 2025-26)

Broader Economic Priorities

Beyond personal income tax, the budget is expected to maintain its focus on long-term economic growth through sustained capital expenditure. Economists anticipate another significant allocation for infrastructure sectors like railways, renewable energy, and defence. Job creation is another critical area, with potential incentives for labour-intensive manufacturing and expanded skilling programs.

The government may also refine its Production-Linked Incentive (PLI) schemes to further boost domestic manufacturing, exports, and employment. With India's commitment to its green transition, the budget is likely to include measures supporting renewable energy, green hydrogen, and electric mobility to reduce import dependency.

Market and Industry Outlook

Market participants are approaching the budget with muted expectations, hoping for policy stability and a continued push for reforms. There is a desire for relief in areas like long-term capital gains tax and a plea to avoid hikes in transaction taxes. Jahangir Aziz, Head of Emerging Markets Economic Research at JPMorgan, noted that the government's nominal GDP growth assumption will be a critical factor, predicting a slight easing of the fiscal deficit to around 4.2%.

Industry leaders have also voiced their expectations. Adani Power's Managing Director, Anil Sardana, has called for reforms in the power distribution sector, particularly the privatisation of state-run discoms. Overall, India Inc. is aligned on the need for continued reforms, strong public investment, and measures to improve competitiveness.

Conclusion

The Union Budget 2026-27 is anticipated to be a statement of policy continuity, focusing on long-term growth drivers rather than major populist announcements. For individual taxpayers, the key takeaway will be the government's direction on the income tax framework. While substantial changes to tax slabs are not widely expected, any adjustments aimed at simplification or providing targeted relief will be closely watched. The budget speech will set the economic tone for the upcoming fiscal year, balancing fiscal consolidation with the need to support growth and household incomes.