What Individuals and Taxpayers Need to Know
The Union Budget for Financial Year 2026-27 is scheduled for Sunday, February 1, 2026, when Finance Minister Nirmala Sitharaman will present India’s fiscal plan in Parliament. The budget gains special significance because it follows major tax reforms that occurred in 2025, and it marks the first complete operational year of the new Income Tax Act, which begins on April 1, 2026.
In this article, we explore the expectations, potential changes, real-world impact, and trends that currently shape income tax policy in India while the country develops its Union Budget 2026.
Why Budget 2026 Matters for Taxpayers
The 2026 budget exists to establish tax stability, which will continue until all current tax law changes have been implemented. Tax experts and taxpayers need new solutions that will make their tax obligations simpler while increasing their spending power and helping them make better investment and savings choices according to the updated tax system.
Last year’s tax system changes established new income tax brackets, which increased tax deductions for middle-class taxpayers in the United States. The budget will concentrate on these two key areas.
- Enhancing existing deductions and rebates
- Addressing compliance challenges
- Supporting investment behavior (capital gains, health insurance, housing)
- Improving clarity and administration for diverse taxpayer categories
Background: What Changed in Budget 2025
To understand expectations for 2026, it’s essential to recall the recent changes in Budget 2025:
New Tax Slabs and Structure
Under the new tax regime announced in 2025:
- Income up to ₹4 lakh: 0% tax
- ₹4 lakh–₹8 lakh: 5%
- ₹8 lakh–₹12 lakh: 10%
- ₹12 lakh–₹16 lakh: 15%
- ₹16 lakh–₹20 lakh: 20%
- ₹20 lakh–₹24 lakh: 25%
- Above ₹24 lakh: 30%
This progressive structure increases the basic exemption limit and smooths out tax progression compared to earlier frameworks.
Standard Deduction and Rebates
Budget 2025 increased the standard deduction for salaried employees and pensioners to ₹75,000. The government established a new tax threshold which enabled taxpayers with incomes up to ₹12 lakh to avoid paying taxes. The tax-free income limit for salaried workers became ₹12.75 lakh after they received their rebate.
Impact for Middle-Income Taxpayers
The reforms delivered substantial relief:
- Taxpayers earning ₹12 lakh a year saw their tax liability go to zero under the new regime.
- Those with incomes between ₹12 lakh and ₹24 lakh benefited from lower marginal rates compared to earlier structures.
- Higher thresholds and rebates have encouraged households to save more and eased consumption pressures.
Core Expectations for Budget 2026
With foundational reforms largely in place, stakeholders are looking for incremental but meaningful tax measures that address current fiscal realities and taxpayer priorities.
1. Increase in Standard Deduction
One prominent expectation is a rise in the standard deduction for salaried taxpayers from ₹75,000 to ₹1,00,000. With inflation affecting living costs, this adjustment would provide additional relief without changing underlying tax slabs.
What this means:
A salaried taxpayer earning ₹15 lakh would see taxable income reduced by an extra ₹25,000 annually, lowering their effective tax bill and improving disposable income.
2. Higher Long-Term Capital Gains Limit
Another key demand is raising the Long Term Capital Gains (LTCG) tax exemption limit from ₹1.25 lakh to ₹2 lakh. This could support long-term equity investment and align India’s tax treatment with global norms that favor long-term savings and investment behaviour.
3. Enhancing 80D and Other Deductions
Tax relief under Section 80D (health insurance premiums) is expected to be expanded to keep pace with rising medical expenses (which have been reported in double-digit inflation ranges). Enhanced home loan interest relief for first-time home buyers is also on the wishlist of many taxpayers.
4. Stability Rather Than Major Overhaul
Given the substantial slate of reforms last year, experts do not expect sweeping changes to the tax slab rates or structural shifts. Instead, the focus is on:
- Stability of policy
- Ease of understanding and compliance
- Rationalised surcharge rates for higher brackets
- Reduced disputes and faster refund processing
This reflects a broader tax policy trend emphasizing certainty and predictability over frequent, large changes.
Real-World Impacts and Examples
Example 1: Salaried Individual Earning ₹12.5 Lakh
Under the revised regime:
- Standard Deduction: ₹75,000
- Rebate under Section 87A: Up to ₹60,000
- Outcome: Total tax liability reduced to ZERO due to rebate, with no tax payable on taxable income up to ₹12 lakh and further deduction bringing it below the threshold.
Example 2: Investor With LTCG Earnings
An investor earning capital gains of ₹2 lakh from equity over a year currently pays no tax up to ₹1.25 lakh and tax on the balance. The proposed increase of the LTCG exemption to ₹2 lakh would enable investors to avoid tax on their gains up to that threshold, which would boost their investment returns while promoting their investment in long-term assets.
Example 3: Freelancers and Gig Workers
With non-standard income sources growing, simplification and clarity around income categorisation, TDS compliance, and digital filing processes are high on the demand list. Budget 2026 could address these through procedural reforms rather than rate changes.
Why These Tax Trends Matter Today
Increasing Disposable Income
Higher standard deductions and rebates mean that taxpayers across income segments retain more of their earnings, boosting consumption and savings. This has implications for household financial planning, lending demand, and overall economic activity.
Simplifying Compliance
The shift toward a streamlined new regime with fewer exemptions but lower rates reflects a broader strategy to make tax compliance easier. Reducing dispute timelines, aligning international filing deadlines, and improving refund processing matters, especially to NRIs and business owners.
Behavioral Impact on Investment
By expanding exemptions like LTCG limits, the tax system can influence investment allocations toward long-term financial assets like equities and mutual funds, which supports capital market development.
Conclusion
The Indian government will focus on budget consolidation, together with taxpayer assistance, as its main priorities for Budget 2026 instead of making substantial changes to existing tax brackets. The following policy changes will occur:
- Increasing standard deduction to ₹1 lakh
- Raising LTCG exemption limits
- Enhancing health and housing-related deductions
- Strengthening compliance mechanisms and tax administration
The adjustments to the system represent precise modifications which seek to achieve two goals, taxpayer relief and fiscal stability. The program provides substantial advantages to employees who receive salary payments, their investors, and freelance workers, while it keeps the essential financial improvements which previous budgetary measures established.
