Since the New Tax Regime was introduced in Budget 2020, India’s personal income tax landscape has shifted noticeably. The new framework offered lower rates in exchange for fewer exemptions and deductions, and the government has continued to tweak it to suit taxpayers’ needs. Finance Minister Nirmala Sitharaman’s Budget 2025 delivered a significant move — lower income tax rates — and all eyes are now on Budget 2026 to see whether the momentum continues.
Where the New Tax Regime stands today
The New Tax Regime remains an optional route alongside the traditional (old) regime. Its premise is straightforward: a simpler rate structure with limited tax breaks, designed to make filing easier and reduce compliance friction. Since its launch, the regime has been adjusted several times to strike a balance between simplicity and fairness for different income groups.
- Optional choice: Taxpayers can still choose between the new and old regimes each year, which means decisions depend on individual circumstances and available deductions.
- Simplification vs exemptions: The new structure reduced the need to track multiple exemptions, but that also meant many familiar deductions became unavailable under that route.
- Recent rate moves: Budget 2025 reduced personal income tax rates under the new regime, giving immediate relief to many taxpayers and prompting renewed interest in the simplified structure.
What to expect in Budget 2026
Budget 2026 is likely to be framed by two competing priorities: supporting growth and employment while preserving fiscal prudence. Given that context, here are the most plausible directions for changes to the New Tax Regime.
1. Further rate adjustments (but gradual)
Following the 2025 rate cut, any additional rate reductions in 2026 may be modest and targeted. The government is likely to prefer gradual adjustments to avoid sudden revenue shortfalls. Expect proposals focused on middle-income taxpayers, possibly by shifting slab thresholds or offering small cuts to specific brackets.
2. Fine-tuning slab structure
Rather than broad tax cuts, Budget 2026 could adjust slab boundaries to deliver relief to taxpayers hit by inflation or wage growth. Raising the basic exemption limit or widening lower tax slabs would help those on modest incomes without large fiscal cost.
3. Targeted reinstatements or carve-outs
To make the new regime more attractive, the government might reinstate limited benefits — for example, a small standard deduction for salaried employees or targeted reliefs for specific expenses such as health, housing, or retirement savings. These would be carefully designed so they do not reintroduce extensive compliance requirements.
4. Greater alignment with compliance and digital filing
Expect further steps to simplify filing: more pre-filled returns, better integration of employer and financial data, and faster tax processing. Digital-first measures reduce friction for taxpayers and can improve collection efficiency without changing rates.
5. Incentives tied to policy goals
Budget 2026 might also use the tax code to accelerate broader economic priorities. Possible incentives include:
- Tax benefits to encourage green investments, electric vehicles or energy-efficient home upgrades.
- Incentives for startups and manufacturing to spur jobs and investment.
- Measures to formalize more of the economy and bring new taxpayers into the system.
6. Focus on revenue neutrality and fiscal health
Any change to personal tax rates will be assessed against fiscal objectives. Large-scale rate cuts would need offsetting measures — such as improved compliance, rationalization of other exemptions, or temporary measures to protect revenues. The government is likely to emphasise sustainable adjustments over headline-grabbing cuts.
How taxpayers should prepare
Whether or not Budget 2026 brings changes, taxpayers can take practical steps now:
- Review your current choice: Each year, re-evaluate whether the new or old regime suits your situation. Small changes to income or deductions can shift the balance.
- Plan investments strategically: If you rely on deductions available only under the old regime, weigh the long-term benefit of those instruments versus the simplicity of the new rates.
- Watch for announcements: Major tweaks or reinstatements typically come with transition rules — read them carefully to optimise your tax position.
- Keep records up to date: Better documentation speeds filing and reduces the risk of disputes if rules change.
Who stands to benefit most
Any design choices in Budget 2026 will influence different groups differently:
- Salaried middle class: Likely to welcome modest slab tweaks, standard deductions, or lower rates.
- Young professionals and taxpayers with few deductions: Generally benefit from a simpler, lower-rate regime.
- Investors and those claiming multiple deductions: Might continue to prefer the old regime if deductions remain valuable.
Bottom line
Budget 2026 is expected to continue the trend of making the New Tax Regime more user-friendly while balancing the need for fiscal discipline. Look for measured rate adjustments, targeted reliefs, and digital-first compliance measures rather than sweeping, economy-wide tax cuts. For taxpayers, the wise approach is to stay informed, review choices annually, and align tax planning with broader financial goals.