With expectations building ahead of the Union Budget 2026-27, ICAI has urged the government to introduce targeted reforms in individual taxation, particularly under the default personal income tax regime.
In its pre-Budget memorandum submitted to the finance ministry, ICAI acknowledged that the new default tax regime has simplified tax slabs and reduced compliance complexity. However, it cautioned that the removal of key deductions has weakened household-level financial protection and created unintended tax pressures for retail taxpayers.
The institute has called for a more balanced approach that retains simplicity while addressing equity and social security concerns for individuals and families.
Health insurance and disability deductions under default regime
A major concern raised by ICAI is the absence of deductions for health insurance premiums and medical expenses under the default tax regime. Currently, taxpayers choosing the new regime are not eligible for deductions on Mediclaim premiums or specified medical expenditure.
ICAI warned that this could discourage health insurance coverage at a time when healthcare inflation and out-of-pocket expenses are rising sharply. It has recommended allowing deductions for medical insurance premiums and certain medical expenses even under the default regime, aligning tax policy with household risk management needs.
The institute has also proposed extending disability-related deductions available under the old tax regime to the default regime. These include tax relief for persons with disabilities and for taxpayers supporting dependent family members with disabilities. ICAI further suggested revising deduction limits upward to reflect inflation and increasing long-term care costs.
Call for higher surcharge threshold
ICAI has flagged surcharge applicability as another area requiring attention. Since taxable income under the default regime is computed without exemptions and deductions, individuals may cross surcharge thresholds more quickly despite no meaningful rise in disposable income.
To prevent such unintended tax escalation, ICAI has proposed increasing the surcharge threshold for individuals and Hindu Undivided Families (HUFs) from Rs 50 lakh to at least Rs 75 lakh. According to the institute, this change would provide relief to middle and upper-middle income taxpayers opting for the simplified regime.
Proposal for optional joint taxation of married couples
In a significant recommendation focused on family taxation, ICAI has suggested introducing an optional joint taxation system for married couples. Under this model, couples could file a single return with proportionately higher exemption limits and tax slabs.
ICAI said such a framework would better reflect the financial realities of single-income households and reduce incentives for income splitting or artificial fragmentation. It noted that similar joint taxation systems are already in place in countries such as the United States.
As the government finalises Budget proposals, ICAI's recommendations highlight growing calls for fine-tuning the default tax regime to ensure simplicity does not come at the cost of equity, social security and household financial resilience.
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