As the Union Budget 2026 draws closer, India's personal income tax framework appears to be heading toward a decisive transformation. Signals emerging from Budget 2025 indicate a clear policy intent to accelerate the transition toward the New Tax Regime, with further incentives likely to encourage taxpayers to move away from the deduction-heavy Old Tax Regime.
The significant tax relief announced last year has already reshaped taxpayer behaviour, and experts believe Budget 2026 could mark the point where the simplified regime effectively becomes the default option for individuals.
Budget 2025 Changes Continue to Shape Budget 2026 Expectations
In Union Budget 2025, Finance Minister Nirmala Sitharaman raised the basic exemption limit under the New Tax Regime from Rs 3 lakh to Rs 4 lakh. Along with the introduction of a standard deduction of Rs 75,000 for salaried taxpayers and pensioners, this move effectively eliminated income tax for salaried individuals earning up to Rs 12.75 lakh per annum.
These changes delivered immediate relief to the middle class and signalled the government's intent to prioritise simplicity and lower compliance burdens over multiple exemptions and deductions. As a result, taxpayers are now closely watching Budget 2026 for further enhancements to the New Tax Regime.
New Tax Regime Adoption Gains Strong Momentum
Data from the Income Tax Department underscores the growing acceptance of the New Tax Regime. For Assessment Year 2024-25, a total of 7.28 crore income tax returns were filed, out of which 5.27 crore returns, approximately 72% were under the New Tax Regime. Only 2.01 crore taxpayers opted for the Old Tax Regime.
This sharp tilt towards the simplified structure is expected to play a key role in shaping Budget 2026 deliberations, with policymakers increasingly confident that taxpayers are willing to forgo deductions in exchange for lower tax rates and easier compliance.
Old vs New Tax Regime: Where the Savings Lie
Under the revised New Tax Regime introduced in Budget 2025, both salaried individuals and pensioners are eligible for a standard deduction of Rs 75,000. Additionally, the minimum taxable threshold has effectively risen to Rs 12 lakh, while the 30% tax slab now applies only to income exceeding Rs 24 lakh.
According to calculations by BankBazaar, these changes have significantly increased take-home income across a wide range of salary levels. The most pronounced gains are seen among middle-income earners, reinforcing the government's focus on boosting consumption and household savings.
Middle-Income Taxpayers Gain the Most
The revised tax slabs deliver substantial relief to taxpayers earning between Rs 7.5 lakh and Rs 25 lakh annually. At an income level of Rs 7.5 lakh, tax liability under the New Tax Regime (2025) has been reduced to zero, compared to Rs 65,000 under the Old Regime. At Rs 10 lakh and Rs 12 lakh, taxpayers save Rs 52,000 and Rs 83,200, respectively, compared to the previous version of the New Regime.
At Rs 15 lakh, tax payable under the Old Regime stands at Rs 2.73 lakh, while the revised New Regime reduces it to Rs 1.09 lakh, translating into a saving of Rs 36,400 or 25%. Savings rise further at higher income levels, with taxpayers earning Rs 20 lakh saving Rs 93,600 and those earning Rs 25 lakh saving Rs 1.14 lakh.
High-Income Earners See Limited Relative Relief
For incomes above Rs 30 lakh, the absolute tax savings under the New Tax Regime remain largely stable at around Rs 1.14 lakh to Rs 1.24 lakh. However, the percentage benefit declines as income rises. At Rs 50 lakh, the saving falls to about 9%, while at Rs 1 crore, the benefit narrows to under 2%. At ultra-high income levels, the relief becomes largely nominal.
This structure highlights that the New Tax Regime is strategically designed to maximise relative benefits for middle-income taxpayers rather than high earners.
What to Expect from Budget 2026
Tax experts believe Budget 2026 could introduce further rationalisation of slabs or additional rebates to strengthen the appeal of the New Tax Regime. With rising adoption rates and a clear policy preference for simplicity, the Old Tax Regime may increasingly become a secondary option for taxpayers with significant deductions.
As India's tax system continues to evolve, Budget 2026 is expected to reinforce a simplified, transparent, and compliance-friendly framework-placing the middle class firmly at the centre of tax relief efforts.
CAclubindia
