Union Budget 2026: Income Tax Framework Remains Unchanged
Every year, taxpayers across India eagerly await the Union Budget presentation, with income tax being one of the most closely watched components. Taxpayers keenly look for changes in slabs, tax rates, and other factors that might ease their financial burden. However, following Finance Minister Nirmala Sitharaman's Union Budget 2026 speech, the income tax framework has remained unchanged from the previous Budget.
Finance Minister Nirmala Sitharaman, who presented her ninth consecutive Union Budget, was the architect who introduced the new tax regime six years ago in 2020. Since then, taxpayers have constantly faced a crucial choice: whether to opt for the new tax regime or stay with the old one. This decision has become increasingly complex as each regime offers distinct advantages—the new regime promises lower rates and simpler compliance, while the old regime attracts higher income earners with numerous deductions and exemptions.
New Income Tax Regime: Key Features for FY 2026-27
The new income tax regime was introduced to provide relief to middle-class taxpayers while simplifying the tax system and making filing easier. For the financial year 2026-2027, under the new tax regime, income up to Rs 4 lakh remains completely tax-free. Beyond this threshold, a progressive slab system applies, with rates increasing gradually based on income levels:
- Rs 4 lakh – Rs 8 lakh: 5% tax rate
- Rs 8 lakh – Rs 12 lakh: 10% tax rate
- Rs 12 lakh – Rs 16 lakh: 15% tax rate
- Rs 16 lakh – Rs 20 lakh: 20% tax rate
- Rs 20 lakh – Rs 24 lakh: 25% tax rate
- Above Rs 24 lakh: 30% tax rate
One of the significant highlights of the new regime, introduced in FY 2025-26, is the enhanced rebate. Previously, resident individuals with total income up to Rs 7 lakh paid no tax. Under the revised system effective from FY 2025-26, this rebate limit has been increased, allowing individuals earning up to Rs 12 lakh to be completely tax-free. For salaried taxpayers, this threshold effectively rises to Rs 12.75 lakh, thanks to a standard deduction of Rs 75,000.
Old Income Tax Regime: Continuing Benefits and Higher Rates
The old income tax regime continues to offer a higher number of exemptions and deductions, making it preferable for salaried taxpayers who claim substantial tax benefits during the year. However, the tax rates in the old tax regime are comparatively higher:
- Up to Rs 2,50,000: Nil tax
- From Rs 2,50,001 to Rs 5,00,000: 5% tax rate
- From Rs 5,00,001 to Rs 10,00,000: 20% tax rate
- Above Rs 10,00,000: 30% tax rate
Deductions commonly claimed under the old regime include House Rent Allowance (HRA), Leave Travel Allowance (LTA), Section 80C for investments, medical insurance under Section 80D, additional NPS contribution under Section 80CCD (1B), and interest on housing loans for self-occupied property.
New vs Old Income Tax Regime: Which Is Better for You in FY 2026-27?
Every year, taxpayers face a fundamental question: which tax regime—new or old—will reduce their tax liability? For income levels up to Rs 12 lakh (or Rs 12.75 lakh for salaried taxpayers), opting for the new tax regime means zero tax, making the old regime irrelevant at these income levels. To illustrate, consider an income of Rs 10 lakh with Section 80C exemptions of Rs 1.5 lakh claimed. Under the old regime, the tax burden would be Rs 75,400 including cess, whereas under the new regime, it is zero.
Understanding the thumb rule when deciding between the old and new income tax regimes is crucial. The simplest approach is to calculate the total exemptions and deductions you can avail. Add up your House Rent Allowance or home loan interest, Leave Travel Allowance (LTA), Section 80C benefits, NPS benefit of Rs 50,000, Section 80D for medical insurance, Section 80TTA for bank interest income, and Section 80G for charity. If this total is lower than Rs 8 lakh for an income threshold above Rs 24 lakh, then the new income tax regime is more beneficial, resulting in lower tax outgo. Conversely, if you can claim exemptions and deductions above Rs 8 lakh at income levels above Rs 24 lakh, the old tax regime is the right choice.
For incomes between Rs 12 lakh and Rs 24 lakh, this threshold limit will vary depending on the deductions and exemptions you can avail.
Budget 2026 Highlights for Taxpayers
In Budget 2026, while the finance minister left the core income tax structure untouched, several announcements were made to ease procedures and extend relief to different categories of taxpayers. Addressing compliance concerns, she offered taxpayers additional time to revise their income tax returns. The window for filing revised returns will now remain open until March 31 instead of December 31, with a nominal fee applicable.
Individuals filing ITR-1 and ITR-2 will continue to adhere to the July 31 deadline. In contrast, non-audit business cases and trusts will be allowed to file returns up to August 31. The Budget proposed a full income tax exemption on interest awarded by motor accident claims tribunals. With this change, tax deduction at source on such interest will no longer apply.
Several changes were introduced to tax collection at source. The TCS rate on overseas tour packages will be reduced to 2% from the earlier rates of 5% and 20%, and the requirement of a minimum transaction amount will be removed. TCS on education and medical expenses under the Liberalised Remittance Scheme will be reduced from 5% to 2%. The New Income Tax Act 2025 is effective from April 1, 2026, and simpler tax return forms will be made available soon. However, for the income tax regime itself, there were no new changes.
Evolution of India's Tax Regime Since 2020
Since 2020, India's new tax regime has gradually evolved to become simpler and more generous, especially for middle-income taxpayers, while the old tax regime has remained unchanged. In 2020, Finance Minister Nirmala Sitharaman introduced the new tax regime to reduce complexity and dependence on tax professionals. It offered lower slab rates but removed most deductions. At that time, income up to Rs 2.5 lakh was exempt, the top 30% rate applied only beyond Rs 15 lakh, and Section 87A ensured zero tax up to Rs 5 lakh.
The Union Budget 2023 marked a major shift. The basic exemption limit under the new regime was raised to Rs 3 lakh, and the Section 87A rebate was increased to Rs 7 lakh, making income up to that level tax-free, though the old regime stayed capped at Rs 5 lakh. Standard deduction benefits were introduced, surcharge at income above Rs 5 crore was cut from 37% to 25%, and the new regime became the default option.
In 2024, taxpayers received more relief after the standard deduction under the new regime increased to Rs 75,000 for salaried employees, and the family pension deduction was raised to Rs 25,000, benefiting around four crore taxpayers. The biggest relief arrived in 2025 when income up to Rs 12 lakh (Rs 12.75 lakh for salaried taxpayers after standard deduction) was made effectively tax-free under the new regime. The 30% tax slab threshold was also raised sharply from Rs 15 lakh to Rs 24 lakh.
From 2020 to 2026, the new tax regime has been repeatedly liberalized with higher exemptions and lower effective taxes, while the old regime remains unchanged, offering higher rates but with deductions and exemptions intact. This ongoing evolution highlights the government's focus on simplifying taxation while providing relief to taxpayers across different income brackets.
