Union Budget 2026: Income Tax Expectations, Slab Changes, and Key Policy Focus

With the Union Budget 2026 scheduled for 1 February 2026, expectations are soaring high amongst people, businesses, and market watchers. This year’s budget is even more crucial, as it comes after the historic changes to personal income tax in Budget 2025, which simplified tax slabs and increased tax-exemption limits for a large number of taxpayers.

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Before we get into what to expect in Union Budget 2026, here’s a refresher on what changed in Budget 2025. There was a significant restructuring of personal income tax last year that increased the tax-free threshold and simplified the slabs, especially under the new tax regime. Now, under this new regime, income of up to ₹12 lakh has become effectively tax-free, and the standard deduction amount was increased to ₹75,000. Further, there are changes to the treatment of capital gains. The changes were an effort to increase disposable income and reduce compliance complexity for millions of taxpayers.

Now that these reforms are in place, Union Budget 2026 is likely to be more on this foundation rather than revolutionize the system again. But analysts and taxpayers share the belief that more adjustments could help mitigate some of the pain caused by a growing tax burden and strengthen economic growth.

Income Tax Slabs and Rates-Expectations

One of the most talked about aspects ahead of Union Budget 2026 has been changes to the tax slab and rates. There also would be the possibility of a full overhaul, though some experts doubt that such a sweeping process is actually in the works; rather, they say, targeted changes are being considered that could ease the tax burden on middle-income individuals. Some of the ideas being discussed are widening tax slabs and changing the threshold levels for the highest tax bracket. For instance, there are demands to push the 30% slab threshold at a higher income level, say roughly ₹30 lakh or so, and provide some respite to upper-middle-income individuals.

In addition to tweaks on slabs, there’s a reasonably general optimism about an inflation-indexed rise in the standard deduction. One of the expectations is that the standard deduction will be enhanced from ₹75,000 to ₹1 lakh, providing a marginal but welcome increase in outlay for salaried individuals.

Such moves, if implemented, are especially required for those in the income bracket of ₹12 lakh to ₹20 lakh, as marginal rates of tax create a deep cut in disposable incomes.

Old vs New Tax Regime: The Duel Continues

Ever since the new tax system came into existence, a large number of taxpayers have switched to it because of its simplicity and lower tax liability. But, the old tax regime provides few popular deductions to those having structured savings plans, housing loan and retirement planning products. Experts point out that even though the new regime continues to be an automatic option, the government could provide an additional measure of flexibility or incentives to make it look all the more attractive, particularly if narrow deductions, such as on housing loan interest or health insurance, can be claimed under this regime without making things complicated.

That balancing act between simplicity and flexibility has remained the core expectation of the tax system. An intelligent approach could increase compliance and also encourage more taxpayers to bring their finances into the new legitimate framework.

Bigger Deductions and Incentives: More Than Just Rates

Taxpayers are urging policymakers to expand deductions and exemptions. For instance:

Section 80D (health insurance premium): There are demands for increased deduction limits, reflecting rising medical costs, particularly for senior citizens.
Section 80C enhancements: Proposals include raising the deduction limit from ₹1.5 lakh to ₹2.5 lakh under the old regime.
Home loan interest benefits: First-time homebuyers and others are hoping for higher deductions on home loan interest to address affordability challenges

For investors, there is a lot of expectation that the government might review the long-term capital gains (LTCG) tax limits and may also go easy on indexation benefits, especially for debt funds. For many, this represents a positive step forward in the direction of promoting long-term investment into both equity and debt securities.

The Senior citizens and unique groups: Customised relief policies

The Union Budget 2026 hopes are not just limited to the salaried middle class. Senior citizens want higher limits on tax-free income, enhanced deductions for health insurance premiums, and better treatment of interest income from small savings and bank deposits, among other things. Making filing of the income tax return for pensioners and those who mostly have interest-based income easier is also high on their wish list.

Likewise, women taxpayers and other demographic segments are asking for targeted incentives to support workforce participation, savings, and long-term financial security.

Beyond Income Tax: Wider Expectations from Budget-2026

While personal taxation is a focus of individuals, businesses, and markets are also watching for clarity on broader fiscal policy. The outlook for a positive economy is reflected in growth projections with expectations of consistent capital expenditure, encouragement to sectors like infrastructure and renewables, and ease of doing business legislation.

On top of the list of demands from industry bodies is fiscal discipline, but supportive measures for private investment. Investors also want to see long-term wealth creation initiatives that “enhance market confidence”.

Conclusion: Budget 2026, A Balancing Act

With the Union Budget 2026 around the corner, Finance Minister Nirmala Sitharaman is most likely to walk a tight rope between tax relief, fiscal discipline, and simplification of tax structure. Taxpayers look forward to some realignment in slabs, useful deductions, and incentives that are in tune with soaring costs and the economic environment. At the same time, policymakers must continue to move forward with the broader economic objectives of growth, investment, and fiscal responsibility.

Whether Budget 2026 meets these expectations will become clear on 1 February, but the discussions that have preceded this already make for a more mature tax environment that values simplification and taxpayer well-being in tandem with economic policy and growth.

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