Budget 2026 income tax expectations 

As we inch closer to the Union Budget, expectations for sweeping tax giveaways are notably subdued. This year, the Budget may not dazzle us with bold announcements, but it holds crucial importance in navigating growth, fiscal discipline, and reform within a challenging economic landscape.

A Challenging Economic Backdrop

The Honourable Finance Minister is presented with a multifaceted macroeconomic environment. A weakening rupee, pressure on exports, the lack of a comprehensive US trade agreement, geopolitical tensions, and ongoing outflows of foreign institutional investment are critical factors that will shape policy decisions. This year’s Budget is expected to closely align with the Government’s overarching economic objectives and reform initiatives.

In this context, targeting support for businesses—especially those in export-oriented sectors—alongside accelerating job creation will likely be of paramount focus in the upcoming Budget.

Limited Room for Tax Relief

Last year’s Budget witnessed a meaningful revision in personal income tax slabs and an enhancement of the Section 87A rebate, reducing the likelihood for further major concessions this time around. These changes were instituted under the new tax regime, while the old tax structure remained unchanged.

This approach aimed to encourage taxpayers still using the old regime to make a shift towards the more streamlined new tax system. For the fiscal year 2023–24, almost 72% of taxpayers chose the new tax regime, a figure expected to grow further in the current year.

Could this indicate a potential phase-out of the old tax framework? Not immediately, especially since the new tax regime is now part of the Income Tax Act, 2025. However, ongoing instances of misuse and wrongful deductions under the old regime may prompt the Government to consider its eventual elimination.

Capital Gains and Market Participation

The 2024 Budget introduced notable changes to the capital gains tax regime, modifying holding periods and tax rates to simplify tax regulations. While these adjustments benefitted some asset classes, tax rates on both short-term and long-term listed securities, along with the Securities Transaction Tax (STT), were on the rise.

Given the increasing involvement of retail investors in Indian markets, it might be worth examining these measures. Although from a revenue standpoint this could be challenging, the Government might contemplate lowering capital gains tax rates on listed securities or increasing the basic exemption limit for long-term capital gains, currently capped at ₹1.25 lakh.

Additionally, allowing the offset of long-term capital losses against short-term capital gains in Budget 2026 could enhance tax equity and better align the treatment of various capital assets.

Fiscal Discipline Remains an Important Consideration

The Government is likely to stick to its fiscal consolidation path, which leaves limited room for aggressive fiscal policies. Nevertheless, measured policy measures—especially those focused on stimulating consumption and creating jobs—could amplify growth momentum and increase tax revenue. Like most fiscal measures, the benefits of such initiatives might take time to manifest.

The Next Phase of Tax Simplification

Tax simplification is an ongoing endeavor. Significant strides have been made through digitization and pre-filled data; however, multiple pain points still exist:

• Clubbing Provisions: These can complicate joint asset ownership between spouses, despite their financial logic. Introducing an option for joint tax filing, similar to practices in countries like the United States, could simplify compliance significantly.
• Notional Taxation on Vacant Properties: Often perceived as inequitable, this measure warrants reevaluation.
• TDS and TCS Mechanisms: While effective for tracking transactions, they frequently lead to excessive deductions that strain cash flow for taxpayers, especially when their final tax liability is significantly lower. Expanding pre-filled tax returns for salaried taxpayers without business income could reduce manual errors and minimize intervention.

Administrative Reforms

Despite delegating appellate powers to Joint Commissioners, a backlog of tax appeals remains. Clear timelines and enhanced accountability will be crucial in restoring taxpayer confidence.

The practice of offsetting refunds against longstanding disputed demands requires urgent reform to prevent delays in granting refunds. Taxpayers should see refunds issued automatically, without the hassle of repeated follow-ups.

Trust as the Cornerstone of Compliance

Recent initiatives, where tax authorities proactively notify taxpayers of potential mismatches, indicate a positive shift towards building a trust-based compliance framework. The Government’s introduction of the Taxpayers’ Charter is a promising step; enforcing its principles effectively could improve compliance for the Government while offering taxpayers peace of mind.

Takeaway

While Budget 2026 may not be characterized by headline-grabbing tax cuts, it is set to outline the Government’s strategy for navigating uncertainty, fostering growth, reinforcing fiscal discipline, and deepening structural reforms. In this light, this Budget might shift focus from immediate relief towards creating long-term economic resilience.

(Kuldip Kumar is Partner, Mainstay Tax Advisors LLP)