Budget 2026 income tax expectations
By Kuldip KumarAs the Union Budget approaches, expectations of major tax giveaways appear muted. However, this Budget may assume significance not for dramatic announcements, but for how the Government balances growth, fiscal discipline, and reform amid a challenging economic environment.A Challenging Economic BackdropThe Honourable Finance Minister faces a complex macroeconomic environment. Factors such as a weakening rupee, pressure on exports, the absence of a comprehensive US trade agreement, geopolitical tensions, and continued foreign institutional investor outflows are likely to influence policy decisions. Measures announced in this year’s Budget are therefore expected to align closely with the Government’s broader economic and reform framework.
Accordingly, incentivising businesses particularly export-oriented sectors and accelerating employment generation are likely to receive focused attention in this Budget.Limited Room for Tax ReliefLast year’s Budget delivered meaningful tax relief through revisions in personal income-tax slabs and enhancement of the Section 87A rebate, leaving limited headroom for further concessions.These changes were introduced under the new tax regime, while the old tax regime was left unchanged. This approach was intended to encourage taxpayers still following the old regime to transition to the simpler new tax system.For FY 2023–24, nearly 72% of taxpayers opted for the new tax regime, and this proportion is expected to increase further in the current year. Does this mean the old tax regime could be phased out entirely? Perhaps not immediately, especially since the new tax regime has also been incorporated into the Income Tax Act, 2025. However, given the continued instances of misuse and claims of incorrect deductions under the old regime, it would not be surprising if the Government eventually considers doing away with it altogether.Capital Gains and Market ParticipationIn the 2024 Budget, the Government made significant changes to the capital gains tax regime, including revisions to holding periods and tax rates, with the objective of simplification. While some asset classes benefited, tax rates on listed securities both short-term and long-term and the Securities Transaction Tax (STT), were increased.Given the growing participation of retail investors in Indian capital markets, there is a case for reviewing these measures. While challenging from a revenue perspective, the Government could consider moderating capital gains tax rates on listed securities or enhancing the basic exemption limit for long-term capital gains, currently set at ₹1.25 lakh. Further, permitting set-off of long-term capital losses against short-term capital gains in Budget 2026 would improve tax equity and align treatment of capital assets.Fiscal Discipline Remains an Important ConsiderationThe Government is expected to adhere firmly to its fiscal consolidation path, leaving limited scope for aggressive fiscal expansion. That said, carefully calibrated policy measures particularly those aimed at stimulating consumption and job creation could strengthen growth momentum and improve tax buoyancy. As with most fiscal initiatives, the benefits of such measures are likely to become visible only after a time lag.The Next Phase of Tax SimplificationTax simplification remains an ongoing journey. While significant progress has been achieved through digitisation and pre-filled data, several pain points persist:Clubbing provisions continue to complicate joint ownership of assets between spouses, despite the sound financial logic behind such arrangements. Introducing an option for joint tax filing, as practiced in countries like the United States, could significantly ease compliance.Notional taxation on vacant properties is often perceived as inequitable and warrants reconsideration.TDS and TCS mechanisms, though effective for tracking transactions, frequently result in excessive deductions and cash-flow strain for taxpayers, especially where final tax liability is substantially lower.Pre-filled tax returns could be further expanded, particularly for salaried taxpayers without business income, reducing manual intervention and errors.Administrative ReformsDespite the delegation of appellate powers to Joint Commissioners, a substantial backlog of tax appeals continues to persist. Introducing clearly defined timelines and enhancing accountability would help restore taxpayer confidence. Similarly, the practice of adjusting refunds against disputed demands often for several years requires urgent reform. Refunds granted in favour of taxpayers should be released automatically, without the need for repeated follow-ups or grievances.Trust as the Cornerstone of ComplianceRecent initiatives where tax authorities proactively alert taxpayers to potential mismatches mark a positive shift towards a trust-based compliance framework. The Government has already introduced the Taxpayers’ Charter; effective enforcement of its principles on the ground would benefit both sides in improving compliance for the Government while offering peace of mind to the taxpayers. Take awayWhile Budget 2026 may not be about headline-grabbing tax cuts, it is likely to outline how the Government intends to navigate uncertainty, sustain growth, reinforce fiscal discipline, and deepen structural reforms. In that sense, this Budget may prove to be less about immediate relief and more about building long-term economic resilience.(Kuldip Kumar is Partner, Mainstay Tax Advisors LLP)
