With the Union Budget to be presented on February 1, 2026, expectations around personal income tax changes are building. This time, the focus is not on one-off relief measures, but on whether the tax framework will be updated to reflect current costs of living, healthcare, housing and changing work patterns.
Based on industry representations, ICAI’s pre-Budget memorandum and expert commentary, these are the key areas under watch.
1. Standard deduction
Under the new tax regime, salaried taxpayers currently get a standard deduction of ₹75,000.
Tax professionals say this has not kept pace with inflation, commuting costs, home-office expenses and rising medical bills.
Expectation:
Raise the standard deduction to ₹1 lakh under the new regime. This would provide automatic relief without paperwork and benefit salaried and pensioned taxpayers who do not claim other deductions.
2. Tax slabs between ₹12 lakh and ₹20 lakh
While the new regime simplified rates, it created sharp jumps in tax liability once income crosses ₹12 lakh.
Expectation:
Rework slabs in this income band to reduce steep marginal increases and smooth post-tax income.
3. Section 80C limit
The ₹1.5 lakh cap under Section 80C has remained unchanged for over a decade, even as housing costs, education fees and retirement expenses have risen.
Expectation:
Increase the 80C limit, allow partial benefits under the new regime, and include a broader set of long-term savings instruments.
4. Health insurance deductions (Section 80D)
Current limits are ₹25,000 for non-senior citizens and ₹50,000 for senior citizens.
With medical inflation running well above general CPI, these limits are seen as inadequate.
Expectation:
Raise 80D limits to at least ₹50,000 for all, extend them to the new regime, and allow credits for preventive health check-ups.
5. Home loan interest
The old regime allows a deduction of up to ₹2 lakh on interest for self-occupied houses. The new regime largely removes this benefit.
Expectation:
Allow Section 24(b) deductions under the new regime, at least for self-occupied homes.
6. TDS on fixed deposit interest
TDS is currently triggered on FD interest above ₹40,000 for non-senior citizens.
Expectation:
Raise TDS thresholds significantly or provide higher exemptions to reduce the tax burden on small savers.
7. Capital gains tax
Long-term capital gains on equity are taxed at 12.5% above ₹1.25 lakh, while short-term gains are taxed at 20%.
Expectation:
Increase the LTCG exemption limit, simplify reporting, and reduce disputes around classification and timing.
8. Deductions under the new regime
About 72% of taxpayers now file under the new regime, but most deductions remain available only under the old system.
Expectation:
Allow selective deductions under the new regime for:
- Medical insurance
- Disability care
- Preventive healthcare
- Retirement contributions
9. ICAI’s key recommendations
ICAI’s pre-Budget submission highlights three priorities:
- Lower compliance burden
- Reduced litigation
- Alignment with modern income structures
It has proposed broader deductions under the new regime, higher surcharge thresholds and section-wise rationalisation.
Assessment
The discussion is no longer about choosing between two tax systems. It is about whether the framework reflects how households actually earn, spend and save.
Budget 2026 will indicate whether tax policy is moving from simplification toward practical alignment with household realities.