Budget 2026: Will the Middle Class Get Another Tax Break or Is Relief Set to Slow?

When the Union Budget 2025 made income up to Rs 12 lakh effectively tax-free under the new tax regime, it caught the middle class by surprise. With the standard deduction added, salaried individuals earning up to Rs 12.75 lakh walked away without paying a single rupee in income tax. The move didn’t just ease household finances; it reset expectations.

As Budget 2026 approaches, the big question is whether the government will continue this pace of tax relief or take a cautious pause amid fiscal pressures and global economic uncertainty.

A New Income Tax Law on the Horizon

One of the most important developments expected alongside Budget 2026 is the rollout of the proposed Income Tax Act, 2025, which is likely to replace the six-decade-old Income Tax Act of 1961 from April 1, 2026.

The new law is aimed at simplifying the tax system. Instead of navigating a maze of sections, deductions and exemptions, taxpayers could see a cleaner structure with fewer complications and lower headline rates. The idea, according to experts, is to make paying tax easier, more transparent and less intimidating, especially for salaried employees and small taxpayers.

The reform is also being seen as part of the government’s long-term vision under the Viksit Bharat 2047 roadmap, which focuses on widening compliance rather than squeezing existing taxpayers.

Bigger Relief Under the New Tax Regime?

The government has been steadily nudging taxpayers toward the new tax regime, and Budget 2026 may take that push further.

Currently, income up to Rs 4 lakh is exempt under the basic exemption limit. There is growing speculation that this could be raised to Rs 5 lakh or even Rs 6 lakh, making the new regime more attractive to lower- and middle-income earners.

After last year’s rebate move that effectively made Rs 12 lakh tax-free, discussions are now centred on whether slab restructuring could reduce the tax burden for those earning up to Rs 15 lakh. Proposals include wider 5 per cent and 10 per cent slabs, which would leave more money in the hands of consumers and potentially boost spending in a slowing global economy.

HRA Relief and Metro City Expansion

House Rent Allowance (HRA) is another area where expectations are running high. At present, only four cities, Delhi, Mumbai, Kolkata and Chennai, are classified as metros for HRA benefits. Employees in these cities can claim higher exemptions due to higher living costs.

There is growing demand to expand this list to include Bengaluru, Hyderabad and Pune, where housing costs have surged sharply in recent years. Such a move would bring relief to thousands of salaried professionals working in India’s technology and business hubs.

Another major expectation is limited HRA benefits under the new tax regime, where such exemptions are currently not allowed. Tax experts believe even partial HRA relief could encourage more people to shift to the new system.

Will the Old Tax Regime Get Attention?

Despite the government’s focus on the new regime, a large number of taxpayers still prefer the old system because of familiar deductions and exemptions.

Section 80C, which allows deductions of up to Rs 1.5 lakh for savings and investments, has not been revised since 2014. With inflation steadily eroding real incomes, there is growing pressure to raise this limit to Rs 3 lakh.

Similarly, deductions for health insurance under Section 80D, currently capped at Rs 25,000, are seen as inadequate in the face of rising medical costs and insurance premiums. Many experts are calling for this limit to be doubled.

There is also hope for enhanced relief on home loan interest, which remains capped at Rs 2 lakh, as a way to support both homebuyers and the real estate sector.

Standard Deduction and Household Budgets

The standard deduction under the new tax regime stands at Rs 75,000. A strong case is being made to increase it to Rs 1 lakh, especially to protect salaried employees and pensioners from inflation.

Such a move would immediately reduce taxable income and strengthen middle-class purchasing power, something policymakers increasingly view as critical for sustaining economic growth.

A Budget That Will Set the Tone

Budget 2026 is shaping up to be a policy test for the government. On one side are middle-class taxpayers hoping last year’s relief was the start of a trend, not a one-off. On the other hand are fiscal realities, global uncertainties and the need to manage the deficit.

The question being debated in offices, homes and boardrooms alike is simple: Will the finance minister spring another surprise, or will tax relief take a back seat this year?

Whatever the outcome, experts agree on one thing: Budget 2026 will not just be about tax numbers. It is expected to signal the direction of India’s tax policy for the next decade, with simplicity, fairness and wider compliance at its core.

The answer will become clear when the finance minister rises in Parliament to present the Budget.

Also Read: Union Budget To Be Presented on February 1