Budget 2026: Wider slabs, gratuity taxation, NPS - What’s next for tax after FM’s 2025 reforms 

As Finance Minister Nirmala Sitharaman prepares to present the Union Budget on February 1, 2026, expectations are running high among taxpayers after last year’s sweeping overhaul of personal income tax. Budget 2025 marked one of the most decisive shifts in recent years, delivering broad-based relief to the middle class by raising the tax-free income threshold to Rs 12 lakh and easing pressure on higher earners by extending the 30% tax slab to incomes above Rs 24 lakh. With those changes now settling in, attention has turned to whether the government will build further momentum in Budget 2026.

Tax professionals believe the focus will remain on fine-tuning the new tax regime to boost disposable income and simplify compliance. 

What middle-class taxpayers can expect

CA Parag Jain, Tax Head at 1 Finance, said there is a growing expectation of a higher standard deduction, potentially raised to Rs 1 lakh from the current Rs 75,000. Such a move would further expand effective tax-free income, especially when combined with rebates. Jain added that widening tax slabs—such as extending the 5% bracket beyond the ₹4–8 lakh range—could offer additional relief to middle-income earners. There is also speculation that select benefits like house rent allowance or housing loan interest deductions could find limited entry into the new regime to make it more attractive for salaried taxpayers.

Gratuity taxation

Gratuity taxation is another area where changes are being closely watched. With the New Labour Codes coming into force in 2026, the existing five-year eligibility condition for tax-free gratuity could come under review. Jain said Budget 2026 may introduce a more flexible framework, such as pro-rata exemptions or a reduced service requirement for fixed-term employees. 

Jain added: "Because of recent changes in the New Labour Codes effective in 2026, it can be anticipated that Budget 2026 will relax the tax exemption threshold to 1 year for fixed-term employees or introduce pro-rata exemptions matching labour codes, which were originally 5-year. To enhance retirement planning, it is expected that the overall tax-free cap will be raised to Rs 25 lakh alongside this change is also hoped for. Such reforms would boost gig/contract workforce security without the tax burdens of employers."

NPS and retirement planning

National Pension System (NPS) rules present a similar case of misalignment between regulatory changes and tax treatment. In 2025, the Pension Fund Regulatory and Development Authority allowed subscribers to withdraw up to 80% of their corpus at maturity, up from 60%, while mandating annuity purchase only for the remaining 20% for larger accounts. However, under the Income Tax Act, only 60% of the corpus currently enjoys tax exemption, leaving the additional 20% taxable. 

Jain said: "It is expected that Budget 2026 will amend Section 10(12A) for full tax exemption on the 80% lump sum, aligning rules and boosting NPS adoption. Additionally, we can hope to include higher deduction limits under 80CCD(1B) to Rs 1-1.2 lakh, even in the new regime. These changes would enhance retirement planning amid rising life expectancies."

Old Tax Regime

Despite the government’s clear tilt toward a cleaner, deduction-light framework, the old tax regime continues to matter for certain groups. Senior citizens, in particular, still rely heavily on deductions linked to healthcare, insurance premiums and interest income. As a result, policymakers face the challenge of strengthening the new system without alienating taxpayers who benefit from the older structure.

Capital Gains Tax regime

Investors, meanwhile, are watching closely for any signals on capital gains taxation. Although no major changes were announced in 2025, the sharp hikes in July 2024 remain fresh in market memory. Anand K Rathi, co-founder of MIRA Money, said further increases could dampen investor sentiment and hurt long-term participation. 

Rathi said: "We don't think there will be any big changes to the capital gains tax system in the near future, especially after taxes went up in July 2024. In the past, higher capital gains taxes have made investors less interested and led to lower market returns. If the policy objective is to revive long-term investment appetite and bring back animal spirits in the market, a more effective approach would be to encourage patient capital rather than penalise it. One method to do this might be to keep or even raise taxes on short-term capital gains to stop people from making risky investments." 

He added: "At the same time, long-term capital gains could be tax-free if you hold them for a longer length of time, like two years instead of one. This would encourage investors to stay invested longer, which is how equity creates value over time, and it would also make the market healthy. Selective tax benefits for sovereign and long-term institutional capital might assist bring in reliable flows, but a long-term tax system that is the same for everyone would be much better for investor confidence."

As Budget 2026 approaches, the challenge for the Finance Minister will be to strike a careful balance, extending relief to salaried taxpayers, aligning retirement policies with tax laws, and fostering a stable investment climate, while keeping fiscal discipline firmly in view.