Budget 2026 countdown: How last year’s tax relief boosted disposable incomes; should middle class expect more?

As India heads towards Union Budget 2026, the sweeping income tax changes announced last year continue to shape expectations among salaried and middle-class taxpayers. Budget 2025 marked one of the most significant resets of the personal income tax framework in recent years, sharply raising the tax-free income threshold and simplifying compliance under the new tax regime.

Union Finance Minister Nirmala Sitharaman increased the standard deduction and expanded the scope of the Section 87A rebate, effectively ensuring that salaried individuals earning up to Rs 12.75 lakh pay zero income tax. For non-salaried taxpayers, the tax-free limit was raised to Rs 12 lakh. The move was positioned as a direct boost to household disposable income and consumption, with implications that will be fully felt from the filing season beginning April 2026.

Another reform in Budget 2025 was the rationalisation of tax deduction at source (TDS) and tax collection at source (TCS) provisions. Threshold limits for TDS on rent, bank interest and contractor payments were raised, easing compliance pressures on small landlords, senior citizens and micro businesses. The government signalled a shift towards fewer deductions, higher thresholds and a more taxpayer-friendly regime.

Revised New Tax Regime

Under the revised new tax regime, income slabs were also restructured to reduce the marginal tax burden. The updated slabs are: nil tax on income up to Rs 4 lakh; 5% on Rs 4–8 lakh; 10% on Rs 8–12 lakh; 15% on Rs 12–16 lakh; 20% on Rs 16–20 lakh; 25% on Rs 20–24 lakh; and 30% on income above Rs 24 lakh. Combined with the enhanced rebate, this structure ensures zero tax liability for most middle-income earners.

According to the FM’s Budget 2025 announcement, the new slab rates from the next fiscal will be as follows:

Up to Rs 4 lakh - Nil
Rs 4-8 lakh – 5%
Rs 8-12 lakh – 10%
Rs 12-16 lakh – 15%
Rs 16-20 lakh – 20%
Rs 20-24 lakh – 25%
Above Rs 24 lakh – 30%

The expected impact

The impact is best illustrated through a comparison of FY25 and FY26 tax outcomes. Earlier, under the new regime, tax exemption applied only up to Rs 7 lakh. With the revised slabs, a taxpayer earning Rs 12 lakh would otherwise face a tax liability of around Rs 80,000. However, the revised structure reduces this to Rs 60,000, which is then fully offset by the enhanced Section 87A rebate. The net result is zero tax payable.

Section 87A has emerged as the cornerstone of the new regime. The rebate now applies to individuals with taxable income up to Rs 12 lakh, while salaried taxpayers benefiting from the Rs 75,000 standard deduction enjoy tax-free income up to Rs 12.75 lakh. As Budget 2026 approaches, expectations are building that the government may consolidate gains and avoid disruption.

In her Budget 2025 speech, the Finance Minister said: “I am now happy to announce that there will be no Income Tax Payable up to income of 12 lakh rupees. I propose to revise tax rate structures as follows, zero to four lakh rupees nil, 4.8 lakh rupees to five four to eight lakh rupees, 5% eight to 12 lakh rupees, 10% 12 to 16 lakh rupees, 15% 16 to 20 lakh rupees, 20% 20 to 24 lakh rupees, 25% and above 24 lakh rupees, 30 lakh, 30% to taxpayers, to taxpayers up to 12 lakh of normal income, other than special grade incomes, such as capital gains.”

Detailed framework explained

The detailed framework behind this announcement was laid out in the Explanatory Memorandum to Budget 2025. It clarified that from assessment year 2026–27 onwards, resident individual taxpayers opting for the new tax regime under Section 115BAC(1A) will see a significant expansion in rebate eligibility.

Specifically, the income threshold for claiming a rebate under Section 87A has been raised from Rs 7 lakh to Rs 12 lakh. At the same time, the maximum rebate amount has been increased sharply from Rs 25,000 to Rs 60,000. This effectively ensures that individuals earning up to Rs 12 lakh under the new regime face zero income tax liability, subject to conditions.

The memorandum also rationalised the structure of Section 87A by inserting an additional proviso, clarifying that the rebate claimed cannot exceed the actual tax payable under the applicable slab rates of Section 115BAC. This move was aimed at simplifying interpretation and preventing excess rebate claims beyond the computed tax liability.

Importantly, the government reiterated that the Section 87A rebate does not apply to income taxed at special rates. Incomes such as short-term capital gains under Section 111A, long-term capital gains under Section 112, and other special-rate incomes remain excluded from the rebate framework, even if the taxpayer’s overall income falls within the Rs 12 lakh threshold.

The rebate benefit is also restricted to resident individuals. Hindu Undivided Families (HUFs), non-resident Indians (NRIs), companies and super senior citizens are not eligible to claim relief under Section 87A.

Together, these clarifications underline the government’s intent to use targeted rebates—rather than blanket exemptions—to deliver tax relief, while keeping the structure of the new tax regime clean, predictable and easier to administer ahead of the next Budget cycle.