Union Budget 2026: New Tax Regime got wider slabs, higher rebate benefits from April 1; check details

Union Budget 2026-27, to be presented by Finance Minister Nirmala Sitharaman on February 1, will come against the backdrop of a major structural shift in India’s personal income tax system. Over the past few years, the Centre has steadily repositioned the New Tax Regime as the preferred framework for individual taxpayers, and the changes announced in Union Budget 2025 marked the most decisive step in that direction so far.

What is the New Tax Regime?

The New Tax Regime is a simplified income tax system that offers lower slab rates in exchange for giving up most deductions and exemptions available under the old regime. Introduced to reduce complexity and improve compliance, it is now the default option for individuals from FY 2024-25 onwards. Taxpayers who wish to continue with the old regime must actively opt out each year.

Unlike the traditional structure, which incentivised savings through deductions such as Section 80C, HRA and LTA, the new regime focuses on straightforward taxation, fewer slabs, and predictable liabilities. The intent is to make tax planning easier, especially for salaried individuals who do not extensively use exemptions.

How Union Budget 2025 reshaped the New Tax Regime

Union Budget 2025 significantly enhanced the attractiveness of the new system by widening slabs, lowering effective tax incidence, and sharply raising the tax-free income threshold. The most notable change was the restructuring of tax slabs into a broader, six-slab framework with lower incremental rates. Under this revised structure, the highest tax rate of 30 per cent now applies only to income above Rs 24 lakh, compared with Rs 15 lakh earlier.

This change alone reduced the tax burden for middle- and upper-middle-income earners. More importantly, the government used rebates and deductions to deliver meaningful relief at the lower end of the income spectrum.

Higher tax-free income

A key reform in Budget 2025 was the enhancement of the rebate under Section 87A. Under the new regime, resident individuals with taxable income up to Rs12 lakh are eligible for a rebate of up to Rs 60,000, effectively making their tax liability zero. Earlier, the rebate threshold was Rs 7 lakh.

In addition, the standard deduction for salaried individuals and pensioners was increased to Rs 75,000 and retained under the new regime. This means that salaried taxpayers with income up to Rs 12.75 lakh before deduction do not pay any income tax. Previously, an individual earning Rs 12 lakh could face a tax liability of up to Rs 80,000 under the new regime; that burden has now been eliminated.

Revised slab structure

For FY 2025-26, income tax under the new regime is levied as follows: income up to Rs 4 lakh is tax-free; Rs 4–8 lakh is taxed at 5 per cent; Rs 8–12 lakh at 10 per cent; Rs 12–16 lakh at 15 per cent; Rs 16–20 lakh at 20 per cent; Rs 20–24 lakh at 25 per cent; and income above Rs 24 lakh at 30 per cent. This structure smoothens tax progression and reduces sharp jumps in liability.

Under the revised income tax framework, individuals with annual income of up to Rs 12 lakh are exempt from paying any income tax. Earlier, a taxpayer earning Rs 12 lakh could face a tax outgo of as much as Rs 80,000 under the new regime. By raising the effective nil-tax threshold from Rs 7 lakh to Rs 12 lakh, the revised slabs have delivered substantial relief to nearly one crore taxpayers.

Further relief comes through a standard deduction of Rs 75,000 available under the new regime. This effectively increases the tax-free income limit for salaried individuals to Rs 12.75 lakh, ensuring that employees earning up to this level before deduction have no income tax liability.

Annual Income (Rs)    Tax Rate
Rs 0 – Rs 4 lakh    Nil
Rs 4 – Rs 8 lakh    5%
Rs 8 – Rs 12 lakh    10%
Rs 12 – Rs 16 lakh    15%
Rs 16 – Rs 20 lakh    20%
Rs 20 – Rs 24 lakh    25%
Above Rs 24 lakh    30%

Marginal relief and surcharge changes

To prevent sudden spikes in tax liability, marginal relief continues to apply for incomes slightly above Rs 12 lakh. If the additional tax payable exceeds the income above Rs 12 lakh, tax is capped at the excess income amount. Budget 2025 also reduced the maximum surcharge rate under the new regime to 25 per cent for high-income taxpayers, improving post-tax outcomes for top earners.

Limited but targeted deductions

While most popular exemptions remain unavailable, certain deductions continue under the new regime. These include employer contributions to the National Pension System under Section 80CCD(2), contributions to the Agniveer Corpus Fund, and incentives for employers hiring new staff under Section 80JJAA. The narrower deduction set reinforces the regime’s simplicity-first approach.

As Budget 2026 approaches, expectations are that the government will further consolidate the New Tax Regime’s dominance, using incremental tweaks rather than radical changes. With Budget 2025 having fundamentally reshaped its structure, the new regime is now positioned as a low-tax, low-complexity alternative designed to suit a broad base of taxpayers.