Zero tax up to Rs 12 lakh lifts middle-class incomes, keeps revenues buoyant: Economic Survey 2025-26

The Union Budget 2025–26 delivered one of the most consequential changes to India’s personal income tax framework in recent years, granting substantial relief to middle-class taxpayers while preserving the buoyancy of direct tax revenues, according to the Economic Survey 2025–26.

At the core of the reform is a zero personal income tax liability for individuals earning up to Rs 12 lakh, with the effective tax-free threshold rising to Rs 12.75 lakh for salaried taxpayers after accounting for the standard deduction. The new structure was accompanied by revised income-tax slabs, rationalised rates and changes in Tax Deducted at Source (TDS) rules, designed to ease cash-flow pressures and simplify compliance.

Uptick in household consumption

The Economic Survey noted that these measures have helped support household consumption at a time when inflationary pressures have moderated. While growth in direct tax collections appears lower in percentage terms, the Survey attributes this to softer nominal growth rather than weakening compliance. In absolute terms, personal income tax collections grew 6.8% year-on-year, indicating that consumption-led growth and formalisation have offset the revenue impact of the tax relief.

Income Tax overhaul

The Survey places the income tax overhaul within a broader, phased reform strategy. Personal income tax changes, effective from April 2025, followed the corporate tax rate reductions of 2019 and preceded the sweeping GST rationalisation introduced in September 2025. Together, these reforms aim to lower the overall tax burden, reduce compliance costs and enhance transparency across the tax system.

A key institutional development highlighted in the Survey is the enactment of the new Income Tax Act, 2025, which received parliamentary approval in August last year and is scheduled to come into force from assessment year 2026–27. The new law seeks to replace decades of layered amendments with a simpler, more coherent legislative framework, offering greater structural clarity and continuity of tax policy.

New Income Tax Act 2025

According to the Survey, the new Income Tax Act focuses on clearer drafting, reduced cross-referencing and a more logical organisation of provisions. This is expected to lower litigation, improve interpretational certainty and reduce compliance costs for taxpayers, while also easing administrative burdens for the tax authorities. The Survey emphasises that predictability and clarity in tax laws are increasingly important for sustaining voluntary compliance and investor confidence.

The Survey also underlines the role of digitalisation in tax administration, noting that improvements in data analytics, information sharing and online compliance systems are reinforcing the effectiveness of tax reforms. These measures have helped expand the tax base and strengthen enforcement without raising headline tax rates.

Overall, the Economic Survey concludes that the personal income tax relief announced in Budget 2025–26, combined with the new Income Tax Act, represents a decisive shift toward a taxpayer-friendly, growth-supportive and fiscally credible direct tax regime. By easing the tax burden on households while keeping revenues resilient, the reforms are positioned as a key support to domestic demand and medium-term economic stability amid global uncertainty.