New tax law, old worries: Budget 2026 must rationalise TDS, offer higher deductions, inflation relief to middle-class

As the nation begins the countdown to the Union Budget 2026, the mood among the professional community (of CAs, tax attorneys, tax consultants, and advisors) is distinct from earlier years. This is because, for the first time in over six decades, the Finance Minister will not just be amending the old law, but may also propose the first set of legislative tweaks to the newly minted Income Tax Act, 2025, which will come into effect from April 1, 2026.

With the new Act promising a simplified "Tax Year" and a leaner structure, the section numbers the professionals have memorised for decades may change.

New code or not, the taxpayer's economic needs remain the same. The expectations this year are twofold: ensuring that the transition to the new code is smooth, and providing much-needed inflation relief to the middle class.

Based on current economic indicators and the "financialisation of savings" narrative (when people switch from traditional asset classes like gold and real estate to financial products like stocks, bonds, and mutual funds), here are the top eight expectations from the upcoming budget.

1. Raise the Standard Deduction: With inflation persistently eroding real wages in urban centres, the current Standard Deduction available to salaried employees is no longer sufficient. I expect this to be enhanced to ₹1 lakh. This psychological benchmark would not only provide genuine relief but further incentivise the shift to the simplified tax regime under the new Act.

2. Revive savings & investment deduction: For those opting for the investment-linked tax regime, the aggregate deduction limit for Life Insurance, PF, and other savings has been stagnant since 2014. To align with the inflation index of the last decade, this limit arguably deserves a hike to ₹3 Lakh. This is crucial for sustaining the flow of household savings into infrastructure and equity markets.

3. Align health insurance with medical inflation: Medical inflation in India is running at double digits (approximately 14 per cent). The current caps on health insurance premium deductions are woefully inadequate. A revision to ₹50,000 for individuals and ₹1 lakh for senior citizens is a necessity to ensure adequate coverage for Indian families.

4. Boost self-funded retirement plans: To reduce the future burden on state social security, the government must encourage self-funded retirement planning. Increasing the exclusive additional deduction for National Pension System (NPS) contributions from ₹50,000 to ₹1 lakh would be a strategic move in this direction.

5. Raise deduction on home loan interest: With interest rates hovering at elevated levels and property prices soaring, the existing deduction limit on home loan interest has lost its impact. Raising this to ₹3 Lakh would renew the "Housing for All" momentum and support the real estate sector, which is a key driver of the economy.

6. Increase LTCG exemption limit: The equity cult in India has expanded significantly. To reward small investors and account for market growth, the basic annual exemption limit for Long Term Capital Gains (LTCG) on equity should be increased to ₹2 Lakh.

7. Restore real estate indexation: The removal of indexation benefits on real estate in previous amendments was a dampener for long-term investors. Reintroducing indexation principles in the new Act, or at least providing a grandfathering option, is essential to ensure that investors are taxed on real gains, not inflationary ones.

8. Rationalise TDS: The current TDS framework has historically been a labyrinth of varying rates. As we move to the new Act, a comprehensive rationalisation into just two to three standard categories (e.g., standard rates for goods vs. services) is critical. This would drastically reduce litigation and unlock working capital currently stuck in refunds.

The Union Budget 2026 is not just a financial statement; it is the curtain-raiser for the Income Tax Act, 2025. While the government's focus will remain on fiscal consolidation and simplifying the statute, it must not lose sight of the taxpayer's wallet.

A budget that balances the structural elegance of the new Act with tangible relief for the common man will be the perfect start to this new era of taxation. Let us hope the Finance Minister delivers a "slab-friendly" budget to welcome the new Tax Year.
(Subin VR is a practising chartered accountant. Views are personal.)