Budget 2026: Every Taxpayer’s Hopes Are Pinned on Income Tax Slab Relief

Income Tax Slab Relief in India took effect April 1, 2025, when the government reset the new tax regime slabs, raised the basic exemption limit to Rs 4 lakh, and expanded the Rs 60,000 rebate under Section 87A for eligible residents.

As of Tuesday, January 20, 2026, no additional slab changes are confirmed ahead of Union Budget 2026 (February 1, 2026).

For readers tracking tax year 2026 (returns filed in 2027), the key point is this: unless the February 1 budget changes the law, these same “new regime” rates are expected to remain the baseline for income earned during 2026–27 as well.

(In India terms, the April 1, 2025 change applies from FY 2025–26 onward.)

What changed: New regime slabs, exemption, and Section 87A rebate (effective April 1, 2025)

Under the new regime, the basic exemption limit increased to Rs 4,00,000 (from Rs 3,00,000). The slab structure also changed, and the headline relief is the Rs 60,000 rebate under Section 87A for total income up to Rs 12,00,000, which can reduce the tax liability to zero (before cess).

The new regime slab rates (introduced from April 1, 2025) are:

• 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%

Health and education cess remains 4% on tax plus surcharge.

Before/After comparison (new regime)

Who is affected (and who is not)

Most resident taxpayers choosing the new regime (or defaulting into it) are affected immediately because the slab rates apply to income earned in FY 2025–26 onward.

Key groups to watch:

• Middle-income salaried individuals: Often see the most direct benefit from the higher exemption and revised slabs.
• Residents with total income up to Rs 12 lakh: May see zero tax liability after the Rs 60,000 Section 87A rebate (subject to how “total income” is computed).
• Higher-income taxpayers: Still face 30% above Rs 24 lakh, plus surcharge if income crosses Rs 50 lakh.
• NRIs (non-residents): The source position to note is that non-residents continue with old regime slabs starting at Rs 2.5 lakh. That means this “new regime default” relief may not automatically apply to many NRIs.

⚠️ Warning: NRI status can change the slab set you fall under. Residence in India is a separate test from U.S. tax residence.

Practical tax impact: examples (illustrative)

These examples use slab math and then note cess. They are simplified and ignore special-rate income and some deduction interactions.

Example 1: Resident with total income of Rs 12,00,000 (new regime)

• Slab tax (before rebate) under the post–April 1, 2025 structure:
• 0–4L: 0
• 4–8L at 5% = Rs 20,000
• 8–12L at 10% = Rs 40,000
• Total = Rs 60,000
• Section 87A rebate up to Rs 60,000 can reduce tax to Rs 0
• Cess of 4% on zero tax = Rs 0

Result: No income tax for many resident taxpayers at Rs 12 lakh total income, under the new regime rules.

Example 2: Resident with total income of Rs 13,00,000 (new regime)

• Tax up to Rs 12L = Rs 60,000 (as above)
• Rs 12–13L taxed at 15% = Rs 15,000
• Total tax before rebate = Rs 75,000
• If income exceeds the rebate limit, the 87A rebate may not apply, so the tax can jump materially.
• Add 4% cess: Rs 3,000
• Total: Rs 78,000 (illustrative)

This “cliff effect” is why taxpayers near the Rs 12 lakh line often plan salary structure and timing carefully.

Tax savings, rebates, and regime choice

The government has projected potential annual savings of up to Rs 1.14 lakh versus the earlier structure for certain income profiles. The real saving depends on what deductions you would have used under the old regime.

Important mechanics:

• The new regime is the default in many cases.
• To claim old-regime deductions and exemptions, you generally must opt out and file accordingly.
• Under the old regime, rebates were described as up to Rs 25,000, with thresholds that were previously discussed around Rs 7 lakh for residents.

If you are an NRI, confirm whether you can even access the “default new regime” benefit set, since many NRIs continue with old regime slab treatment.

Transition rules and “grandfathering” points

• The slab change is effective from April 1, 2025. Income earned before that date is not recomputed under the new slabs.
• For income earned after that date, apply the new slab schedule unless you validly opt for a different regime where allowed.
• Surcharge rules still apply based on the income level. For new regime, surcharge is nil up to Rs 50 lakh and increases in steps above that.

Ahead of Budget 2026: bracket creep and what taxpayers are watching

With inflation pushing salaries up, “bracket creep” is a real concern when slab thresholds stay fixed. As of January 20, 2026, there is no confirmed change, but widely discussed expectations include:

• Raising the 30% slab threshold from Rs 24 lakh to Rs 35 lakh
• Indexing slabs to inflation every 3–5 years
• Increasing the standard deduction (proposals around Rs 1–1.25 lakh, versus current figures often cited at Rs 75,000 in the new regime and Rs 50,000 in the old regime)

These changes also tie into consumption tax collections. Some experts argue income tax relief can lift spending, which can raise GST receipts. It can also affect import consumption patterns, indirectly touching “tariff” discussions for households that buy imported goods.

ICAI proposal: optional joint taxation for married couples (not law yet)

The ICAI has floated an optional “joint taxation” concept. It would:

• Double the exemption to Rs 8 lakh for household income
• Apply household slabs with 30% above Rs 48 lakh
• Raise surcharge thresholds to Rs 1.5 crore for couples (proposal)

This is only a proposal today. It would require a legal change in the Finance Bill.

Special note for immigrants and visa holders filing U.S. returns

If you live in the U.S. and pay Indian tax, the U.S. side often matters as much as India’s slabs:

• U.S. tax residents (green card or substantial presence) generally report worldwide income under IRS rules in Publication 519 at Pub 519.
• Indian income taxes may be creditable on a U.S. return using Form 1116 (Foreign Tax Credit), depending on the income category and limitations.
• You can find forms and instructions at IRS forms and background at international taxpayers.

Coordinating India’s rebate-driven zero-tax outcomes with U.S. tax can be tricky, because U.S. tax does not mirror Section 87A.

📅 Deadline Alert: Union Budget 2026 is scheduled for February 1, 2026. If slabs change, payroll withholding and advance tax planning may need quick updates.

Recommended actions and timeline

1. By February 1, 2026. Track Budget announcements for slab, rebate, and standard deduction changes.
2. Before committing to a regime. Compare your deduction profile under the old regime versus the new regime default.
3. NRIs. Confirm residential status for India and the slab regime that applies to you.
4. U.S. filers with Indian income. Map Indian tax paid to U.S. reporting early, including Form 1116 and residency rules under IRS Publication 519.