Budget 2026 Income Tax Changes Explained: What Changed, Who Benefits And How

Finance Minister Nirmala Sitharaman presented India's Union Budget 2026-27 in the Lok Sabha on Sunday, February 1, 2026, at 11 am. The theme of this year's Budget was "Yuvashakti", focusing on youth empowerment anchored around three core responsibilities: nation building, economic growth and social justice.

Budget 2026 has brought significant relief for small taxpayers by prioritising simplification over rate changes. A new Income Tax Act will replace the decades old 1961 law from April 1, 2026. While tax slabs remain unchanged, major relief has been announced through TCS, TDS, exemptions, penalties and compliance rules. Here is a detailed breakdown of what has changed, who gains the most and how taxpayers can benefit.

What Is the New Income Tax Act and When Will It Apply?

The New Income Tax Act, 2025 will come into force from April 1, 2026, replacing the existing Income Tax Act of 1961. The government's stated aim is to simplify the tax framework by reducing clauses, lowering litigation and making compliance easier.

Key highlights include redesigned ITR forms such as ITR-1 and ITR-2 to make filing easier for individuals. While the standard filing deadline for these returns remains July 31, taxpayers can now file revised returns up to March 31, instead of the earlier December 31 deadline.

Litigation is expected to reduce as appeal procedures are streamlined. Small taxpayers will find it easier to obtain nil TDS certificates, and companies will be allowed to directly accept Forms 15G and 15H through depositories. The government has clarified that older cases will not be affected by the new Act, as the focus is on promoting the new tax regime and cleaning up compliance systems.

Income Tax Slabs in Budget 2026: New vs Old Regime

Budget 2026 has not altered income tax slabs, continuing the structure announced in Budget 2025. The emphasis remains on making the new tax regime more attractive through lower rates and simplified deductions.

Under the new tax regime, salaried taxpayers get a standard deduction of ₹75,000. A rebate under Section 87A of up to ₹60,000 makes income up to ₹12.75 lakh effectively tax free.

New Tax Regime Slabs
0 to ₹4 lakh: Nil
₹4 lakh to ₹8 lakh: 5 percent
₹8 lakh to ₹12 lakh: 10 percent
₹12 lakh to ₹16 lakh: 15 percent
₹16 lakh to ₹20 lakh: 20 percent
₹20 lakh to ₹24 lakh: 25 percent
Above ₹24 lakh: 30 percent

The old tax regime continues with a standard deduction of ₹50,000 and a rebate of ₹12,500, making income up to ₹5 lakh tax free. Deductions under Section 80C, HRA and home loan interest remain available.

Old Tax Regime Slabs
0 to ₹2.5 lakh: Nil
₹2.5 lakh to ₹5 lakh: 5 percent
₹5 lakh to ₹10 lakh: 20 percent
Above ₹10 lakh: 30 percent

For senior citizens aged 60 to 80 years, the basic exemption limit under the new regime is ₹4 lakh, while under the old regime it is ₹3 lakh. Super senior citizens above 80 years continue to enjoy a ₹5 lakh exemption under the old regime. Despite demands to extend the 30 percent slab to ₹35 lakh, no such change was announced.

Major Reliefs Beyond Tax Slabs

While slabs remain unchanged, Budget 2026 introduces several compliance and relief measures. TCS on foreign education, medical treatment abroad and overseas tour packages has been reduced from 5 percent to 2 percent, without any threshold. The same reduced rate applies under the Liberalised Remittance Scheme.

Amounts received from Motor Accident Claims Tribunals, including interest, have been made fully tax free, and TDS on such payments has been removed. For NRIs selling property in India, TDS will now be PAN based, eliminating the need for a TAN. Manpower supply services have been brought under Section 194C, with TDS rates of 1 to 2 percent, while employee hiring services will now attract a 2 percent TDS instead of 1 percent.

On penalties, small offences such as concealing assets below ₹20 lakh will now attract only monetary fines, with no criminal prosecution. Serious cases may still face imprisonment of up to two years. Immunity from penalties has also been extended to cases of misreporting of income. Additional measures include safe harbour margins for IT services, dividend exemptions for cooperative entities under conditions, a six month disclosure window for foreign assets and a fiscal deficit target of 4.3 percent of GDP.

Who Gets Relief and How Much?

Relief under Budget 2026 is targeted largely at youth, salaried employees, students, NRIs and small taxpayers, with the new regime offering maximum benefits.

For salaried middle class taxpayers, higher standard deductions and simpler return forms reduce tax burdens. For example, a person earning ₹10 lakh annually under the new regime will have a taxable income of ₹9.25 lakh after deduction. Tax liability works out to ₹32,500, with further savings possible through rebates. Compared to the old regime, this results in annual savings of ₹5,000 to ₹10,000.

Students and young professionals benefit from reduced TCS. A ₹20 lakh remittance for education abroad will now attract ₹40,000 TCS instead of ₹1 lakh, saving ₹60,000. Overseas tour packages also become cheaper, with families saving ₹20,000 to ₹30,000 per trip.

NRIs selling property worth ₹50 lakh will no longer need to register for TAN, reducing administrative costs by ₹5,000 to ₹10,000. Small taxpayers and senior citizens benefit from easier nil TDS certificates and simplified Form 15G and 15H processing. For instance, a freelancer earning ₹4 lakh can avoid a ₹20,000 TDS deduction.

Accident victims gain significantly, as compensation and interest are now fully exempt. A claim of ₹5.5 lakh that earlier attracted tax of ₹1.65 lakh will now be fully tax free. Businesses also benefit from reduced litigation and penalties, with savings on legal costs exceeding ₹50,000 in some cases. Overall, the government estimates that nearly 70 percent of taxpayers under the new regime could see savings of 10 to 20 percent.

What to Expect Next and How to Prepare

Budget 2026 keeps tax rates stable but delivers meaningful relief through TCS and TDS reductions, especially for the middle class and young taxpayers. The new Income Tax Act aims to simplify compliance and encourage global opportunities.

Taxpayers earning below ₹12 lakh may find the new regime more beneficial, while those with higher incomes and deductions should evaluate the old regime. Using the income tax portal's calculator and seeking professional advice is recommended.

These changes will apply from FY 2026-27, corresponding to Assessment Year 2027-28.