Union Budget 2026: Big Income Tax Changes Likely; What May Change From HRA Benefits To 80C Deductions

As Finance Minister Nirmala Sitharaman prepares to present the Union Budget 2026 in Parliament this February, the focus of millions of taxpayers is firmly fixed on one key issue: income tax relief.

In Budget 2025, the government surprised the middle class by making income up to ₹12 lakh tax-free under the new tax regime, which effectively rose to ₹12.75 lakh after standard deduction. That move reset expectations. Now, the big question ahead of Budget 2026 is whether the pace of tax relief will continue or slow down amid fiscal challenges.

Will the New Income Tax Act 2025 Redefine the System?

One of the most significant reforms on the table is the rollout of the proposed Income Tax Act, 2025, which is expected to replace the decades-old Income Tax Act, 1961, from April 1, 2026. The new law aims to simplify compliance by reducing complexity and moving away from numerous section-based deductions toward a cleaner, lower-rate structure. Experts believe this reform aligns with the government's long-term vision of creating a transparent and efficient tax system as part of the 'Viksit Bharat 2047' roadmap.

New Tax Regime May See Bigger Exemptions and Slab Relief

The government has consistently promoted the new tax regime as the default option, and Budget 2026 could take this further. Currently, income up to ₹4 lakh is exempt under the basic exemption limit. Tax experts suggest this could be raised to ₹5 lakh or even ₹6 lakh to make the regime more attractive.

After last year's move that made ₹12 lakh income tax-free through rebates, there is now speculation that slab restructuring could allow individuals earning up to ₹15 lakh to face minimal or no tax burden. Wider 5 percent and 10 percent slabs are also being discussed to ensure higher disposable income for the middle class and to boost consumption.

HRA Changes and Metro City Expansion on the Cards

House Rent Allowance is another area where taxpayers are expecting relief. Under current rules, only Delhi, Mumbai, Kolkata and Chennai qualify as metro cities for HRA calculation, allowing employees to claim up to 50 percent of basic salary as exemption. Budget 2026 may expand this list to include Bengaluru, Hyderabad and Pune, benefiting salaried professionals in these high-cost cities.

There is also growing demand to introduce limited HRA benefits under the new tax regime, where such exemptions are currently not allowed. Experts argue that including HRA could accelerate the shift towards the new system.

Old Tax Regime May Not Be Ignored After All

While the spotlight remains on the new tax regime, industry bodies and tax professionals believe the government cannot overlook taxpayers who continue to prefer the old system. Section 80C, which allows deductions of up to ₹1.5 lakh, has remained unchanged since 2014. With rising inflation, demands are growing to increase this limit to ₹3 lakh.

Similarly, Section 80D, which covers health insurance premiums, currently offers a deduction of ₹25,000. Given the sharp rise in medical costs and insurance premiums, experts consider an increase to ₹50,000 not just desirable but necessary. Relief on home loan interest, currently capped at ₹2 lakh, may also be enhanced to stimulate the real estate sector.

Standard Deduction and Middle-Class Purchasing Power

The standard deduction under the new tax regime currently stands at ₹75,000. There is strong pressure to raise it to ₹1,00,000 to offset inflation and reduce taxable income for salaried individuals and pensioners. Such a move would directly strengthen the purchasing power of the middle class, which policymakers see as crucial for sustaining economic growth.

Budget 2026 Seen as a Policy Test for the Government

Budget 2026 is widely viewed as a balancing act for the government. On one side are rising expectations from taxpayers seeking continued relief, and on the other is the challenge of managing the fiscal deficit amid global economic uncertainty.

"Will the finance minister once again deliver a surprise by boosting middle-class purchasing power, or will global headwinds force a pause on tax relief?" This question dominates discussions among taxpayers and economists alike.

Experts agree that this Budget will not be just about numbers. It is expected to set the direction for India's tax policy in the coming decade, with simplicity, lower rates and wider compliance at its core. Whether Budget 2026 matches the relief momentum of last year will become clear when the finance minister rises to present the Budget in Parliament.