Union Budget 2026: With the announcements of the Union Budget for FY 2026-27 nearing, one question dominates middle-class conversations across the country: will income tax relief finally ease household finances? The government’s preference for the New Tax Regime is now unmistakable, and by simplifying structures and reducing reliance on exemptions, policymakers aim to make compliance easier, according to a Motilal Oswal report.
The report added that instead of sweeping reforms, Budget 2026 is expected to bring measured adjustments.
With the 8th Pay Commission likely to boost salaries and pensions in early 2026, modest slab rationalisation could prevent higher incomes from being eroded by taxes. Possible steps include widening lower tax brackets and increasing the standard deduction to better reflect rising living costs. The most impactful relief may be targeted at middle-income urban earners, where spending has the strongest multiplier effect, the report added.
Revision To The Effective Tax Exemption Limit
Karthik Narayan, Vice President ( Tax & Transition), Stellar Innovations, said, “Budget 2026 is anticipated to be crucial in shaping the future of the Indian taxation system. The single most important change the middle class is hoping to see is a revision to the effective tax exemption limit. The removal of tax slabs, along with the introduction of the Rs 12 lakh benchmark, made Budget 2025 oddly constraining.”
He further added that while middle-class tax-earning families did receive relief, the absence of graduated tax slabs made it difficult to apply taxes proportionally. “As a result, most families received similar levels of relief regardless of income differences. This is why expectations for Budget 2026 are notably different. Instead of maintaining a uniform proportion of tax relative to income, it is now anticipated that families will receive relief in a more equitable manner,” Narayan opined.
‘New Taxation Band’
Narayan stressed that the proposed addition of a new taxation band, a 25 per cent tax on net income between Rs 30 lakh and Rs 50 lakh, is expected to address this imbalance. “This new slab would provide relief to middle-to-upper-income earners while reserving the 30 per cent tax rate for the highest income brackets. Such a structure is expected to increase purchasing power at the upper end of the economic pyramid while ensuring fair and proportional taxation for middle-class families,” he said.
Talking about what he expects on the limits of tax deduction. He said, “Budget 2026 is also expected to raise the limits on tax deductions and introduce calibrated enhancements to existing benefits, encouraging tax savings, investments, and retirement planning. Reforming these identified areas gives Budget 2026 the potential to become one of the most progressive budgets for middle-class tax-earning families.”
‘Tax Deduction limit On Interest Income From Savings Instruments’
Narayan highlighted that experts have encouraged the government to increase the tax deduction limit on interest income from savings instruments such as fixed deposits and to streamline the TDS/TCS mechanism to reduce taxpayer compliance friction while maintaining transparency.
Additionally, there is a growing need for the tax system to ensure that tax slabs and deduction limits are regularly updated to account for inflation, so taxpayers are not pushed into higher tax brackets due to nominal income growth alone, he said.
