As Budget 2026-27 approaches, Indian taxpayers are closely watching Finance Minister Nirmala Sitharaman’s announcements for signs of further income tax simplification. Expectations range from easier compliance and clearer return filing to a possible rationalisation of income tax slabs under the new tax regime, which the government has positioned as the default option.
India currently operates two personal income tax regimes, the old and the new. While the old regime offers fewer slabs with multiple deductions and exemptions, the new regime provides lower tax rates and higher rebate thresholds, but with very limited deductions.
Tax experts say that although the new regime reduces tax outgo for many, its multiple slabs can still be confusing, prompting calls for a GST-style simplification of personal income tax rates.
Lessons From GST Rate Rationalisation
India’s GST structure was recently simplified, reducing multiple slabs into fewer, broader categories. Effective September 2025, GST rates broadly fall into four buckets:
- 0% – Essential items such as basic food, healthcare, and education
- 5% – Daily-use and merit goods
- 18% – Standard rate for most goods and services
- 40% – Luxury and sin goods
The removal of the 12% and 28% slabs significantly reduced complexity. Tax experts believe a similar philosophy could eventually be applied to personal income tax, though not necessarily immediately.
Current Income Tax Slabs Under the New Regime
The new income tax regime, introduced in Budget 2020, has evolved steadily. For FY 2025–26, income up to ₹12 lakh is tax-free due to enhanced rebates, rising to ₹12.75 lakh for salaried taxpayers with standard deduction.
New Tax Regime Slabs (FY 2025–26):
- ₹0 – ₹4 lakh: Nil
- ₹4 – ₹8 lakh: 5%
- ₹8 – ₹12 lakh: 10%
- ₹12 – ₹16 lakh: 15%
- ₹16 – ₹20 lakh: 20%
- ₹20 – ₹24 lakh: 25%
- Above ₹24 lakh: 30%
With seven slabs, the structure is progressive but relatively complex.
Old Tax Regime: Simpler but Deduction-Heavy
By contrast, the old tax regime continues with four slabs:
- Up to ₹2.5 lakh: Nil
- ₹2.5 – ₹5 lakh: 5%
- ₹5 – ₹10 lakh: 20%
- Above ₹10 lakh: 30%
While simpler in structure, it relies heavily on deductions and exemptions, which the government is gradually discouraging.
Should Income Tax Slabs Be Reduced?
Tax experts broadly agree that fewer and broader slabs would make the system easier to understand and improve compliance. However, most believe that Budget 2026-27 may not deliver an immediate overhaul, given fiscal constraints and recent tax relief measures. Experts point out that:
- Recent reforms in GST and the new Income Tax Act, 2025 show a clear policy intent to simplify taxation
- The new Income Tax Act significantly reduced sections and language complexity
- Extending this philosophy to slab rationalisation could reduce disputes and compliance costs
Benefits of Fewer Income Tax Slabs
Experts highlight several advantages of a simplified slab structure:
- Simpler tax filing and better taxpayer understanding
- Lower compliance costs and fewer errors
- Improved voluntary compliance and a broader tax base
- More transparent tax rates, avoiding sharp jumps in liability
- Higher consumption confidence due to predictable take-home income
Global Comparisons and Indian Realities
Some experts cite countries like Denmark and the Netherlands, which operate with fewer personal tax slabs. Others caution that India’s wide income distribution and equity considerations justify a more graduated structure.
Many developed economies, including the US, UK, and Germany, also use multiple slabs, suggesting that simplification must be balanced with fairness and revenue needs.
Will Budget 2026-27 Announce Fewer Tax Slabs?
Experts surveyed by Times of India Online largely agree on one point: a move to 2-3 income tax slabs is unlikely in Budget 2026-27, though gradual rationalisation remains a long-term goal. Key reasons include:
- Significant tax relief already provided in the previous Budget
- Estimated revenue forgone of nearly ₹1 lakh crore from recent changes
- Flat trends in non-corporate tax collections
Most experts expect the government to continue incremental adjustments, tweaking rates and thresholds, rather than making structural changes immediately.
The Road Ahead
Tax professionals believe India may eventually transition to a personal income tax regime with fewer slabs, similar to GST’s evolution. However, the government will need to balance simplicity, equity, and revenue stability, ensuring taxpayers are not worse off during the transition.
For now, Budget 2026-27 is expected to focus more on fine-tuning the new regime rather than a dramatic slab reduction.
Source: Times of India