As the Union Budget 2026-27 draws closer, the Economic Survey tabled in Parliament on January 29 provides a strong signal on the government’s thinking around direct taxation. The message for individual taxpayers is clear: the focus is shifting away from increasing tax rates or revising slabs, and firmly towards widening the tax base and improving compliance.
For salaried individuals, professionals, self-employed taxpayers, and investors, this approach suggests greater stability and predictability on the personal income tax front, with fewer disruptive changes in the upcoming Budget.
Direct Taxes Take Centre Stage in Revenue Mobilisation
One of the most significant takeaways from the Economic Survey is the structural rise in the contribution of direct taxes. Direct taxes now account for nearly 59% of total tax revenues, up from around 52% in the pre-pandemic period. This shift has not been driven by higher tax rates, but by:
- Rising formalisation of incomes
- Expansion of the digital economy
- Improved tax administration and compliance mechanisms
For Budget 2026, this trend is critical. Even if overall gross tax revenue growth moderates, the robust performance of direct taxes reduces the need for increasing personal income tax rates, giving the government room to focus on reform rather than revenue extraction.
Personal Income Tax: Growth Through Participation, Not Rate Increases
The strongest growth within direct taxes has come from non-corporate tax collections, largely attributable to personal income tax. According to the Survey, these collections have risen from about 2.4% of GDP in the pre-pandemic years to nearly 3.7% of GDP in FY 2025-26, outpacing overall economic growth. Key drivers behind this expansion include:
- A sharp rise in income tax return filings, from 6.9 crore in FY 2022-23 to 9.2 crore in FY 2025-26
- Increased use of technology and data analytics by the tax department
- Higher levels of voluntary and self-corrective compliance
This data reinforces the likelihood that Budget 2026 will avoid tinkering with tax slabs or rates, instead consolidating gains from a broader and more compliant taxpayer base.
What Individual Taxpayers Can Expect in Budget 2026
Following last year’s significant relief, zero tax liability for income up to ₹12 lakh (₹12.75 lakh for salaried taxpayers), the scope for fresh giveaways is limited. However, experts expect several targeted clean-up and rationalisation measures, including:
- No major changes to personal income tax slabs or rates
- Removal of outdated provisions, such as clubbing of income from assets gifted to a daughter-in-law
- Correction of anomalies in TDS/TCS provisions, particularly for capital gains on property transactions involving non-residents
- Possible increase in the gift tax exemption limit, unchanged at ₹50,000 since 2006
- Expanded scope for filing updated returns
- Fine-tuning of the faceless assessment scheme
- Decriminalisation of minor tax offences
- Simplification and tighter alignment of TDS payment and reporting norms
- Rationalisation of penalties for Schedule FA and FSI defaults, especially where lapses are technical or clerical
Overall, the emphasis is expected to be on system refinement rather than policy reversal.
From Notices to Nudges: The Changing Face of Tax Administration
A recurring theme in the Economic Survey is the government’s growing reliance on behavioural nudges instead of coercive enforcement. Data-driven reminders have shown strong results in improving compliance while keeping litigation at bay. Key examples highlighted in the Survey include:
- Under the Foreign Asset Campaign, nearly 25,000 taxpayers revised returns, with over 61% responding positively, leading to disclosure of foreign assets exceeding ₹29,000 crore and foreign income of over ₹1,000 crore
- Nudges related to Section 80GGC political donation deductions prompted over 91,000 taxpayers to file updated returns, correcting excess claims of nearly ₹2,050 crore and generating additional tax payments of over ₹680 crore
- Targeted nudges for incorrect HRA claims resulted in additional tax collections exceeding ₹119 crore
Budget 2026 is expected to deepen this approach through further investment in analytics, data matching, and digital compliance tools, reinforcing a facilitative rather than punitive tax environment.
Conclusion: Stability Over Surprise in Budget 2026
The Economic Survey strongly indicates that Budget 2026-27 is unlikely to introduce hikes in personal income tax slab rates. Instead, the government appears committed to a strategy centred on:
- Widening the taxpayer base
- Enhancing voluntary compliance
- Simplifying tax provisions
- Building trust through predictable and transparent administration
For individual taxpayers, the outlook is one of continuity, consolidation, and system clean-up, rather than fresh rate increases or abrupt policy shifts. If executed well, these measures could further strengthen confidence in India’s evolving direct tax framework.
Source: Adapted from Economic Times