The new income tax regime has steadily gained popularity among taxpayers due to its simpler structure and lower tax rates. However, experts believe that as household costs rise, particularly for healthcare, housing, and education, the regime offers limited relief beyond ₹12 lakh, reducing its appeal for the middle class.
With Budget 2026-27 approaching, tax experts say targeted, well-designed changes could strengthen the regime’s effectiveness without undermining its simplicity.
Standard Deduction: Small Change, Meaningful Relief
Under the current framework, salaried taxpayers earning up to ₹12 lakh benefit from the enhanced Section 87A rebate and a standard deduction of ₹75,000. However, relief drops sharply once income crosses this threshold.
Experts point out that a salaried individual earning ₹15 lakh would have a taxable income of around ₹14.25 lakh after the standard deduction, resulting in a tax liability of approximately ₹97,500.
If the standard deduction were increased to ₹1.25 lakh, the tax saving would be around ₹7,800. While modest, experts note that such savings could help offset recurring expenses such as health insurance premiums or school fees, easing household cash flow.
Other experts suggest that even a smaller increase, to ₹1 lakh, or a capped health-related deduction could reduce tax liability by ₹4,000 or more in the ₹13–20 lakh income range, where the current regime feels less rewarding.
Reintroducing Limited, Real-World Deductions
Experts broadly agree that any return of deductions should be limited, capped, and focused on unavoidable expenses, rather than reviving complex tax-planning tools. Three areas are seen as priorities:
- Healthcare: A capped deduction of ₹25,000-50,000 for health insurance premiums could reflect rising medical inflation, estimated at 12-14% annually, and encourage wider insurance coverage.
- Housing: Urban households face high housing costs. Experts suggest a simple, flat deduction linked to either HRA or home loan interest, rather than multiple overlapping provisions.
- Retirement savings: A single, unified retirement deduction could promote long-term savings without bringing back the full complexity of Section 80C.
Tax professionals also support limited deductions for PPF contributions, savings bank interest, and health insurance, arguing that these address essential life needs while preserving the regime’s simplicity.
Senior Citizens Need Targeted Relief
The new tax regime is widely seen as less attractive for senior citizens, whose income typically comes from pensions and interest.
Experts point out that the absence of:
- A higher basic exemption, and
- Relief on interest income
makes the regime relatively harsh for retirees.
Suggestions include introducing an age-based basic exemption, a social security deduction, or extending Section 80TTB benefits to the new regime. Increasing the interest-income exemption cap from ₹50,000 to ₹75,000 or ₹1 lakh could significantly improve outcomes for senior citizens.
Encouraging Long-Term Financial Planning Without Complexity
Rather than product-specific deductions, experts recommend outcome-based incentives. A single capped deduction for retirement savings, combined with targeted relief for healthcare, first-home purchases, and retirement, could encourage responsible financial behaviour without complicating compliance.
Embedding such incentives into payroll systems or banking frameworks could further promote disciplined, long-term saving habits and reduce last-minute tax planning.
What Budget 2026-27 Could Achieve
Experts believe the upcoming Budget offers an opportunity to fine-tune the new tax regime by:
- Extending relief beyond ₹12 lakh
- Addressing healthcare, housing, and retirement costs
- Making the regime more inclusive for senior citizens
If executed carefully, these changes could enhance the regime’s appeal while preserving its core promise of simplicity and transparency.
Source: Business Standard