The Union Budget 2026-27's income tax changes are the most significant overhaul of the personal taxation landscape since the new tax regime was introduced in FY21. The Finance Minister announced a near-doubling of the tax-free income threshold under the new tax regime from Rs 7 lakh to Rs 12 lakh — achieved through a combination of raising the basic exemption to Rs 4 lakh (from Rs 3 lakh) and a higher rebate under Section 87A that ensures zero tax liability for individuals with total income up to Rs 12 lakh. With the standard deduction for salaried employees increased to Rs 75,000, a salaried individual earning up to Rs 12.75 lakh from salary will have zero tax liability under the new regime — eliminating income tax for a substantial portion of India's formal salaried middle class.
The revised new regime tax slabs represent a meaningful reduction in tax rates across most income levels. The 5% tax band now covers Rs 4-8 lakh (previously Rs 3-6 lakh), the 10% band covers Rs 8-12 lakh, the 15% band covers Rs 12-16 lakh, the 20% band covers Rs 16-20 lakh and the 30% band applies above Rs 20 lakh. By comparison, the old regime (which continues to be available for those who prefer it) has lower tax rates at lower incomes due to the various deductions available, but the government estimates that for approximately 87% of taxpayers, the new regime now offers a better net outcome even after accounting for the loss of deductions under Section 80C, 80D, HRA and home loan interest. The expected migration of taxpayers from old to new regime is projected to reach 95%+ by FY28.
To illustrate the practical impact: a salaried employee earning Rs 15 lakh (including Rs 3 lakh HRA but no home loan or insurance premium investments) would have paid Rs 1,95,000 in tax under the old regime and Rs 1,55,000 under the new regime in FY26. Under the new FY27 regime, the same employee would pay Rs 80,000 — a saving of Rs 75,000 compared to FY27 old regime and Rs 75,000 compared to the FY26 new regime. The saving is even larger for employees who contribute to EPF, NPS and claim HRA, since the old regime's deduction advantage is eroded by the new regime's significantly lower base tax liability at the same income level.
The budget retained the existing surcharge rates on high-income earners — 15% surcharge on incomes above Rs 1 crore and 25% surcharge above Rs 5 crore — meaning that the effective marginal tax rate for the highest earners remains unchanged at approximately 42.7%. The government has maintained this position on the basis that India's top marginal rate, while high, is not internationally extreme and that reducing it further would disproportionately benefit the wealthiest taxpayers at the expense of fiscal resources needed for public goods that benefit all income groups. However, industry bodies including CII and FICCI have recommended reducing the surcharge to 20% above Rs 1 crore to encourage high-earning professionals to remain in India rather than relocating to lower-tax jurisdictions like the UAE or Singapore.
Capital gains taxation was not significantly changed in Budget 2026, with the finance ministry choosing to maintain the LTCG rates (12.5% on equity LTCG above Rs 1 lakh, 20% on debt LTCG with indexation) established in Budget 2024-25 rather than introducing further changes that might disrupt investor confidence. However, several industry stakeholders had requested restoration of the LTCG exemption limit to Rs 2 lakh (from the current Rs 1 lakh) given the 35% increase in market levels since the threshold was set, and this is expected to be taken up in Budget 2027-28 when the government may have more fiscal headroom. The Securities Transaction Tax (STT) rate on futures and options was also maintained unchanged, having been increased in the previous year to moderate excessive speculation in the derivatives segment.
