Budget 2026: How The New Tax Regime Could Change

With the new income tax law coming into force from April 1, 2026, the Union Budget 2026 is expected to make measured but deliberate adjustments to the New Tax Regime. The focus is unlikely to be on redesigning the framework and more on correcting clear structural gaps that have emerged since the regime was made the default option.

The most probable area of change is the slab structure itself. “While lower rates have been effective in principle, the current progression creates sharp perception issues for middle and upper middle-income taxpayers. A smoother rate transition through rationalisation of slabs is a logical next step and would address adoption concerns without reintroducing exemptions. This would be consistent with the government’s stated objective of reducing arbitrage between the old and new regimes,” says Shubham Jain, Director, SVAS Business Advisors.

Second, the complete absence of recognition for long-term social security-oriented savings has proven to be a practical weakness. The Budget 2026 is expected to introduce limited, clearly ring-fenced deductions for retirement and health-related contributions within the New Tax Regime. This would not dilute simplicity but rather align the regime with economic behaviour the government itself seeks to encourage.

Crucially, these changes are expected to be embedded into the new income tax law rather than introduced as transitional concessions. “With the statute taking effect from April 1, 2026, the government has a narrow window to ensure that the default regime is also the preferred one. The Union Budget 2026, therefore, is likely to mark the shift from promotion to consolidation of the New Tax Regime, backed by structural corrections rather than incentives or temporary relief,” informs Jain.

Neeraj Agarwala, Partner, Nangia & Co LLP, points out that currently, the option to choose between the Old Tax Regime and the new concessional tax regime introduced under section 115BAC is not uniform across categories of taxpayers. This difference has become a growing point of concern, particularly for professionals, freelancers, and business owners.

Taxpayers earning salary income are permitted to exercise the choice between the old and new tax regimes every financial year. They may opt for the regime that best suits their income structure, deductions, and exemptions for that particular year and can change the option again in the subsequent year. This annual flexibility allows salaried taxpayers to respond to changes in income levels, investment patterns, or personal circumstances.

“In contrast, taxpayers having income from business or profession face a significantly more restrictive framework. Such taxpayers are allowed to switch from the Old Tax Regime to the New Tax Regime only once. If a taxpayer with business or professional income opts for the New Tax Regime, they are thereafter barred from reverting to the Old Tax Regime in any future year, unless they cease to have business or professional income altogether. This effectively makes the decision irreversible for continuing businesses and professionals,” says Agarwala.

The rationale behind this restriction appears to be administrative simplicity and prevention of frequent regime switching. However, in practice, it creates rigidity for entrepreneurs, freelancers, and self-employed individuals whose incomes are often volatile and may vary significantly from year to year.

This asymmetry between salaried taxpayers and those engaged in business or profession limits informed tax planning and reduces flexibility for a segment that already operates in an uncertain economic environment. As the tax system evolves, taxpayers are increasingly expecting a more fluid and equitable framework that allows business and professional taxpayers the same annual choice available to salaried individuals.