Budget 2026 Explained: Why Tax Slab Tweaks Matter More Than Big Relief

As India heads into Budget 2026 , the economic picture looks steady but sensitive. Growth remains strong by global standards, inflation has cooled from its highs, and government-led capital spending continues to support medium-term momentum. Yet one weak spot persists, private consumption, especially urban and discretionary spending, is yet to fully revive.

From Big Relief to Smart Fine-Tuning

Budget 2025–26 delivered headline-grabbing relief, including zero tax up to ₹12 lakh under the new regime and ₹12.75 lakh for salaried taxpayers after standard deduction. Budget 2026 faces a different task: protecting that demand boost while sticking to a credible fiscal consolidation path.

Income Tax: Now a Macroeconomic Lever

Personal income tax is back in focus, not as a populist move, but as a tool to support growth. The shift to the new tax regime has simplified compliance and reduced complexity. The real question now is whether today’s slabs and thresholds reflect inflation, income trends, and consumption patterns in a fast-formalising economy.

Why Small Tweaks Matter More Than Ever

India’s direct tax system has grown large enough for even modest changes to have macro impact. In FY2024–25, gross direct tax collections touched nearly ₹27 lakh crore, with non-corporate taxes at about ₹13.7 lakh crore. Over 9 crore income tax returns were filed, and the new regime has become the dominant choice, with more than 5.2 crore returns in AY 2024–25.

The Middle Class Holds the Key

The real action lies in the income distribution. In AY 2023–24, around 7.5 crore individuals filed returns. Of these, over 2 crore earned between ₹5.5 lakh and ₹9.5 lakh, while nearly 1 crore reported incomes between ₹10 lakh and ₹20 lakh. This ₹5.5–20 lakh bracket forms the backbone of India’s salaried and professional middle class.

Rising Costs, Shrinking Headroom

This group is under constant pressure, from EMIs and rent to education fees, healthcare inflation, and insurance costs. Crucially, they also have the highest tendency to spend. Any increase in disposable income here is far more likely to flow back into the economy, making tax recalibration especially powerful for demand revival.

The Hidden Problem of Bracket Creep

Tax slabs have not kept pace with inflation. As nominal salaries rise, taxpayers slide into higher brackets without any real gain in purchasing power. This “bracket creep” quietly raises the tax burden and weakens consumption, without any formal policy announcement. Fixing this does not require big tax cuts, just smarter design.

What Global Examples Reveal

Globally, many countries address this issue transparently. The US indexes tax brackets to inflation, while Canada adjusts thresholds annually through a clear formula. These systems prevent inflation from becoming an invisible tax hike. In contrast, the UK’s long freeze on thresholds boosted revenues but hurt household demand and taxpayer sentiment.

A Rules-Based Opportunity for Budget 2026

India doesn’t need to copy global models blindly, but clarity matters. Budget 2026 could shift from one-time relief to rules-based recalibration. Options include periodic indexation of slabs under the new regime or smoothing sharp jumps in marginal tax rates where most taxpayers are concentrated.

Balancing Growth and Fiscal Discipline

Fiscal constraints remain real. With Budget 2025-26 targeting a fiscal deficit of 4.4% of GDP, any major unfunded tax cuts would risk credibility. However, targeted and data-driven adjustments can support consumption without derailing fiscal consolidation.

At its core, the tax slab debate reflects India’s evolving growth strategy. Public investment has carried the economy through global uncertainty. The next phase depends on stronger private consumption. Thoughtful income tax recalibration in Budget 2026 can help unlock that demand, supporting growth today while safeguarding fiscal stability tomorrow.

Disclaimer: The information provided in this article is based on expert inputs and is intended for general informational purposes only.