Budget 2026: Experts explain why the new tax regime still needs fixes

Experts argue cost-of-living relief can reduce the sharp tax jump after ₹12 lakh

The new tax regime has steadily become the preferred choice for many taxpayers because of its simplicity and lower rates. However, as incomes rise and expenses such as healthcare, housing and education grow, the regime’s limited relief beyond Rs 12 lakh hardly offers a respite to the middle class. With Budget 2026 approaching, experts say the government can strengthen the regime’s appeal by offering targeted relief while keeping compliance simple.

 

Standard deduction: A small tweak with a large psychological impact

For salaried taxpayers earning between Rs 10 lakh and Rs 15 lakh, the new regime currently provides clear relief up to Rs 12 lakh through the enhanced Section 87A rebate and the standard deduction of Rs 75,000.

 

 

“The new tax regime for FY 2025-26 has delivered clear relief up to Rs 12 lakh,” says Niyati Shah, chartered accountant & vertical head- personal tax at 1 Finance.

 

However, she says the benefit drops sharply once income crosses Rs 12 lakh.

 

To illustrate, Shah explains that a salaried employee earning Rs 15 lakh would have taxable income of about Rs 14.25 lakh after standard deduction, resulting in tax of roughly Rs 97,500.

 

“If Budget 2026 increases the standard deduction to Rs 1.25 lakh, the immediate saving would be around Rs 7,800,” she says. While the amount may not look large, Shah adds, it can directly offset annual health insurance premiums or school-related expenses, improving household cash flow.

 

Vishwanathan Iyer, senior associate professor at Great Lakes Institute of Management Chennai, notes that “for someone earning Rs 15 lakh, a higher standard deduction of Rs 1 lakh or a capped deduction for health insurance can lower tax by about Rs 4,000.”

 

He argues that small, well-targeted deductions can materially reduce tax outgo in the Rs 13–20 lakh segment, where the current regime feels less rewarding.

 

Reintroduce limited deductions that reflect real-life costs

Experts broadly agree that if deductions are reintroduced, they must be limited, capped and focused on unavoidable expenses rather than tax planning. 

Shah highlights three priority areas: Healthcare, housing and retirement. She recommends a capped deduction of Rs 25,000-Rs 50,000 for health insurance premiums, noting that medical inflation is estimated at 12–14 per cent annually. 

 

“A capped deduction for health insurance would strongly encourage coverage and protect households from sudden financial shocks,” she says.

 

Housing is another major expense for urban households. Shah suggests a simplified flat deduction linked to either HRA or home loan interest.

“A single, unified retirement savings deduction would also reinforce long-term saving habits without reviving the entire Section 80C framework,” she adds.

 

Kinjal Bhuta, treasurer at Bombay Chartered Accountants’ Society, also favours limited deductions such as health insurance premiums, PPF investments and savings bank interest. He says these relate to essential life needs and would not undermine the simplicity of the new regime.

 

SR Patnaik, partner and head of taxation at Cyril Amarchand Mangaldas, supports similar measures. He suggests that the government may introduce “enhanced simple deductions” such as higher interest deductions on savings and fixed deposits, and even consider raising the 30 per cent tax slab threshold beyond Rs 15 lakh.

 

Senior citizens need age-sensitive relief

The new regime remains less attractive for senior citizens because it does not account for their income profile.

 

Retirees mainly rely on interest income and pensions, yet the regime offers little relief for these sources.

 

“The absence of a higher basic exemption and relief for interest income makes the regime harsh for retirees,” says Iyer.

 

Ritika Nayyar, partner at Singhania & Co., says the regime removes “interest and health cushioning” that retirees depend on. She suggests introducing a “social security deduction” or an age-related basic exemption, especially for those over 75. Patnaik adds that extending Section 80 TTB to the new regime and increasing the cap from Rs 50,000 to Rs 75,000 or Rs 1 lakh could make a meaningful difference.

 

Nudges for long-term financial planning without complexity

Experts argue that Budget 2026 should shift from product-based deductions to outcome-based incentives. Bhuta says a single capped retirement deduction would promote disciplined savings. 

 

Shah adds that “targeted incentives for retirement, health and first-home purchases” can encourage responsible financial behaviour without complicating compliance. Prof. Iyer emphasises that embedding incentives into payroll or bank reporting would encourage steady habit formation, moving taxpayers away from last-minute tax planning.