Budget 2026 Expectations: What Indians want on Direct Taxes?

31 Jan 2026 , 05:04 PM

One of the reasons people are not expecting major changes on the direct tax front is because the new Income Tax Law, which will be implemented from April 01, 2026. The new Income Tax Law will substantially simplify tax rules, starting with a unified term ‘TAX YEAR’ to remove confusion basis ‘previous year’ and ‘assessment year’. Apart from this, there are some expectations that investors, tax-payers, and the republicans are expecting to be perfected or being implemented in the upcoming Union Budget 2026. Here is the gist of expectations:

• MARGINAL RELIEF FOR THE LOWER INCOME GROUPS

In the 2025 union budget, incomes up to ₹12 lakhs had already been made tax-free through a rebate under Section 87A. On top of that, there is standard deduction of ₹75,000 per financial year, which means income up to ₹12.75 lakhs would be virtually tax-free. While not much is expected at an entry level, there are expectations that tax for higher income groups could be reduced by tweaking the income slabs.

Another expectation is that the standard deduction may be increased from the current ₹75,000 in the NTR to ₹1.25 lakhs; to put them at par with equity capital gains tax.

• SIMPLIFYING AND RATIONALIZING TDS RATES

At present, the tax deduction at source (TDS) happens on all payouts at different rates ranging from 0.1% to 35.0%. The range of tax-cuts mounts confusion, spate of litigations, overpayment of taxes impacting working capital and more things. The idea is to simplify the entire process of TDS and also the number of rate slabs so as to keep the funds blockage at the bare minimum. Here are two things that are expected from the budget.

One way would be to not charge TDS, where GST has already been paid on the transaction, since there is already an audit trail. Secondly, the number of slabs can be reduced to just 2 slabs of 5% and 10%, so that the TDS process can be substantially simplified.

• PROVIDING RELIEF TO TAXPAYERS ON REFUND DELAYS

This problem has been pronounced in certain years, and FY26 has been one such year. The tax filing deadline for last fiscal year was delayed to 16-September 2025 but majority of the large tax returns are still awaiting processing or refunds. That is crores of household cash flows and business working capital blocked in outstanding refunds. This has created a problem for taxpayers since advance taxes have to be paid in the current year according to the stipulated timelines. A real-time refund tracking mechanism would be of great help.

One demand has been that the government pay the same rate of interest on delayed refunds as they charge on delayed tax payments. While that looks an interesting suggestion, the cost implications for the government would be too heavy.

• RATIONALIZING TAXATION ON DIVIDENDS AND SHARE BUYBACKS

Taxes on dividends have been a major bone of contention, especially for large investors and promoters. It invariably leads to dual taxation as dividends are a post-tax appropriation and are also taxed in the hands of the investor. The other contentious issue is the new buyback tax; which treats buyback proceeds as other income but the buyback cost as a loss to be written off against gains. This leads to a huge tax drain and is discouraging buybacks.

On dividends, they can be taxed at a concessional rate of 10% instead of the peak rate. Also, it would be better to revert to the practice of levying buyback tax on the company.

• TWEAKING LONG TERM CAPITAL GAINS ON EQUITY

An investor or trader in equity and F&O is first subjected to STT and then subjected to LTCG / STCG / Business Income Tax. This leads to escalation of tax burden, often blunting post-tax returns. In addition, investors also pay other statutory charges like GST, stamp duty, exchange charges, and SEBI turnover tax. In the upcoming Union Budget, investors and traders are expecting the government to look at this rationally, and offers some relief to the investors on LTCG, if not on STCG and STT.

STT has been a frictionless source of income and may not change. However, the budget can look at raising the exempt LTCG threshold from ₹1.25 lakhs to ₹2.00 lakhs; and also make LTCG beyond 5 years fully tax-free to encourage long term financial planning with equities.

• BRING BACK BENEFITS FOR DEBT FUNDS

Debt funds play an important role in asset allocation and risk reduction. However, the unfavourable taxation has pushed people away from debt funds. It is time to bring back some of the benefits and add more. Firstly, it is time to offer capital gains tax benefit on debt funds with more than 65% exposure to equities. They must be treated at par with debt funds holding less than 65% in debt. Also, investors should have the option of choosing between 12.5% tax on long term gains and 20% tax with indexation benefits. Not to forget; an ELSS equivalent DLSS for debt funds would go a long way in enthusing investors.

• ENCOURAGING FINANCIAL PLANNING IN NTR 

The new tax regime has the advantage of simplicity. However, it is not encouraging people to save and invest for the long term. While people may still buy life and health insurance as a necessity, the penetration is clearly falling. Even in the NTR, the tax code must ensure that there is some tax incentive for basic building blocks of financial planning like life insurance, health insurance, mutual fund investments (with lock-in), investment in a home etc.

• MORE LIBERAL TREATMENT FOR BANK INTEREST

Presently, there are broad exemptions available to persons under the age of 60 under Section 80TTA and senior citizens under Section 80TTB. These pertain to exempt interest income on bank deposits. Currently, Section 80TTA has a limit of ₹10,000 per annum, while Section 80TTB has a limit of ₹50,000 per annum. Also, beyond a threshold, there is TDS deduction on interest on bank deposits. This cap is at a minimum and need to change.

One way is to raise the limit under Section 80TTA to ₹25,000 and the exemption limits under Section 80TTB to ₹1 lakh. With TIS and AIS tracking; TDS on bank interest can be scrapped.

• CLARITY ON ULIPS; PARITY FOR ELSS

This is an interesting area. ULIPs at the time of redemption are exempt under Section 10 (10D). However, that is only if the annual premium does not exceed 10% of the sum assured. But that is where the confusion arises. If the premium is more than 10%, how will the tax be imposed; there is no clarity on this front. It is not clear if such excess benefits would be taxed as other income or as capital gains. Parity in taxation between ELSS and ULIPs is another contentious issue.

It would be good if the budget can clarify on the ULIP taxation front. More importantly, ULIPs have a taxation advantage over ULIP in terms of Section 10 (10D). These benefits can be extended to ELSS, while the lock-in for ULIPs can be reduced to 3 years for parity.

• TAX SAVING PRODUCTS FOR GOLD MONETIZATION

With nearly 34,000 tonnes of idle gold in India, investors are expecting the government to look at tax saving products through gold monetization. While, the government has not officially stopped the sovereign gold bonds (SGBs), there have been no fresh issues after February 2024. It is true that SGBs have put a huge burden on the government, hence this time it has to be better thought through, since monetization of gold through tax-saving investments is a big opportunity.