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 is being implemented from April 01, 2026; which will substantially simplify tax rules. The new Income Tax Law will also see the Tax Year replacing the Assessment year concept and making compliance a lot simpler. Indian taxpayers still do have some key expectations on direct taxes from the upcoming Union Budget on 01-February 2026. Here is a gist of these demands.

• MARGINAL RELIEF FOR THE LOWER INCOME GROUPS

To be fair, not much can be expected on this front. In the 2025 union budget, incomes upto ₹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.

• TIME TO SIMPLIFY AND RATIONALIZE TDS RATES

Today, the tax deduction at source (TDS) happens on all payouts at different rates ranging from 0.1% to 35.0%. That creates unnecessary confusion, spate of litigations, overpayment of taxes impacting working capital etc. 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 could be considered in 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.

• GIVE TAXPAYERS RELIEF 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 not processed nor refunds paid out. That is crores of household cash flows and business working capital blocked in outstanding refunds. It is creating 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.

• RATIONALIZE 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.

• TIME TO TWEAK 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, SEBI turnover tax etc. It is time the government looks 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.

• ENCOURAGE FINANCIAL PLANNING IN NTR ALSO

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. The NTR may not offer as many benefits as the OTR, but the whole idea is to channel their resources into such long-term productive outlays.

• MORE LIBERAL TREATMENT FOR BANK INTEREST

Today, 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. These rates are too low 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, it is time for the government to seriously 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. How the new product is structured remains to be seen. Obviously, the SGB put a huge burden on the government, hence this time it has to be better thought through. But monetization of gold through tax-saving investments is a big opportunity.

Summary With the New Tax Code implementation from April 2026, and substantial tax reliefs in Budget 2025; the scope for further relief is limited. However, the government is likely to still reach out and offer some tax sops to the households. The most important challenge would be to ensure that consumer purchasing power is protected and also enhanced. More importantly, the tax changes need to direct Indian investors towards quality savings and long-term financial planning. That is the agenda!