Key Highlights of Indian Income Tax Changes in Budget 2026-2027

The Indian government’s Budget for 2026-2027 introduces several important changes to the income tax structure. These updates aim to simplify tax compliance, provide relief to taxpayers, and encourage investments in key sectors. Understanding these changes is crucial for individuals and businesses to plan their finances effectively for the coming fiscal year.

Indian currency notes and calculator representing income tax calculations

Revised Income Tax Slabs and Rates

One of the most significant updates in this budget is the revision of income tax slabs. The government has adjusted the tax brackets to account for inflation and rising living costs. This change benefits middle-income earners by reducing their overall tax burden.

• The basic exemption limit has been increased from ₹3 lakh to ₹3.5 lakh.

• New tax slabs have been introduced with slightly higher thresholds, allowing taxpayers to retain more of their income.

• The highest tax rate remains at 30%, but it now applies to income above ₹15 lakh instead of ₹10 lakh.

  
  

For example, a salaried individual earning ₹12 lakh annually will now fall into a lower tax bracket compared to the previous year, resulting in tax savings.

Changes in Surcharge and Cess

The budget also revises the surcharge rates applicable to high-income individuals and entities. The surcharge on income above ₹5 crore has been increased from 37% to 39%, aiming to enhance tax equity. Additionally, the health and education cess remains at 4% on the total tax payable.

These changes mean that ultra-high-net-worth individuals will contribute a slightly higher share of their income towards taxes, supporting government welfare programs.

New Deductions and Exemptions

To encourage savings and investments, the government has introduced new deductions and enhanced existing ones under Section 80C and related provisions.

• The limit for deduction under Section 80C has been increased from ₹1.5 lakh to ₹2 lakh.

• Investments in specified green energy bonds now qualify for an additional deduction of up to ₹50,000.

• Contributions to the National Pension Scheme (NPS) receive enhanced tax benefits, encouraging long-term retirement planning.

  
  

For instance, a taxpayer investing ₹2 lakh in eligible instruments can now claim a higher deduction, reducing taxable income and overall tax liability.

Simplification of Tax Filing Process

The government has taken steps to make tax filing easier and more transparent. The introduction of pre-filled tax returns with updated income and deduction details aims to reduce errors and save time for taxpayers.

• Pre-filled forms will include salary income, bank interest, and dividend income.

• Taxpayers can now file returns using simplified forms based on their income sources.

• The deadline for filing returns has been extended by one month to accommodate these changes.

  
  

These measures will particularly benefit salaried employees and small taxpayers by making compliance less cumbersome.

Person using laptop for filing income tax returns online

Impact on Senior Citizens and Pensioners

Senior citizens receive special attention in this budget. The government has raised the exemption limit for individuals above 60 years to ₹5 lakh, providing greater relief to retirees.

• Interest income from savings accounts and fixed deposits up to ₹50,000 is now exempt from tax.

• Pension income up to ₹3 lakh annually is exempted.

• Medical insurance premium deductions under Section 80D have been increased for senior citizens.

  
  

These changes aim to ease the financial burden on older adults, helping them manage expenses without heavy tax liabilities.

Corporate Tax and Dividend Distribution Tax Updates

The budget includes updates affecting companies and shareholders.

• The corporate tax rate for domestic companies with turnover up to ₹400 crore remains at 25%.

• Dividend Distribution Tax (DDT) has been abolished, and dividends are now taxed in the hands of shareholders at applicable rates.

• A new provision allows companies to carry forward losses for up to 10 years, up from 8 years previously.

  
  

These changes encourage reinvestment of profits and provide clarity on dividend taxation, benefiting both companies and investors.

Tax Benefits for Startups and MSMEs

To support entrepreneurship and small businesses, the budget extends tax incentives for startups and Micro, Small, and Medium Enterprises (MSMEs).

• Startups continue to enjoy a 3-year tax holiday within their first 10 years of operation.

• MSMEs with turnover up to ₹50 crore can avail of a reduced tax rate of 20%.

• Investments in startups through specified funds qualify for additional tax deductions.

  
  

These measures aim to boost innovation and job creation by easing the tax burden on emerging businesses.

Small business owner reviewing financial documents at eye level

Other Notable Changes

Several other adjustments in the budget impact taxpayers in various ways:

• Capital gains tax on long-term equity investments held for more than 2 years is reduced from 20% to 15%.

• Tax exemption on agricultural income remains unchanged.

• The government introduces stricter penalties for non-compliance and tax evasion to improve revenue collection.

  
  

These updates reflect the government’s focus on fairness and transparency in the tax system.

The Budget 2026-2027 brings meaningful changes to the Indian income tax landscape. By revising tax slabs, enhancing deductions, and simplifying compliance, it offers relief to many taxpayers while ensuring a fair contribution from high earners. Individuals and businesses should review these updates carefully to optimize their tax planning and take advantage of new benefits. Staying informed and proactive will help navigate the fiscal year with confidence and clarity.