Faster resolution of litigations, use of AI and more; 6 ways Budget 2026 can transform taxpayer experience

The Union Budget 2026 is set to be presented by the Finance Minister (FM) on February 1, 2026. This budget sits between the bumper budget presented in February 2025 and the upcoming Income Tax Act 2025 which will be implemented from April 1, 2026. This really makes the upcoming budget as a bridge to move from present to the future with enhanced focus on trust, ease of compliance and use of technology.

Last year, the FM rejigged the concessional tax regime to increase the amount of rebate available on income-tax resulting in NIL tax liability for resident individual taxpayers with income up to Rs 12 lakh. For salaried individuals, standard deduction of Rs 75,000 enhanced the relief to those with gross income up to Rs 12.75 lakh.

This has been the theme with the current government in the past few budgets wherein the focus has been to incentivize the concessional tax regime which is simpler from administrative perspective both for the taxpayers and the income-tax department.


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1. Budget can prioritize on administrative improvements

While the focus is likely to remain on the concessional tax regime, one may not expect any big bang changes to the tax slabs and tax rates, as this year, the government is likely to focus more on the transition plan from the existing Income-tax Act, 1961 to Income Tax Act 2025. The budget is expected to prioritize practical implementation and administrative improvements, such as expedited tax refunds and simplified compliance processes, to enhance the taxpayer experience and facilitate a smooth transition to the new law.

2. Transforming digital framework to enhance taxpayers' experience

The government has increased its investment in digital infrastructure and use of technology to extract information from multiple sources related to incomes and investments made by taxpayers. The introduction of Annual Information Statement (AIS) and Taxpayer Information Summary (TIS) few years ago changed the game for information centricity to report income summary from multiple sources under one domain, making it easier for both taxpayers and income-tax department to track and reconcile the reporting in the income-tax return. Since these statements are not always 100% accurate and are marred by data duplication, the government may focus more on transforming the digital framework to enhance taxpayer experience and transparency.

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3. Creating a transparent system using AI to enhance trust in the system

By leveraging AI enabled digital tools, the process can be made more accessible and compliant by pre-filling of tax return forms, reduction of errors and simplification of tax filing and processing. Processing of refund to the taxpayers remains an area of concern with large number of taxpayers still awaiting the processing of their income-tax returns and consequential refunds. The government should devise ways to provide real-time updates on processing and refund tracking to create a transparent system for the taxpayers, which will also enhance the trust in the system.

4. Faster resolution of pending litigations

Tax controversies and pending number of cases at various levels of income-tax department remains high in number with no clear timelines on dispute resolution and closure. Taxpayer friendly reforms are need of the hour to support the government's intent of faster and transparent outcomes, which will instil more confidence in the judicial system for the taxpayers.

5. More clarity on VDA tax framework

The upcoming budget should also address the concerns over taxation of virtual digital assets (VDA), which has emerged as a recognized investment class over the last few years. At present, India taxes gains on transfer of VDA at 30% by allowing deduction of cost of acquisition from the sale price while any other expenses are not eligible to be reduced. Unlike the capital gain transactions, set-off of loss is not allowed in case of VDAs. This is in contrast to the position adopted by some other countries such as the US and UK, which treat transfer of VDAs as capital gain transactions.

6. Allow tax deferment on ESOPs to all employees

Taxation of employee stock options at allotment stage creates immediate cash outflow for the employees without any realisable real gains in their hands. This has been a pain point and a long-standing demand to defer the taxation to the actual point of sale of shares when the employee is able to encash the gains. While tax deferment is available for employees of eligible start-ups, extending the same benefit to employees of all categories of employers will be a much welcome move given the rising trend of share incentives being rolled out by the Indian companies.

As we near the Union Budget 2026, the government's emphasis on trust, compliance, and technology will be crucial in shaping personal taxation's future. The transition to the Income Tax Act 2025 offers a chance to streamline processes and enhance taxpayer experience through digital innovations. Ultimately, this budget must balance revenue needs with taxpayers' realities, paving the way for a progressive and inclusive economic future.

(The article is authored by Shalini Jain, Tax Partner, EY India. Akshay Sharma, Director- Tax, EY India also contributed to the article.)