Move 30% tax slab to Rs 40 lakh income: Four compelling reasons why Budget 2026 should revise 30% tax slab in new income tax regime

In line with the Central Government's vision, the Budget 2026 announcement, set for February 1, is expected to continue to focus on India's roadmap toward Viksit Bharat 2047. From an income tax perspective, the new Income Tax Act, 2025, scheduled to be effective from 1 April, 2026, simplifies language, removes obsolete provisions and consolidates and restructures provisions. While the law itself does not overhaul the individual tax regime, there are always expectations from individual taxpayers before every Budget.

In Budget 2025, the finance minister reaffirmed the government's commitment to ease the tax burden on the middle class, stating: "The middle class provides strength for India's growth… we have periodically reduced their tax burden. This statement reflects a consistent policy approach to empower the middle class, which forms the backbone of India's consumption-driven economy. However, the question remains: Are current tax thresholds aligned with today's economic realities?"

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India operates under a progressive tax regime, offering taxpayers two options:

• Old Regime: The highest tax rate of 30% applies to income above INR 10 lakh, with multiple deductions and exemptions.
• New Regime: Introduced in 2020 to simplify compliance by lowering rates and removing most deductions. Post Budget 2025, the highest slab of 30% applies to income above Rs 24 lakh (increasing it from Rs 15 lakh).

This revision has delivered significant benefits under the new tax regime. For instance, there is no tax payable due to the enhanced rebate for individuals' taxable income (other than special rate income) up to INR 12 lakh per annum and those earning in excess of INR 24 lakh per annum, now save INR 1,14,400 in taxes compared to FY 2024-25 (under new tax regime), boosting take-home pay and underscoring the impact of slab adjustments. Yet, the current threshold of INR 24 lakh for applying the top tax rate appears inadequate for several reasons.

1. Tax slabs in India have not been revised in proportion to inflation over the years. While incomes have grown and living costs have surged, tax thresholds have remained relatively stagnant. Without indexing slabs to inflation, taxpayers experience an unintended increase in their effective tax burden. Countries like the UK address this by automatically adjusting personal allowance annually to maintain fairness. It is recommended to adopt a similar mechanism to ensure tax certainty and prevent erosion of increased income.

2. Urbanization, economic growth, and rising salaries mean that INR 24 lakh is no longer a high-income benchmark, especially in metro cities. Salaried qualified professionals within few years of experience quickly cross the Rs 24 lakh mark, pushing them into the highest bracket prematurely. For many, this rate feels punitive given rising living costs in these cities.

3. Many middle-class taxpayers (being in the "excluded employee" category under the PF laws) are opting out of Provident Fund and may end up with very low retirement savings. As they are also generally not eligible to use any of the Government health insurance schemes, it is critical to enable them by way of higher net earnings to contribute to schemes such as NPS for their living and medical expenses in the post-retirement phase.

4. For comparison, in China, the 30% tax rate applies only when taxable income exceeds CNY 420,000 (approximately Rs 5.5 million), significantly higher than India's current threshold.

Considering inflation, living costs, and income trends, it is recommended that the 30% slab highest tax rate threshold be increased to INR 40 lakhs under the new tax regime. Further, introducing an automatic adjustment mechanism on a year-on-year basis would ensure tax fairness and predictability over time.

Hence, it is recommended that the increase in the income threshold for salaried individuals would align India's individual tax rate framework to global standards and make the tax system simpler, fairer, and growth oriented.

While such a measure may lead to some revenue loss for the government, this can be offset through stronger enforcement of tax provisions and improved compliance in other segments of the economy.

(The article is authored by Alok Agrawal, Partner, Deloitte India)