Budget 2026 focuses on middle-class relief: Tax-free income up to ₹12 lakh continues, new regime gets major push

In the Union Budget 2026, Finance Minister Nirmala Sitharaman retained last year’s income tax relief for middle-class taxpayers while announcing key reforms to simplify returns, ease compliance, and boost the IT and digital ecosystem.

Union Finance Minister Nirmala Sitharaman, while presenting the Union Budget for 2026-27, announced a series of income tax reforms aimed primarily at middle-class taxpayers, with a strong emphasis on simplifying the tax system and encouraging the adoption of the New Tax Regime. While no additional exemption beyond last year’s relief was announced, the government has chosen to continue the tax-free income benefit of up to ₹12.75 lakh, offering stability and predictability to salaried individuals.

The finance minister made it clear that the government’s focus this year is not on expanding exemptions but on making the New Tax Regime more attractive and easier to comply with. In a key change, the zero-tax threshold under the New Tax Regime has been raised to ₹4 lakh. Additionally, due to the rebate available under Section 87A, individuals earning up to ₹12 lakh annually under the New Tax Regime will not have to pay any income tax.

For higher income groups, the highest tax slab remains unchanged, with a 30 per cent tax rate applicable to individuals earning more than ₹24 lakh annually. This move signals continuity in tax policy while fine-tuning the structure to benefit lower and middle-income earners.

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The budget also introduced several compliance-related reforms. Taxpayers will now be allowed to file updated returns even after the completion of reassessment proceedings, provided they pay an additional 10 per cent tax. This is aimed at reducing litigation and encouraging voluntary compliance.

Clear timelines have also been announced for filing income tax returns. Individuals filing ITR-1 and ITR-2 must submit their returns by July 31, while businesses and trusts not requiring audits will have time until August 31.

The IT sector received multiple incentives in this budget. All IT services have now been brought under a single category, with a uniform Safe Harbour Margin of 15.5 per cent. The turnover limit under this provision has been significantly increased from ₹300 crore to ₹2,000 crore, providing major relief to technology companies. Further, foreign cloud service providers setting up data centres in India will enjoy a tax holiday until 2047, strengthening India’s digital infrastructure ambitions.

For non-resident Indians, the budget simplifies property transactions by making it mandatory for buyers to deduct TDS during property purchases, eliminating the need for sellers to obtain a TAN. Cooperative societies also stand to benefit, as dividend income from inter-cooperative transactions is proposed to be exempt under the New Tax Regime.

The total budget size for 2026-27 has been pegged at ₹53.5 lakh crore, with net tax collections estimated at ₹28.7 lakh crore. Overall, the budget reflects the government’s intent to simplify taxation, support digital growth, and provide steady relief to the middle class without disrupting fiscal discipline.