Budget 2026 May Raise Tax Free Income Limit to Rs 17 Lakh Under New Regime

Budget 2026: Finance Minister Nirmala Sitharaman is scheduled to present the Union Budget 2026-27 on February 1, and expectations are already soaring high among the middle class. There is a strong buzz that taxpayers, especially those opting for the New Tax Regime, might witness significant relief this year. Industry experts anticipate that the effective tax-free income threshold could be pushed up to approximately Rs 17 lakh through a series of enhanced deductions.

Following last year’s move to exempt income up to Rs 12 lakh from taxation, the upcoming budget is expected to build on those reforms to make the simplified tax regime even more attractive.

How Can Tax-Free Income Reach Rs 17 Lakh?

The calculation that pushes the exemption limit to Rs 17 lakh is based on specific proposals and deductions currently being discussed by industry bodies. While the current structure allows for tax-free income up to roughly Rs 12 lakh (including rebates), the following proposed additions could raise the bar:

• Increased Standard Deduction: Raising the limit from the current Rs 75,000 to Rs 1 lakh.
• Home Loan Interest: Introducing a deduction of up to Rs 2 lakh on home loan interest under the new regime.
• Principal Repayment: Allowing a deduction of Rs 1.5 lakh on the principal amount of home loans.
• Health Insurance (Section 80D): A proposed deduction of Rs 50,000 for medical insurance premiums.

According to industry analysis, if the government accepts these recommendations, the cumulative effect would allow a taxpayer to earn up to Rs 17 lakh without incurring a tax liability.

Key Demands from Industry Experts

Prominent bodies like the Institute of Chartered Accountants of India (ICAI) and FICCI have submitted pre-budget memoranda highlighting gaps in the current new tax regime.

• Medical Insurance Deduction: Experts point out that the absence of deductions for health insurance premiums (mediclaim) is a major drawback of the new regime. With rising medical costs, reintroducing Section 80D benefits is seen as a necessary step.
• Higher Basic Exemption: ICAI has suggested increasing the basic exemption limit from Rs 4 lakh to Rs 8 lakh to provide genuine relief to lower-income groups.
• Surcharge Threshold: There is also a proposal to raise the surcharge threshold from Rs 50 lakh to Rs 75 lakh to prevent middle-income earners from jumping into higher tax brackets prematurely.

Focus on Senior Citizens and Future Laws

Senior citizens have largely stuck to the old tax regime due to the lack of specific benefits for them in the new system. The upcoming budget is expected to address this issue by potentially offering relief related to medical expenses and basic exemption limits for the elderly.

It is worth noting that the new Income Tax Act 2025 will come into force on April 1, 2026, replacing the decades-old 1961 Act. This shift aims to streamline tax laws, and the popularity of the new regime is evident, with nearly 72% of returns (52.7 million) filed under it in the last assessment year.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. Please consult with a tax expert before making financial decisions.