Budget 2026 Expectations on Income Tax

The direct and indirect tax reforms introduced slab rates and, through GST 2.0, have been a significant factor in increasing consumer spending over the past year. As the Indian economy performs impressively amid global economic tensions, economists, tax professionals, and taxpayers are keenly awaiting the expected tax reforms to be announced in the budget 2026.

The Union Budget 2026 will be presented before Parliament on Sunday, 1 February 2026, at 11:00 AM.

Income Tax Slabs

• Significant slab relaxations were made last year. Therefore, less likely that slabs will be further relaxed this year. 
• However, experts suggest that slab rates should keep pace with inflation; otherwise, as the assessee’s income increases, he would end up paying taxes under higher slab rates, without an increase in real income.

Administrative Reforms

• Tax provisions over the recent years have undergone multiple amendments to ensure simplicity. 
• Also, the assessment procedures have been significantly digitalised to ensure transparency in the proceedings. 
• However, further simplification of tax laws and the establishment of a faster, more efficient dispute-resolution mechanism are expected in the 2026 budget. 
• This will ensure better compliance and faster disposal of assessments.

Foreign Tax Credit at the TDS deduction stage

• Assessees who are liable to pay tax in two countries, for the same income, can claim tax paid in one country as a credit in another country. This is called the Foreign Tax Credit.
• However, as per sections 90, 90A, and 91 of the Income Tax Act, Foreign Tax Credit can be claimed only at the time of payment of self-assessment tax, not at any time before that.
• Creating an option to consider Foreign Tax Credit at the TDS deduction stage is long overdue - a likely amendment in the budget 2026.

Section 24(b) - Interest Deduction under House Property

• Under section 24(b), interest paid on a home loan can be claimed as a deduction of up to Rs 2 lakhs for a self-occupied property. 
• This ceiling limit was last increased almost a decade ago, making it less relevant in real terms.
• Therefore, the maximum ceiling limit for interest deduction for self-occupied house properties under Section 24(b) could be relaxed in the upcoming budget 2026.

ESOP Tax Implications for Employees Relocating Abroad

• It may occur that the resident employees relocate outside India during the vesting period, and the ESOP perquisite becomes taxable at the end of the vesting period.
• In such situations, there is no clear guidance on the taxation of such perquisites. 
• Therefore, grey areas like these are expected to be addressed in the upcoming budget.

Increased Depreciation Benefits for Manufacturing Industries

• Depreciation under section 32 is generic for all entities, with an additional depreciation provided to manufacturing entities in the first year of operation.
• Given the higher incidence of machinery wear and tear and the sector's requirement for further development, more depreciation benefits can be expected this year.
• This tax benefit can boost the indigenous production and help the economy achieve the mission of Aatmanirbhar Bharat.

Tax Benefits in Artificial Intelligence and Robotic Technology

• Since big data analytics, artificial intelligence, and robotics are emergent and booming in the technological landscape, tax benefits can be expected in the 2026 budget to boost these sectors.
• This will increase India’s technological relevance and enhance its standing in the global landscape.

Car Perquisite Valuation for Electric Vehicles

• As per section 17, the valuation of car perquisite provided by the employer is based on engine cubic capacity, which is not relevant to electric vehicles. 
• The inclusion of electric cars in the perquisite valuation is an expected change in the 2026 budget.

Capital Gains Taxation on Contingent Consideration

• This ambiguity is prevalent in merger and acquisition transactions, often involving the transfer of shares.
• A part of the sale consideration is often dependent on future, uncertain events, such as the achievement of revenue (and/or) EBITDA targets over the next few years in these kinds of transactions.
• Therefore, calculating capital gains becomes difficult in this regard.
• The current provisions of the act do not address the taxation of capital gains in these situations. 
• Clarifying tax provisions on this issue is expected to be addressed in the forthcoming budget.

Relaxation of Section 80JJAA

• India is taking various measures to create more jobs in the market. However, there is a greater need for employment generation in the current economic situation.
• Under section 80JJAA, the ceiling limit for the deduction on the new employee’s cost may be increased to address the situation.

Decriminalization of Income Tax Provisions

• In the Union Budget 2025, certain provisions, such as those relating to non-compliance with specific TCS requirements, were decriminalized. 
• As a continuation of this approach, further decriminalization of income-tax provisions is anticipated in the forthcoming budget.

Conclusion

Budget 2026 is considered an important budget, as it is expected to address key developmental and sustainability issues amid rising global tensions.

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3. Budget 2025 Expectations on Income Tax