Union Budget 2026: Government May Boost New Tax Regime Appeal With Higher Standard Deduction, More Benefits

As the Union Budget 2026 approaches, expectations are rising that the government may announce several measures to make the new income tax regime more attractive for individual taxpayers. Introduced by Finance Minister Nirmala Sitharaman in the Union Budget 2020, the new tax regime was designed to simplify income tax by offering lower slab rates in exchange for fewer exemptions and deductions.

Although the new regime initially failed to gain popularity, its acceptance has grown steadily over the past six years. A rising number of taxpayers are now opting for it while filing their income tax returns, largely due to gradual policy tweaks and simplified compliance. However, experts believe there is still scope for improvement, and Budget 2026 could play a key role in accelerating this shift.

Why Many Taxpayers Still Prefer the Old Tax Regime

Despite the government’s push toward a cleaner, deduction-light system, the old tax regime continues to remain relevant. One major reason is the wide range of deductions it offers, especially for senior citizens and salaried individuals.

Under the old regime, taxpayers can claim deductions on health insurance premiums, home loan interest, education loans, HRA, life insurance, and savings instruments. Senior citizens, in particular, benefit from deductions related to medical expenses and interest income. These advantages make the old regime financially more appealing for many households.

In contrast, the new tax regime currently offers very limited deductions, which discourages taxpayers with structured expenses and long-term financial commitments.

Limited Deductions Under the New Tax Regime

At present, taxpayers opting for the new regime can claim only a standard deduction and deduction on employer contributions to the National Pension System (NPS). Popular deductions such as:

• House Rent Allowance (HRA)

• Health insurance premiums

• Term life insurance

• Home loan and education loan benefits

are not permitted under the new structure.

According to tax experts, allowing a few essential deductions without complicating the system could significantly improve the regime’s attractiveness while maintaining its simplicity.

Experts Suggest Allowing HRA and Health Insurance Deductions

Financial experts believe that introducing selective deductions such as HRA and health insurance could be a game-changer. Shweta Rajani, Mutual Fund Head at Anand Rathi Wealth, points out that permitting these deductions would make the new regime more practical without making it complex.

With healthcare costs rising rapidly, mediclaim insurance has become a necessity rather than a luxury. The absence of tax benefits on health insurance under the new regime is seen as one of its biggest drawbacks. Allowing this deduction could encourage more taxpayers to switch voluntarily.

Standard Deduction Hike Likely in Budget 2026

Another major expectation from Union Budget 2026 is an increase in the standard deduction limit under the new tax regime. Currently, standard deduction is the primary relief available to salaried taxpayers opting for the new system.

Given rising inflation and increasing cost of living, experts believe the deduction should be revised upward. Deloitte India’s Executive Director Nitin Bajaj has stated that enhancing the standard deduction would provide immediate relief without increasing complexity.

Stocktick Capital founder Vijay Maheshwari suggests that increasing the standard deduction to ₹1 lakh–₹1.25 lakh could significantly boost take-home salaries for salaried individuals and improve acceptance of the new regime.

Home Loan and Education Loan Benefits May Be Considered

There is also speculation that the government may consider extending home loan and education loan tax benefits to the new regime. These loans have become common financial tools for Indian families, especially among middle-income households.

Experts argue that since these loans are already linked to banks and financial institutions, verification is simple through bank statements. Allowing such deductions would not only be easy to implement but would also align the new regime with real-life financial needs.

What to Expect From Budget 2026

If the government introduces selective deductions, increases the standard deduction, and includes loan-related benefits, the new tax regime could become the default choice for a much larger section of taxpayers. Such changes would strike a balance between simplicity and savings, helping the government gradually phase out the old tax regime.

As taxpayers await the Union Budget 2026 announcements, all eyes will be on whether the government takes bold steps to make the new tax regime more flexible, practical, and widely acceptable.