Budget 2026: How can FM Sitharaman make New Tax Regime better? Deductions, tweaks and more — What experts say

Budget 2026 Expectations: Finance Minister Nirmala Sitharaman is set to present the Union Budget 2026 on Sunday, 1 February. Budget 2026 is especially important for taxpayers as the FM may reveal this year's tax reforms, which directly impact millions of Indians.

The government introduced the New Tax Regime in Budget 2020 and has since made several changes to accommodate taxpayers' interests. In Budget 2025, FM Sitharaman made a grand move, lowering the income tax rates and making income effectively tax-free for those who earn up to ₹12 lakh per annum. However, the changes were made only in the New Tax Regime.

Over the years, the government has made certain adjustments to the New Tax Regime to simplify it, including modifying the tax slabs. But will FM Sitharaman make any changes to the income tax sector in Budget 2026?

According to Richa Sawhney, Partner, Tax, at Grant Thornton Bharat, it may not be feasible for the government to make any further changes to the New Tax Regime, considering the consequential move made last year.

Budget 2026: How can the New Tax Regime be more attractive?

Speaking to Livemint, Gaurav Jain, Partner – Direct Tax at Forvis Mazars in India, called for certainty, predictability, and disciplined administration in the New Tax Regime in Budget 2026 to make it more attractive.

“The success of the Income Tax Act, 2025, will depend on the restrained use of powers, decriminalisation of technical and interpretational defaults, and limiting prosecution to cases involving wilful intent or fraud. Improving appellate efficiency through enforceable timelines, refining the faceless appeals mechanism, and ensuring consistent application of settled law will reduce litigation, strengthen taxpayer confidence, and enhance voluntary compliance under the new regime,” he noted.

According to Sawhney, certain moves can also make the New Tax Regime beneficial for taxpayers, making it more popular than the Old Tax Regime, which still offers deductions.

“Going forward, if the cost-of-living parameters and inflation rates are considered for a default annual tweak in the slab rates in the new tax regime, it may benefit a large section of taxpayers and provide a fillip to further popularise the new tax regime,” Sawhney said.

Yashraj Bhardwaj, co-founder and COO at Petonic AI, said that Budget 2026 presented an opportunity to strengthen the new tax regime and make it more appealing to taxpayers.

“Rationalising tax slabs, increasing the basic exemption limit, and providing limited, well-designed deductions within the new regime would help improve disposable incomes while preserving ease of compliance. Aligning tax thresholds with inflation and evolving income patterns can also encourage wider adoption,” he said in a statement to Livemint.

Reintroduce deductions for homebuyers, say experts

ClearTax founder and CEO Archit Gupta emphasised the need to incorporate Section 24(b) of the Income Tax Act, 1961, into the new tax regime. Under this section, taxpayers can claim a deduction of up to ₹2 lakh on the interest paid on a home loan for a self‑occupied property.

“If the New Regime is to be more than ‘simpler’ and truly become a default choice for mainstream taxpayers, it should accommodate the real aspirations of Indians — and on home ownership, that means bringing Section 24(b) back into the regime,” he said.

According to Gupta, introducing interest deductions in the new income tax regime can lower the cost of housing finance.

“In a context where prices are rising, and affordable supply is constrained, giving home buyers predictable and meaningful tax support will make the New Regime not just easier to file, but financially compelling to choose,” he told Livemint.