Budget 2026: How New Tax Regime is Changing Income Tax for Middle-Income Earners

In Budget 2025, the government made a big change by raising the basic tax-free income limit under the New Tax Regime. Because of this, people expect that in Budget 2026, the government may promote the New Tax Regime even more. The aim is to make tax rules simple, easy to understand, and hassle-free, without too many deductions and paperwork.

In the Union Budget 2025, the government made paying tax easier for salaried people by increasing the basic tax-free income limit under the New Tax Regime from Rs. 3 lakh to Rs. 4 lakh. Along with a higher standard deduction, this change means that salaried individuals earning up to Rs. 12.75 lakh do not have to pay any income tax under the new system. Because of this major relief, many taxpayers are now thinking more seriously about whether they should shift to the New Tax Regime. Earlier, people preferred the Old Tax Regime because it allowed many deductions, such as HRA, LIC, and home loan benefits. But with Budget 2026 coming closer, taxpayers are comparing both options to decide which regime gives them more savings and is simpler to follow.

Most taxpayers in India are now naturally moving towards the New Tax Regime because it is easier and involves fewer complications. The data clearly shows this shift in the 2024-25 assessment year; about 72 out of every 100 people who filed income tax returns chose the New Tax Regime, while only 28 stayed with the Old Regime. Because such a large majority has already adopted the New Regime, the government is likely to focus more on strengthening and expanding it in Budget 2026, possibly making it the default option and further reducing the importance of the Old Tax Regime.

Why ‘New Tax Regime’ is more beneficial for salaried employee?

Under the New Tax Regime, the government has made things easier and more beneficial for salaried employee and pensioners. Now, they can claim a standard deduction of Rs. 75,000. Along with this, the basic tax-free income limit has been increased to Rs. 12 lakh, as announced in the Budget. When you add the standard deduction to this limit, a salaried person or pensioner can earn up to Rs. 12.75 lakh in a year without paying any income tax.

Tax-saving Calculations

From FY 2024 to FY 2025, the way people pay income tax has changed. The new tax system introduced in Budget 2025 lets people, especially those in the middle-income group, keep a lot more of their earnings. Compared to the old system, many taxpayers now pay less tax, which means bigger savings in their pockets.

For people earning lower incomes, the new tax rules are very helpful. If your taxable income is up to Rs 5 lakh, you don’t have to pay any tax under either the old or new system. But as your income rises, the difference becomes noticeable. But people earning Rs 7.5 lakh used to pay Rs 65,000 under the old system, but under the updated 2025 new regime, they pay nothing, saving Rs 26,000 compared to last year’s new regime.

The savings grow bigger for higher incomes. At Rs 10 lakh and Rs 12 lakh, taxpayers save Rs 52,000 and Rs 83,200, respectively, compared with the previous new system.

The biggest benefits are for those earning between Rs 15 lakh and Rs 25 lakh. If you earn Rs 15 lakh, your tax drops from Rs 2.73 lakh under the old rules to Rs 1.09 lakh under the new ones, saving about Rs 36,400 (or 25%). At Rs 20 lakh, the savings are nearly Rs 94,000 (31%), and at Rs 25 lakh, you save Rs 1.14 lakh, again around 25%.

For people earning more than Rs 30 lakh a year, the actual amount of tax they save under the new system stays roughly the same, around Rs 1.14 lakh to Rs 1.24 lakh. However, as their income goes up, this saving becomes a smaller percentage of what they earn.

On the other hand, the new tax regime clearly favours middle-income earners. People earning between Rs 7.5 lakh and Rs 25 lakh per year see the biggest relative benefit. The system is designed to be simpler, with fewer deductions, while still giving these middle earners the most noticeable tax relief.