Experts expect limited direct tax changes in Budget FY27, following the introduction of the new Income Tax Act, 2025.
Calls are growing for relief on standard deduction, Section 80C limits, and TDS simplification.
Industry and tax advisors stress the need for greater tax certainty to reduce litigation and improve compliance.
Ahead of the Budget, expectations are rising across sectors, particularly on the income-tax (IT) front. However, with the proposed Income-tax Act, 2025 already introduced, some industry experts expect limited substantive changes on the direct tax front in the upcoming Budget.
In the previous Budget, Union Minister of Finance Nirmala Sitharaman announced a slew of tax reforms, with taxpayers now closely watching for possible revisions to tax slabs and deductions this year.
1 January 2026
Get the latest issue of Outlook Business
The Union Budget for FY26 also unveiled the Income Tax Act, 2025, which seeks to replace the Income Tax Act, 1961, with a simplified structure featuring fewer sections, updated tax slabs, a higher standard deduction of ₹75,000, and streamlined provisions, including those related to tax deduction at source (TDS).
Rising living costs, higher housing expenses, and taxes on investment returns have now fuelled fresh calls for relief on the income-tax front.
According to a report by The Economic Times, experts have urged the government to revisit home loan benefits, revise the standard deduction, and introduce changes to provisions under the Income Tax Act, 1961—particularly Section 80C—as well as the rebate under Section 87A.
As per a pre-Budget report by EY India, the direct tax framework is expected to undergo changes, including the smooth implementation of the new Income Tax Act, 2025, supported by detailed guidelines. Further, tax certainty and predictability are also being emphasised to reduce frequent changes in tax rates. “A predictable tax policy builds trust and improves compliance, which is vital for enhancing revenue collection,” the report said.
Providing tax certainty for foreign investors also remains critical. “In the absence of specific rules related to the determination of permanent establishment (PE) and profit attribution, these become common grounds for litigation. Clear and codified rules will make taxation predictable,” the report added.
Simplification of TDS
“One of the most pressing areas requiring attention is the simplification of compliance, particularly in the area of tax deduction at source. TDS is not a tax on the deductor’s income; rather, the deductor acts as an agent of the State, facilitating tax collection,” said Dinesh Kanabar, Chairman and Chief Executive Officer of Dhruva Advisors India Private Limited.
Kanabar suggested that rationalising TDS rates into two or three brackets would help limit frequent litigation, which often arises from disputes over applicable rates, classification of payments, and procedural lapses.
He proposed a simplified structure—one rate for salary income, a uniform rate for most non-salary payments, and a higher rate for exceptional categories such as lottery winnings or similar windfall incomes. Such rationalisation, he said, would significantly reduce compliance complexity.
Section 80C of the Income Tax Act
Section 80C of the Income Tax Act allows individuals and Hindu Undivided Families (HUFs) to claim a deduction of up to ₹1.5 lakh annually from their gross total income by investing in specified instruments such as PPF, EPF, ELSS mutual funds, and life insurance policies. This provision helps reduce overall tax liability.
However, experts argue that the ₹1.5 lakh limit under Section 80C, which has not been revised since 2014, has become outdated due to inflation, rising living costs, and eroding purchasing power. This, they say, has reduced its effectiveness in promoting long-term savings, including for retirement, among middle-class households. An upward revision of the limit could help boost household savings and improve financial resilience.
In its pre-Budget report, Deloitte has urged the government to issue guidance through public consultation, allowing industry to provide insights and build consensus on the quantification of the number of users. Rules for the attribution of income should also be prescribed to ensure certainty and smooth implementation of significant economic presence (SEP) provisions. On the policy recommendation front, Deloitte has urged the removal of ambiguities related to the deduction of additional employee costs and greater certainty on the deductibility of stock-compensation expenses.
