Union Budget 2026-27: Income Tax Changes, New Slabs & Implications | Virtual Auditor

Last Updated: 20 March 2026  |  Applicable From: AY 2027-28 (FY 2026-27)  |  Reference: Finance Act, 2026

The Union Budget 2026-27, presented by the Hon’ble Finance Minister on 1 February 2026, introduced sweeping changes to India’s income tax framework. At Virtual Auditor, we have distilled every significant amendment — from the headline-grabbing nil-tax threshold of ₹12 lakh to the less-publicised TDS rate rationalisations — into a single, annually updatable regulatory tracker. Whether you are a salaried individual recalculating your tax outgo, a startup founder evaluating Section 80-IAC eligibility, or a CA advising clients on capital gains restructuring, this article is your definitive reference.

Table of Contents

1. Revised New Tax Regime Slabs for AY 2027-28
2. No Tax Up to ₹12 Lakh — How It Works
3. Standard Deduction Changes
4. Capital Gains Regime Rationalisation
5. TDS Rate Revisions
6. Startup-Related Provisions (Section 80-IAC & Beyond)
7. Relief for Senior Citizens
8. Other Noteworthy Amendments
9. Old Regime vs. New Regime — Comparison Table
10. Compliance Calendar for AY 2027-28
11. Expert Insight
12. Key Takeaways
13. Frequently Asked Questions

1. Revised New Tax Regime Slabs for AY 2027-28

The most widely discussed change in Budget 2026-27 is the complete overhaul of the new tax regime slab structure under Section 115BAC of the Income-tax Act, 1961. The revised slabs, effective from Assessment Year 2027-28 (Financial Year 2026-27), are designed to provide substantial relief to the middle class while keeping the highest marginal rate unchanged at 30%.

Revised Slab Structure Under the New Tax Regime (Section 115BAC)

Total Income (₹)	Tax Rate
Up to 4,00,000	Nil
4,00,001 – 8,00,000	5%
8,00,001 – 12,00,000	10%
12,00,001 – 16,00,000	15%
16,00,001 – 20,00,000	20%
20,00,001 – 24,00,000	25%
Above 24,00,000	30%

The introduction of a 25% slab (₹20–24 lakh) is a notable structural addition. Previously, the jump from 20% to 30% was abrupt. This graduated approach reduces the marginal burden for taxpayers earning between ₹20 lakh and ₹24 lakh.

Comparison With Previous New Regime Slabs (AY 2026-27)

For context, the earlier new tax regime (applicable for AY 2025-26 and AY 2026-27) had the following structure:

Total Income (₹)	Old New Regime Rate	Revised Rate (AY 2027-28)
Up to 3,00,000	Nil	Nil (now ₹4L)
3,00,001 – 7,00,000	5%	5% (now ₹4–8L)
7,00,001 – 10,00,000	10%	10% (now ₹8–12L)
10,00,001 – 12,00,000	15%	15% (now ₹12–16L)
12,00,001 – 15,00,000	20%	20% (now ₹16–20L)
Above 15,00,000	30%	25%/30% split

The widening of each slab band and the upward shift of thresholds mean that almost every taxpayer under the new regime will pay less tax from FY 2026-27 onward.

2. No Tax Up to ₹12 Lakh — How It Works

The headline announcement — “no income tax for income up to ₹12 lakh” — requires careful unpacking. This is achieved through a combination of the revised slab structure and an enhanced rebate under Section 87A of the Income-tax Act, 1961.

Section 87A Rebate Enhancement

The rebate under Section 87A has been increased to ₹60,000 for individuals opting for the new tax regime whose total income does not exceed ₹12,00,000. Here is how the arithmetic works:

• Income up to ₹4,00,000: Nil tax
• ₹4,00,001 to ₹8,00,000: 5% = ₹20,000
• ₹8,00,001 to ₹12,00,000: 10% = ₹40,000
• Total tax before rebate: ₹60,000
• Section 87A rebate: ₹60,000
• Net tax payable: Nil

Salaried Individuals — The ₹12.75 Lakh Benefit

For salaried taxpayers, the standard deduction of ₹75,000 effectively raises the nil-tax threshold to ₹12,75,000 in gross salary terms. This is because the standard deduction reduces the “total income” below the ₹12 lakh mark, thereby qualifying the taxpayer for the full Section 87A rebate.

Marginal Relief Mechanism

The Finance Act, 2026, includes a marginal relief provision to ensure that taxpayers earning marginally above ₹12 lakh do not face an abrupt tax burden. If the total income exceeds ₹12 lakh by a small amount, the tax payable shall not exceed the amount by which the income exceeds ₹12 lakh. This prevents situations where an additional ₹1,000 of income could trigger a disproportionately large tax liability.

3. Standard Deduction Changes

The standard deduction, available under both the old and new tax regimes, has been a progressive tool for simplifying tax computation for salaried individuals and pensioners. Budget 2026-27 has made the following modifications:

For Salaried Employees

The standard deduction under the new tax regime remains at ₹75,000, as enhanced in the July 2024 budget. Under the old regime, it continues at ₹50,000. The Government has not changed the absolute quantum in Budget 2026 but has ensured that the standard deduction interacts favourably with the new ₹12 lakh nil-tax threshold.

For Pensioners

Pensioners receiving pension from a former employer continue to claim the standard deduction. Family pension recipients may claim a deduction of ₹15,000 or one-third of the pension, whichever is lower, under both regimes.

Practical Impact

For a salaried individual earning a gross salary of ₹12,75,000:

• Gross salary: ₹12,75,000
• Less: Standard deduction: ₹75,000
• Total income: ₹12,00,000
• Tax before rebate: ₹60,000
• Less: Section 87A rebate: ₹60,000
• Tax payable: Nil

We advise our clients to review their income tax return filing strategy in light of these changes to optimise their tax position.

4. Capital Gains Regime Rationalisation

Budget 2026-27 carries forward and refines the capital gains rationalisation that began in July 2024. The key amendments affecting capital gains taxation are outlined below.

Holding Period Simplification

The Finance Act, 2026, maintains the simplified two-tier holding period framework:

Asset Class	Holding Period for LTCG
Listed equity shares, equity-oriented mutual funds, business trusts	12 months
All other capital assets (immovable property, unlisted shares, gold, debt MFs, etc.)	24 months

Tax Rates on Capital Gains

The following rates apply from AY 2027-28:

• Short-Term Capital Gains (STCG) on listed equity & equity MFs (Section 111A): 20%
• Long-Term Capital Gains (LTCG) on listed equity & equity MFs (Section 112A): 12.5% (with an annual exemption of ₹1.25 lakh)
• LTCG on all other assets (Section 112): 12.5% without indexation benefit
• STCG on other assets: At applicable slab rates

Removal of Indexation — Continued Impact

The removal of indexation benefit for computing LTCG on immovable property and other non-equity assets, which was introduced in July 2024, continues under the Finance Act, 2026. The flat 12.5% LTCG rate applies in lieu of the erstwhile 20% with indexation. We have noted that this remains a contentious issue, particularly for long-held real estate, and our capital gains tax advisory practice continues to receive significant queries on this matter.

Section 54 & 54F Exemptions

The exemptions under Sections 54 (reinvestment in residential property) and 54F (sale of non-residential asset with reinvestment in residential property) remain available. However, the computation of the exempt amount is now based on the capital gain computed without indexation. Budget 2026 has introduced a monetary cap of ₹10 crore on the total exemption claimable under these sections, carrying forward the earlier amendment.

5. TDS Rate Revisions

Budget 2026-27 continues the Government’s agenda of rationalising TDS rates to reduce the compliance burden on deductors and improve liquidity for deductees. The following changes are noteworthy:

Key TDS Rate Changes (Effective 1 April 2026)

Section	Nature of Payment	Earlier Rate	Revised Rate
194A	Interest (other than on securities) — Senior Citizens	10%	Threshold raised to ₹1,00,000
194H	Commission or Brokerage	5%	2%
194-IB	Rent by Individual/HUF	5%	2%
194DA	Insurance Commission	5%	2%
194LBC	Income from Securitisation Trust	25%/30%	10%
194T	Payments to Partners (New Section)	N/A	10% (above ₹20,000)

New Section 194T — TDS on Payments to Partners

One of the most significant TDS-related changes is the introduction of Section 194T, which mandates TDS at 10% on payments by firms to partners — including salary, remuneration, interest, bonus, or commission — exceeding ₹20,000 per annum. This provision, effective from 1 April 2026, brings partnership firm transactions under the TDS net for the first time and has far-reaching implications for the large number of partnership firms and LLPs in India.

We at Virtual Auditor have been advising partnership firms and LLPs to restructure their payment schedules and update their accounting systems to comply with this new requirement. For detailed assistance, explore our TDS return filing services.

TCS Rationalisation

Budget 2026 has also rationalised Tax Collected at Source (TCS) provisions:

• TCS on foreign remittance under LRS (Section 206C(1G)): Threshold increased to ₹10 lakh (from ₹7 lakh) for the financial year
• TCS on sale of goods (Section 206C(1H)): Removed for transactions through recognised stock exchanges

6. Startup-Related Provisions (Section 80-IAC & Beyond)

India’s startup ecosystem has been a focus area for successive budgets, and Budget 2026-27 strengthens this commitment with several targeted provisions.

Section 80-IAC — Extended Sunset Date

The sunset date for incorporation of eligible startups claiming deduction under Section 80-IAC has been extended from 31 March 2025 to 31 March 2030. Eligible startups incorporated before this date can claim a 100% deduction of profits for three consecutive assessment years out of ten years from incorporation, provided they meet the following conditions:

• Incorporated as a company or LLP
• Total turnover does not exceed ₹100 crore in the relevant previous year
• Recognised by DPIIT as an eligible startup
• Not formed by splitting up or reconstruction of an existing business

Angel Tax Abolition — Continued Relief

The abolition of the so-called “angel tax” under Section 56(2)(viib) for all classes of investors, which was effected from AY 2025-26, continues. Budget 2026 has not reintroduced any alternative provision, providing continued certainty to the startup funding ecosystem.

ESOP Taxation

The deferral of TDS on ESOPs for eligible startups continues under the existing framework. The tax is deferred to the earliest of: (a) 5 years from the date of allotment, (b) the date of sale of shares, or (c) the date of cessation of employment. Budget 2026 has not altered this timeline.

For startups evaluating their tax position, our startup advisory services provide comprehensive guidance.

7. Relief for Senior Citizens

Budget 2026-27 includes targeted relief measures for senior citizens (aged 60 and above) and super senior citizens (aged 80 and above).

Enhanced TDS Threshold on Interest Income

The threshold for TDS on interest income under Section 194A for senior citizens has been raised from ₹50,000 to ₹1,00,000. This means banks and post offices will not deduct TDS on interest payments to senior citizens unless the aggregate interest exceeds ₹1 lakh in a financial year.

Updated Return Filing Exemption

Senior citizens aged 75 and above, whose income consists only of pension and interest from the same bank, continue to enjoy the exemption from filing income tax returns under Section 194P. The bank performs the necessary TDS computation.

Deduction Under Section 80TTB

The deduction of ₹50,000 on interest income from deposits held by senior citizens under Section 80TTB continues under the old tax regime. This deduction is not available under the new tax regime.

8. Other Noteworthy Amendments

Rationalisation of Reassessment Provisions

Budget 2026 has tightened the reassessment framework under Sections 148 and 148A. The monetary threshold for reopening assessments beyond three years has been raised, and the time limit for completion of reassessment proceedings has been reduced. This is aimed at reducing taxpayer harassment from prolonged reassessment proceedings.

Updated Return (Section 139(8A))

The window for filing updated returns has been extended from 24 months to 48 months from the end of the relevant assessment year. However, the additional tax payable increases with time:

• Within 12 months: 25% additional tax
• 12 to 24 months: 50% additional tax
• 24 to 36 months: 60% additional tax
• 36 to 48 months: 70% additional tax

Charitable Trusts — Rationalisation

The twin registration regime for charitable trusts (Sections 12AB and 80G) has been streamlined. Budget 2026 proposes a unified registration process with a single application form, reducing the compliance burden on charitable and religious trusts.

Vivad Se Vishwas Scheme 2.0 — Extension

The Direct Tax Vivad Se Vishwas Scheme, relaunched in October 2024, has been given a further extension for pending appeals as of a specified date. Taxpayers with disputed demands can settle at favourable rates, helping reduce the backlog of tax litigation.

9. Old Regime vs. New Regime — Comparison Table for AY 2027-28

Parameter	Old Regime	New Regime (Default)
Basic Exemption Limit	₹2.5L / ₹3L (Sr.) / ₹5L (Super Sr.)	₹4,00,000
Standard Deduction (Salaried)	₹50,000	₹75,000
Section 80C/80D Deductions	Available	Not available
HRA Exemption	Available	Not available
Section 87A Rebate	₹12,500 (income up to ₹5L)	₹60,000 (income up to ₹12L)
Maximum Marginal Rate (excl. surcharge)	30% (above ₹10L)	30% (above ₹24L)
Nil-Tax Threshold (Salaried)	~₹5.5L (with 80C, 80D, etc.)	₹12.75L

The clear advantage of the new regime for most taxpayers — especially those without significant deductions under Chapter VI-A — is evident. We recommend a thorough tax planning exercise before making the choice.

10. Compliance Calendar for AY 2027-28

Key Dates (Subject to Extensions)

Date	Compliance
15 June 2026	First instalment of advance tax (15%)
15 September 2026	Second instalment of advance tax (45% cumulative)
15 December 2026	Third instalment of advance tax (75% cumulative)
15 March 2027	Fourth instalment of advance tax (100%)
31 July 2027	Due date for ITR (non-audit individuals)
31 October 2027	Due date for ITR (audit cases)
30 November 2027	Due date for ITR (transfer pricing cases)
31 March 2029	Last date for updated return (with 50% additional tax)

This section will be updated if CBDT announces any extensions for FY 2026-27.

Frequently Asked Questions

Q1. Is the new tax regime compulsory from AY 2027-28?

No. The new tax regime under Section 115BAC is the default regime, but it is not compulsory. Taxpayers with business or professional income can opt out of the new regime by filing Form 10-IEA before the due date of filing the return. Salaried individuals without business income can choose the regime at the time of filing their ITR each year. However, given the significantly enhanced benefits under the new regime, most taxpayers will find it advantageous to remain in the default regime.

Q2. I earn ₹13 lakh. Will I pay tax on the entire amount or only on the excess over ₹12 lakh?

You will pay tax on your entire income as per the slab rates, since you do not qualify for the Section 87A rebate (which requires total income not exceeding ₹12 lakh). However, marginal relief ensures that your tax liability will not exceed the amount by which your income exceeds ₹12 lakh (i.e., ₹1 lakh). Under the normal slab computation, tax on ₹13 lakh would be ₹75,000. Since this is less than ₹1 lakh, normal slab rates apply. Marginal relief kicks in only when the tax computed exceeds the marginal income above ₹12 lakh.

Q3. How does the new Section 194T on partner payments work?

From 1 April 2026, any firm (including LLPs) making payments to partners by way of salary, remuneration, commission, bonus, or interest on capital exceeding ₹20,000 in a financial year must deduct TDS at 10%. The TDS must be deposited on or before the 7th of the following month (30 April for March deductions). Firms must update their TAN registration and file quarterly TDS returns reflecting these deductions. We at Virtual Auditor recommend that all partnership firms and LLPs review their partnership deeds and payment schedules to ensure compliance.

Q4. Has the capital gains tax on property sale changed in Budget 2026?

The fundamental framework introduced in July 2024 continues. Long-term capital gains on immovable property (held for more than 24 months) are taxed at 12.5% without indexation. Short-term gains (held for 24 months or less) are taxed at applicable slab rates. The exemptions under Sections 54 and 54F for reinvestment in residential property remain available, subject to the ₹10 crore overall cap. Budget 2026 has not introduced any further changes to this framework.

Q5. Can I still file an updated return for AY 2024-25 under the extended window?

Yes. With the window now extended to 48 months from the end of the relevant assessment year, you can file an updated return for AY 2024-25 (FY 2023-24) until 31 March 2028. The additional tax payable depends on the delay: 25% if within 12 months from the end of the AY, 50% if 12–24 months, 60% if 24–36 months, and 70% if 36–48 months. An updated return can only be used to declare additional income and pay additional tax; it cannot be used to claim refunds or reduce previously declared income.

Q6. What happens to Section 80C deductions like PPF, ELSS, and LIC premiums?

Section 80C deductions are not available under the new tax regime. They continue to be available only under the old tax regime. If your total deductions under Section 80C (₹1.5 lakh), Section 80D (₹25,000–₹1 lakh), Section 24(b) home loan interest (₹2 lakh), and other Chapter VI-A deductions exceed approximately ₹4–5 lakh, you should run a comparative calculation. For most taxpayers with moderate deductions, the new regime will still be more beneficial due to the wider slabs and higher rebate.

Q7. How do the TCS changes on foreign remittance (LRS) affect individuals?

The threshold for TCS on foreign remittances under the Liberalised Remittance Scheme has been raised from ₹7 lakh to ₹10 lakh per financial year. Remittances up to ₹10 lakh will not attract TCS. Beyond ₹10 lakh, TCS continues at 20% (5% for education loans). This change benefits individuals sending money abroad for education, travel, or investments, as it reduces the upfront TCS outflow and the need to claim refunds in the ITR.

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Annual Update Log

Date	Update
1 February 2026	Budget 2026-27 presented; initial analysis published
20 March 2026	Finance Act, 2026 enacted; article updated with final provisions

This regulatory tracker is updated as CBDT notifications and circulars are issued. Bookmark this page for the latest information on Budget 2026 income tax changes.

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