Budget 2026: Should the 30% income tax slab be raised and indexed to inflation?

Capex push, RBI stance and liquidity measures to guide banking stocks

• Experts suggest raising the 30% tax slab to counter inflation's effect on income.
• Raising tax threshold boosts middle-class savings, spending, and economic growth.
• Annual inflation-linked tax slab reviews suggested for fairness and adaptability

Did our AI summary help?

Rising salaries might seem beneficial on paper, but for many middle-class families, increased pay hasn't led to more spending power. As inflation drives up prices for housing, healthcare, education, and everyday necessities, more taxpayers are falling into the 30 per cent tax bracket without any actual financial gain.

Ahead of Budget 2026, the salaried consumers are wondering if tax slabs should rise with inflation to reflect real living costs.

The imperative for inflation-adjusted tax slabs

Tax experts unanimously advocate for increasing the 30 percent income tax slab, currently kicking in above Rs 24 lakh, to counter inflation's erosive impact on real income.

“Low slabs push even first-time earners, like young engineering graduates, into the top bracket prematurely, fostering a perception of taxation as a burden rather than a contribution," Anil Harish, Partner, DM Harish & Co, said.

While recent budget revisions provided some relief, fiscal constraints might limit further hikes, yet they remain desirable. Tax experts suggest annual adjustments linked to the consumer price index (CPI), with comprehensive reviews every five years, to maintain equity.

Akhil Chandna, partner, Global People Solutions Leader, Grant Thornton Bharat, proposes raising the threshold to Rs 35 lakh, arguing that nominal wage growth has been outpaced by living expenses, leading to "bracket creep" where taxpayers face higher rates without genuine wealth gains.

If the tax brackets stay the same while prices rise, people end up paying a larger share of their earnings in tax. They are not actually getting wealthier in terms of what they can afford. Moving the limit higher would help the taxpayers to an extent for not being penalized just because their salaries increased to keep up with the cost of living.

The consensus highlights a fundamental issue with India's tax system: it doesn't account for inflation, which erodes purchasing power and creates unfairness.

Economic implications of the adjustment

Elevating the slab could yield multifaceted benefits, balancing short-term revenue dips with long-term gains.

SR Patnaik, Partner (head - taxation), Cyril Amarchand Mangaldas, said while the government might forgo some direct tax income, increased disposable funds for the middle class would boost consumption, generate additional GST revenue and easing inflationary pressures.

Raising the tax slab would boost savings, investments and drive economic growth. This could also encourage tax compliance by reducing incentives for evasion and promoting transparency.

Tax experts said that more money in consumers' hands stimulates demand for goods like cars and electronics, aiding business expansion.

Harish said, “Adjust tax slabs to change perceptions, making high earners feel valued rather than penalised.”

This change is expected to boost the economy by putting more money in the pockets of the middle class, who are hit hardest by inflation in urban cities.

Also read | Budget 2026: Skilling, affordability, accountability top Gen Z wishlist

Differential impact across demographics

The proposed tax hike would help specific groups, like salaried employees, self-employed, and retirees, with relief tailored to their financial struggles.

Salaried employees stand to gain significantly, as Patnaik said, with reduced tax deducted at source (TDS) leading to higher monthly take-home pay for essentials and investments. It also prevents bonuses from being heavily taxed. This helps cover urban costs like healthcare and education.

For the self-employed, a higher threshold creates a buffer of capital to reinvest in their businesses without losing a third of their profits to taxes.

Retirees also benefit as their fixed income is better protected against rising healthcare costs, helping their savings last longer.

This will leave more money with the urban middle class, who drive spending on housing, cars, and electronics, helping the economy grow while better reflecting the true cost of living in expensive cities.

Ritika Nayyar, Partner, Singhania & Co, said the increase's magnitude is crucial — a small hike might not offset rising urban costs, but any increase would still bring taxation in line with current realities.

Exploring alternatives to direct slab increases

Beyond slab revisions, experts propose complementary mechanisms for inflation adjustment.

Hairsh said, “There should not be an introduction of new tax credits. The law is just getting simplified under the new regime and stability in the law is very important.”

Tax experts suggest expanding deductions for provident funds, health insurance, tuition, and housing loans — updating the outdated Rs 2 lakh cap on home loan interest to reflect current property prices.

Nayyar recommends reinstating inflation indexation for slabs, similar to past capital gains computations, for automatic annual updates based on price trends.

Chandna said the government could consider committing to an automatic inflation-linked review of tax slabs every 3-5 years. Enhancing the standard deduction for salaried employees and increasing the Section 87A rebate for lower-income taxpayers would provide broader relief.

These alternatives aim to embed adaptability into the tax framework, ensuring ongoing relevance without frequent overhauls.

Also read | Budget 2026 hopes for LTCG cut to 10%, raise in exemptions, restoration of indexation benefit

Broader reforms for a taxpayer-friendly system

Tax experts urge structural enhancements alongside fiscal tweaks. They emphasise treating taxpayers respectfully, curbing litigations, and resolving grievances promptly.

Chandna suggest digital compliance tools to simplify processes, aligning policy with economic goals like boosted savings and consumption.

In summary, raising the 30 percent slab emerges as a pivotal step for inflation-proofing India's tax system, promising relief and vitality.