Budget 2026: How can FM make the new tax regime more attractive?

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• Experts urge Budget 2026 to add key deductions to new tax regime for broader appeal.
• Calls to raise the standard deduction and offer relief for senior citizens
• Loan benefits and better tax certainty proposed to boost regime adoption

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The New Tax Regime has come a long way from being a confusing alternative to becoming the default choice for many taxpayers. After Budget 2025 widened tax slabs and raised rebates, the simplified regime finally began to look rewarding, not just convenient. With more taxpayers expected to opt for it while filing returns this year, the focus has now shifted to the next big question: what can Budget 2026 do to make it even more appealing?

Despite the government’s clear push towards a cleaner, deduction-free system, the old tax regime hasn’t lost its relevance entirely. For senior citizens, expenses such as healthcare, insurance, and interest-driven income still make deductions and higher exemption limits hard to ignore. As Budget 2026 approaches, expectations are building around whether the Finance Minister can fine-tune the new regime without leaving key taxpayer groups behind.

Introduce Select Deductions to Improve Practicality

One of the biggest gaps in the new tax regime is the absence of commonly used deductions. At present, taxpayers can claim only the standard deduction and employer contributions to NPS, while benefits such as HRA and medical insurance remain unavailable.

Experts say reintroducing a small set of essential deductions could make the regime more workable without undoing its core promise of simplicity. “Allowing limited deductions like HRA and medical insurance can significantly improve the appeal of the new tax regime while keeping it simple,” says Shweta Rajani, Mutual Fund Head at Anand Rathi Wealth.

Rising healthcare costs make this issue harder to ignore. Medical insurance, in particular, remains a major out-of-pocket expense for households. “Medical expenses have been rising steadily, and the absence of mediclaim deductions under the new tax regime is a clear gap,” says Nitin Baijal, Executive Director, Deloitte India, pointing to an area where fine-tuning could broaden adoption.

Increase the Standard Deduction to Offset Lost Benefits

With most deductions removed, the standard deduction has become the primary source of relief under the new tax regime. Experts believe there is scope to increase it to better reflect inflation and higher living costs.

Baijal notes, “Raising the standard deduction would provide wide-based relief without increasing compliance complexity. This approach could compensate salaried taxpayers who have given up multiple exemptions.”

Other experts also echo this view, and see this as a critical reform. Vijay Maheshwari, founder of Stocktick Capital says, “Raising the standard deduction to Rs 1-1.25 lakh would help offset inflation and improve take-home income for salaried taxpayers under the new regime.” Adding that such a move would make the system more equitable without reintroducing complexity.

Extend Loan-Linked Benefits Through Formal Channels

Education loans and home loans continue to be important financial commitments, yet their tax benefits are currently restricted to the old regime. Experts argue that these deductions are relatively easy to administer as they are linked to banks and formal financial institutions.

“Most of this information is already available through bank statements and employer systems, so compliance would not become an issue,” Baijal says. Including such benefits could improve the practicality of the new regime while preserving its simplified structure.

Address Structural Gaps for Senior Citizens

Despite growing adoption, the new tax regime remains less attractive for senior citizens. Unlike the old regime, it offers no higher basic exemption limits and does not allow health insurance deductions, even as medical expenses rise sharply with age.

“There is a strong case for additional relief for senior citizens under the new regime,” Baijal says, suggesting that slab thresholds could be revisited to provide meaningful relief.

Rajani adds, “for retirees, medical and insurance-related expenses make deductions especially relevant, which is why the old regime continues to hold appeal for this segment.”

Move from Ease of Filing to Ease of Financial Planning

For the new tax regime to become the default by choice rather than compulsion, experts say it must support long-term financial planning.

“Targeted, capped incentives for retirement savings, health insurance and first-home purchases can strike the right balance between simplicity and financial security,” says Maheshwari. He argues that such measures would encourage responsible behaviour without complicating compliance.

On capital markets, Maheshwari adds “stability matters more than tax cuts. Maintaining current equity LTCG rates, raising the exemption threshold to Rs 2-3 lakh, and offering a clear long-term roadmap to improve investor confidence.”

Improve Tax Certainty Beyond Rates and Deductions

Some experts believe Budget 2026 should focus beyond tax rates altogether. With major reforms like GST and the new tax code already in place, attention could shift to predictability and dispute resolution.

“India does not need lower taxes at this stage; it needs a more efficient and predictable tax regime,” says Sanjiv Malhotra, Senior Advisor - Head of Tax Practice, Shardul Amarchand Mangaldas & Co. He highlights tax certainty for foreign investors and customs reforms as priority areas.

Malhotra argues that revamping dispute resolution mechanisms, expanding successful models like Advance Pricing Agreements, and extending faceless processes to customs could significantly improve confidence in India’s tax framework.