ICAI Proposes Tax Reforms for Health Deductions and Surcharge Limits in Budget 2026 Memorandum

The Institute of Chartered Accountants of India (ICAI) has submitted targeted recommendations for individual taxation reforms to the finance ministry in its pre-Budget memorandum ahead of Budget 2026. The proposals focus on addressing gaps in the default tax regime, particularly concerning health insurance deductions, surcharge thresholds, and family taxation structures.

Health Insurance and Medical Deductions

ICAI has highlighted a significant concern regarding health insurance coverage under the current default tax regime. The institute notes that taxpayers opting for the simplified regime cannot claim deductions for mediclaim premiums or medical expenditure, which could discourage continued health insurance coverage during a period of rising out-of-pocket healthcare costs.

The institute has recommended allowing deductions for medical insurance premiums and specified medical expenses under the default regime to align tax policy with household risk protection needs. This change would help maintain the regime's simplicity while supporting essential healthcare coverage.

Disability-Related Tax Relief

ICAI has proposed extending disability-related deductions, currently available under the old tax regime, to the default regime. These provisions include:

• Tax relief for individuals with disabilities
• Deductions for taxpayers supporting dependent family members with disabilities
• Enhanced deduction limits to account for inflation and rising care costs

The institute emphasizes that these measures would ensure equitable treatment across both tax regimes while supporting vulnerable populations.

Surcharge Threshold Adjustments

A key concern raised by ICAI relates to surcharge applicability under the default tax regime. Since total income calculation excludes exemptions and deductions, taxpayers may cross surcharge thresholds sooner without experiencing a real increase in disposable income.

ICAI has recommended raising the surcharge threshold for individuals and Hindu Undivided Families from ₹50 lakh to at least ₹75 lakh. This adjustment would prevent unintended tax escalation for middle- and upper-middle-income earners choosing the simplified regime.

Joint Taxation for Married Couples

The institute has proposed introducing an optional joint taxation system for married couples, allowing them to file a single return with proportionately higher exemption limits and tax slabs. ICAI suggests this system would better reflect the financial realities of single-income households and reduce incentives for income fragmentation.

The proposed joint taxation model draws inspiration from similar systems already implemented in countries such as the United States, where married couples can choose between joint and separate filing options based on their financial circumstances.

Policy Balance and Implementation

ICAI acknowledges that while the new default tax regime has successfully simplified slab rates, it has simultaneously removed key deductions that support household financial security. The institute urges the government to reconsider this balance to make the regime more equitable for individuals and families while maintaining its simplified structure.

These recommendations represent ICAI's effort to address practical challenges faced by taxpayers under the current system while supporting the government's broader tax simplification objectives. The proposals aim to create a more balanced approach that maintains regime simplicity while preserving essential deductions for healthcare and family support.