Tax professionals are unanimously calling for reforms to India's income tax structure ahead of Budget 2026, with particular focus on raising the 30% income tax slab threshold to counter inflation's impact on middle-class purchasing power. The current system, experts argue, fails to account for rising living costs that push taxpayers into higher brackets without corresponding increases in real wealth.

Current Tax Structure Challenges

Tax experts highlight fundamental issues with India's existing tax framework, particularly the 30% slab that currently applies to income above ₹24.00 lakh. Anil Harish, Partner at DM Harish & Co, points out that low slabs push even first-time earners, including young engineering graduates, into the top bracket prematurely. This creates a perception of taxation as a burden rather than a contribution to national development.

The core problem lies in the system's failure to account for inflation, which erodes purchasing power and creates inherent unfairness. As nominal wages increase to keep pace with rising costs, taxpayers find themselves in higher tax brackets without experiencing genuine wealth gains—a phenomenon known as "bracket creep."

Proposed Solutions and Expert Recommendations

Akhil Chandna, Partner and Global People Solutions Leader at Grant Thornton Bharat, proposes raising the 30% tax threshold to ₹35.00 lakh. This adjustment acknowledges that nominal wage growth has been consistently outpaced by living expenses, particularly in urban areas where housing, healthcare, and education costs continue to rise.

Experts suggest implementing annual adjustments linked to the Consumer Price Index (CPI) with comprehensive reviews every five years to maintain equity and ensure the tax system remains relevant to economic realities.

Economic Impact and Benefits

SR Patnaik, Partner (Head - Taxation) at Cyril Amarchand Mangaldas, explains that while the government might forgo some direct tax income initially, the increased disposable funds for the middle class would boost consumption and generate additional GST revenue. This approach could also help ease inflationary pressures by stimulating economic activity.

The proposed changes would yield several economic benefits:

• Enhanced Consumption: More disposable income would drive demand for goods like automobiles and electronics
• Improved Tax Compliance: Reduced incentives for evasion and increased transparency
• Business Growth: Increased consumer spending would aid business expansion
• Investment Boost: Higher savings rates would support capital formation

Demographic-Specific Advantages

The proposed tax structure changes would provide targeted relief across different demographic groups. Salaried employees would benefit from reduced Tax Deducted at Source (TDS), leading to higher monthly take-home pay for essentials and investments. This adjustment would also prevent bonuses from being heavily taxed, providing crucial relief for urban expenses like healthcare and education.

For self-employed individuals, a higher threshold would create a capital buffer for business reinvestment without losing significant portions of profits to taxation. Retirees would benefit as their fixed incomes gain better protection against rising healthcare costs, helping their savings last longer.

Alternative Reform Mechanisms

Beyond direct slab increases, experts propose complementary mechanisms for inflation adjustment. Ritika Nayyar, Partner at Singhania & Co, suggests reinstating inflation indexation for tax slabs, similar to past capital gains computations, enabling automatic annual updates based on price trends.

Additional reform suggestions include:

• Expanding deductions for provident funds, health insurance, and education expenses
• Updating the outdated ₹2.00 lakh cap on home loan interest deductions
• Enhancing standard deductions for salaried employees
• Increasing Section 87A rebates for lower-income taxpayers
• Implementing digital compliance tools to simplify tax processes

Implementation Framework

Experts emphasize the importance of maintaining stability in tax law while ensuring adaptability to economic changes. The proposed framework includes automatic inflation-linked reviews every 3-5 years, preventing the need for frequent legislative overhauls while ensuring ongoing relevance to economic conditions.

The consensus among tax professionals highlights the urgent need for structural reforms that treat taxpayers respectfully while aligning policy with broader economic goals of boosted savings and consumption. These changes would represent a pivotal step toward inflation-proofing India's tax system while providing meaningful relief to the middle class.

A common misconception about India's new tax regime is that it eliminates all deductions, but this assumption proves incorrect when examining home loan interest provisions. Section 24(b) of the Income Tax Act continues to provide relief for taxpayers with rented properties, though with significant restrictions compared to the previous regime.

Section 24(b) Deduction Mechanism

Under the new tax regime, taxpayers who have let out their properties can still claim interest paid on home loans under the "Income from House Property" head through Section 24(b). However, this benefit applies exclusively to rented properties and remains unavailable for self-occupied homes.

The deduction framework operates differently from the old regime's more flexible structure. While taxpayers can claim interest deductions, the treatment of any resulting losses has become more restrictive.

Income vs Interest Payment Scenarios

The practical application of Section 24(b) depends heavily on the relationship between rental income and interest payments:

When rental income falls short of interest payments, the resulting loss under "Income from House Property" cannot be freely adjusted against salary or other income sources, unlike the old regime. Additionally, such losses typically cannot be carried forward, significantly reducing the provision's effectiveness.

Documentation and Compliance Requirements

Taxpayers claiming this deduction must provide comprehensive documentation during ITR filing, including:

• Lender name and complete details
• Loan account number
• Loan sanction date
• Total interest paid during the assessment year
• Supporting proof and certificates

Inaccurate or incomplete information can result in ITR rejection or notices from the Income Tax Department, making proper documentation crucial for successful claims.

Practical Limitations and Considerations

The new regime's approach to house property losses creates practical challenges for taxpayers. When interest payments exceed rental income, the excess amount's treatment depends on specific assessment year rules and Central Board of Direct Taxes clarifications. While some years may allow limited set-off or carry-forward provisions, these typically don't extend across different income heads.

This restriction makes the deduction considerably less beneficial than under the old regime, where losses could be more freely adjusted against other income sources. Taxpayers should avoid assuming blanket entitlements and should consult official guidance or tax professionals before relying on this provision for tax planning purposes.