As preparations for Union Budget 2026 gather momentum, a quiet but significant debate is unfolding among policymakers, economists, and taxpayers alike — is it time to radically simplify personal income tax, much like the government did with GST?
The comparison is deliberate. Over the years, the Centre has frequently cited the evolution of the Goods and Services Tax as proof that even a complex, multi-layered tax system can be rationalised into something simpler, broader, and easier to comply with. Now, many believe direct taxes could be next in line for a similar overhaul.
New tax regime: Simple in theory, crowded in practice
When the new income tax regime was introduced, its promise was clear: fewer exemptions, fewer deductions, and a cleaner structure that salaried taxpayers could easily understand. While the regime has indeed lowered headline rates and attracted a majority of taxpayers, critics argue that simplicity remains incomplete.
Despite several budget tweaks, the new regime currently operates with as many as seven income slabs, each with different marginal rates. For many taxpayers, especially salaried employees, this has resulted in confusing calculations and frequent rate changes, undermining the very objective of a “simple” system.
This has sparked growing speculation that Budget 2026 could attempt a GST-style compression of income tax slabs, reducing the number of rates and widening income bands.
What the proposed post-Budget 2026 slabs look like
According to discussions doing the rounds in policy circles, a possible structure under the new tax regime after Budget 2026 could look like this:
- Income up to ₹4 lakh – Nil
- ₹4 lakh to ₹8 lakh – 5%
- ₹8 lakh to ₹12 lakh – 10%
- ₹12 lakh to ₹16 lakh – 15%
- ₹16 lakh to ₹20 lakh – 20%
- ₹20 lakh to ₹24 lakh – 25%
- Income above ₹24 lakh – 30%
While this still appears layered, the broader thinking is that these slabs could eventually be merged further, especially in the middle-income range.
Old tax regime: Fewer slabs, more complexity elsewhere
By contrast, the old tax regime — still available but increasingly sidelined — has far fewer slabs:
For individuals below 60 years of age:
- Income up to ₹2.5 lakh – Nil
- ₹2.5 lakh to ₹5 lakh – 5%
- ₹5 lakh to ₹10 lakh – 20%
- Above ₹10 lakh – 30%
However, its reliance on multiple exemptions and deductions has made compliance-heavy filing unavoidable, which is why the government continues to push taxpayers toward the new regime.
Lessons from GST: How simplification actually happened
When GST was rolled out, it came with a wide range of tax rates — 0%, 5%, 12%, 18% and 28%, along with cesses and special categories. While the intention was to strike a balance between revenue and affordability, the system quickly became difficult to navigate, particularly for businesses.
Over time, the government and the GST Council began systematic rationalisation. Many goods were shifted out of the 12% and 28% brackets, and today, the majority of goods and services fall under just two primary rates — 5% and 18%. The highest slab is now largely restricted to luxury, sin, and demerit goods.
The outcome has been fewer classification disputes, easier compliance, and a system that ordinary consumers can understand without referring to tax charts.
Can the same model work for income tax?
The central question now is whether this philosophy can be applied to personal income tax.
While income tax is structurally different from GST, the principle of fewer rates and wider bands remains relevant. Under the current system, incremental income is taxed across multiple small slabs, making salary planning and tax forecasting unnecessarily complex.
A GST-inspired income tax structure would aim to:
- Reduce the number of slabs
- Smoothen marginal rate jumps
- Make effective tax liability easier to calculate
What slab compression could mean in practice?
One widely discussed idea is merging the middle slabs.
Instead of separate 10%, 15%, and 20% rates, the government could introduce one broad middle slab, flanked by:
- A low-rate slab for entry-level incomes
- A high-rate slab for top earners
Another proposal gaining traction is pushing the 30% tax threshold significantly higher, ensuring that only genuinely high-income individuals fall into the top bracket — much like how GST’s highest rate applies only to selective goods.
Importantly, such changes need not result in revenue loss. The focus would be on clarity and predictability rather than tax concessions.
Why slab simplification matters: A real-world example
Consider a salaried individual earning ₹30 lakh per year under the current new tax regime. Their income is taxed across multiple slabs — 5%, 10%, 15%, 20%, 25%, and 30%.
While the effective tax rate is lower than 30%, the calculation process itself is layered and time-consuming.
With compressed slabs, the same taxpayer could:
- Estimate tax liability faster
- Understand take-home pay more clearly
- Plan savings and investments with greater certainty
Why is Budget 2026 being closely watched?
The government has consistently emphasised its goal of creating a simple, predictable, and low-compliance tax ecosystem. GST rationalisation was a major step for indirect taxes. Personal income tax could be the next logical reform frontier.
For middle-class and upper-middle-class taxpayers, slab compression could translate into:
- Fewer surprises at year-end
- Easier salary negotiations
- Clearer monthly cash flow expectations
For the government, a simpler structure could mean better compliance, fewer disputes, and sustained revenue stability.
Whether Budget 2026 delivers this structural shift remains uncertain. But the comparison with GST has already shaped the narrative — if India could simplify one of the world’s most complex indirect tax systems, many are asking: why not income tax next?
Read More: Need for Customs Duty Rate Rationalisation: What Budget 2026 Must Address?
