The Government has officially enacted the Finance Act, 2026 (No. 4 of 2026), following Presidential assent on March 30, 2026. The legislation gives effect to the Union Government’s financial proposals for the financial year 2026–27 and introduces significant provisions relating to income-tax rates, surcharge structures, and the continued evolution of the new tax regime.
The Act comes into force largely from April 1, 2026, marking the beginning of the new assessment year and tax year under both the existing Income-tax Act, 1961 and the newly introduced Income-tax Act, 2025 framework.
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Revised Income Tax Thresholds and Continuity of New Tax Regime
One of the key highlights of the Finance Act, 2026 is the continuation and reinforcement of the concessional tax regime under section 115BAC(1A). The law prescribes that individuals opting for the new tax regime will enjoy a higher basic exemption limit of ₹4,00,000, compared to ₹2,50,000 for regular taxpayers. Senior citizens continue to benefit from higher exemption thresholds of ₹3,00,000 and ₹5,00,000 depending on age.
The Act also retains the concept of aggregating agricultural income with total income for rate purposes where such agricultural income exceeds ₹5,000, ensuring continuity in tax computation methodology.
Surcharge Structure: Steep Gradation for High-Income Earners
The Finance Act, 2026 maintains a progressive surcharge structure, particularly impacting high-income individuals and entities. For individuals and similar taxpayers not opting for the new regime, surcharge rates range from 10% to a maximum of 37% for income exceeding ₹5 crore.
However, in line with recent policy trends, surcharge on certain categories such as dividend income and capital gains is capped at 15% in specified cases, especially under the concessional tax regime, offering relief to investors.
Domestic companies and cooperative societies also continue to face tiered surcharge rates, generally capped at 7% and 12% depending on income levels, while foreign companies are subject to lower surcharge rates of 2% and 5%.
Health and Education Cess Retained
The Act continues the levy of Health and Education Cess at 4% on the aggregate of income-tax and surcharge. This remains unchanged and is intended to support government expenditure on public health and education infrastructure.
Integration with Income-tax Act, 2025
A notable structural shift reflected in the Finance Act, 2026 is the simultaneous application of tax provisions under both the Income-tax Act, 1961 and the newly enacted Income-tax Act, 2025. The Act provides separate rate schedules and surcharge provisions under Part I-A and Part I-B of the First Schedule for both regimes, indicating a transitional phase in India’s direct tax system.
Under the new Income-tax Act, 2025, similar exemption limits and surcharge structures have been prescribed, ensuring consistency and a smoother transition for taxpayers migrating to the new code.
