Budget 2026: Should India Raise and Index the 30% Income Tax Slab to Inflation?

As inflation erodes real incomes, tax experts are urging the government to raise India’s 30% income tax slab from ₹24 lakh to ₹35 lakh and link slabs to inflation, arguing it would ease middle-class strain and support economic growth.

Rising salaries may appear impressive on paper, but for much of India’s urban middle class, higher pay has failed to translate into greater purchasing power. With inflation steadily driving up the cost of housing, healthcare, education, and daily essentials, more taxpayers are being pushed into the highest income tax bracket without feeling financially better off.

Ahead of Union Budget 2026, this has reignited a debate on whether India’s income tax slabs—particularly the 30% bracket—should be raised and indexed to inflation to better reflect real living costs.

Currently, the 30% tax slab applies to incomes above ₹24 lakh under the new tax regime. Tax experts argue that this threshold has not kept pace with inflation and wage growth, resulting in “bracket creep,” where taxpayers pay higher taxes despite no real increase in purchasing power.

“Low slabs push even first-time earners, such as young engineering graduates, into the top bracket prematurely, fostering a perception of taxation as a burden rather than a contribution,” said Anil Harish, Partner at DM Harish & Co.

Experts broadly support increasing the threshold to around ₹35 lakh. Akhil Chandna, Partner and Global People Solutions Leader at Grant Thornton Bharat, said nominal salary growth has been consistently outpaced by rising living expenses, unfairly pushing taxpayers into higher tax brackets.

If tax slabs remain static while prices rise, individuals end up paying a larger share of their income in taxes without actually becoming wealthier in real terms. Raising the threshold would help ensure taxpayers are not penalised merely for keeping pace with inflation.

Economic implications of raising the slab

While increasing the slab could lead to some short-term loss in direct tax revenue, experts believe the long-term economic benefits could outweigh the costs.

SR Patnaik, Partner and Head of Taxation at Cyril Amarchand Mangaldas, noted that higher disposable income for the middle class would boost consumption, increase GST collections, and potentially ease inflationary pressures. Increased spending on goods such as cars, electronics, and housing could also support business expansion and job creation.

Higher take-home pay could encourage savings and investments, while also improving tax compliance by reducing incentives for evasion. “Adjusting tax slabs can change perceptions, making high earners feel valued rather than penalised,” Harish added.

Who benefits the most?

Salaried employees stand to gain immediately through reduced tax deducted at source (TDS), resulting in higher monthly cash flows to meet urban expenses like education, rent, and healthcare. Bonuses would also face a lower effective tax burden.

For the self-employed, a higher threshold could free up capital for reinvestment in businesses instead of losing a significant portion of profits to taxes. Retirees, too, would benefit as fixed incomes are better protected against rising medical and living costs, helping savings last longer.

Ritika Nayyar, Partner at Singhania & Co, cautioned that the size of the increase matters. “A marginal hike may not fully offset rising urban costs, but any increase would still bring taxation closer to current economic realities,” she said.

Alternatives to slab hikes

Some experts suggest complementary measures rather than frequent slab revisions. These include expanding deductions for provident fund contributions, health insurance, education expenses, and housing loans—particularly updating the ₹2 lakh cap on home loan interest, which many say is outdated.

Others recommend reinstating inflation indexation for tax slabs, similar to how capital gains were once adjusted, allowing for automatic annual updates. Chandna proposed a formal review of slabs every three to five years, along with enhancements to standard deductions and Section 87A rebates.

Toward a taxpayer-friendly system

Beyond numerical adjustments, experts stress the need for broader reforms—simpler compliance, reduced litigation, faster grievance redressal, and respectful treatment of taxpayers. Digital tools and policy stability, they argue, are just as important as fiscal relief.

As Budget 2026 approaches, raising and indexing the 30% tax slab is emerging as a key proposal to inflation-proof India’s tax system—offering relief to taxpayers while supporting consumption-driven growth.