Union Budget 2026: A Paradigm Shift in Direct Taxation

The Union Budget 2026, presented on 1 February 2026, marks a historic milestone in India's fiscal policy. As the first budget formulated at Kartavya Bhawan and the ninth consecutive presentation by the Finance Minister, it sets the stage for a revamped economic framework. Influenced heavily by the Viksit Bharat Young Leaders Dialogue 2026, the proposals reflect a deep commitment to "Yuva Shakti" and inclusive progress.

The Government has articulated a "Sankalp" to transform aspirations into tangible outcomes, ensuring that the dividends of growth permeate to farmers, women, SC/ST communities, and the youth. With a robust focus on technology—spanning AI, energy security, and digital infrastructure—and a steadfast adherence to fiscal discipline under the Atmanirbhar Bharat initiative, the economy continues to demonstrate resilience with a growth trajectory hovering around 7%.

Below is a detailed analysis of the pivotal Direct Tax proposals that promise to reshape the compliance landscape for the assessee.

1. Structural Overhaul: The New Income-tax Act, 2025

In a move to simplify the legislative framework, the Government has finalized a comprehensive review of the existing laws. The Budget proposes the enactment of the Income-tax Act, 2025, which is slated to come into force starting 1 April 2026.

Concurrently, new Income Tax Rules and revised return forms will be notified. These changes aim to streamline the compliance journey, ensuring that the assessee faces minimal procedural friction while fulfilling tax obligations.

2. Rationalization of Deductions and Exemptions

Employee Contributions to Welfare Funds (Section 29)

Historically, employers faced disallowances if employee contributions to funds like PF or ESIC were not deposited by the due dates specified under the respective labor acts, even if paid before the tax return deadline.

The Budget proposes a significant relief under Section 29. The deduction for such contributions will now be linked to the income tax return filing deadline under Section 263(1). Consequently, an employer assessee will be eligible for the deduction provided the contribution is deposited on or before the due date for filing the return of income, decoupling it from the stricter timelines of welfare laws for tax deduction purposes.

Relief for Motor Accident Victims

Interest awarded on compensation under the Motor Vehicles Act, 1988 has been a subject of taxation, with TDS applicable if the amount exceeded Rs. 50,000. Recognizing the hardship faced by victims, the Budget proposes to move such interest income received by an individual or their legal heir into the exempt category. Furthermore, the requirement to deduct TDS on such payments is proposed to be eliminated.

Disability Pension for Armed Forces

To honor the sacrifices of the defense personnel, the Budget proposes a formal statutory exemption for disability pensions. This covers both the service and disability elements for personnel invalided out of service due to disability attributable to or aggravated by military service. This benefit also extends to eligible paramilitary forces. However, it is clarified that this exemption does not apply to cases of retirement on superannuation.