As we approach February 2026, the Indian economic landscape is buzzing with Pre-Budget chatter. At Motilal Oswal, we view the Union Budget not just as a fiscal balance sheet but as a catalyst for the Financialization of Savings. With the Nifty 50 consistently finding new floors and India’s GDP growth targeting a steady 7.3% - 7.5%, the 2026 Budget is expected to be a milestone in the journey toward Viksit Bharat 2047.

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For the individual taxpayer, the strategy is simple: Increase disposable income to fuel domestic consumption. Two instruments are central to this goal: the Standard Deduction and Section 87A Rebates.

Here is our perspective on what to expect in 2026 regarding these silent tax-savers.

Standard Deduction: The Inflation Offset

The Standard Deduction is a flat deduction available to all salaried employees and pensioners, regardless of their investments. In the 2025 Budget, the government already showed its hand by raising this from ₹50,000 to ₹75,000 for those opting for the New Tax Regime.

Why 2026 Expects More:

Our research at Motilal Oswal highlights that urban inflation, particularly in essential services and transport, has outpaced the general CPI. For the 8th Pay Commission (likely effective from Jan 2026) to have its full impact on the economy, the tax-free portion of the salary needs to grow.

• Current Limit: ₹75,000 (New Regime).
• Budget 2026 Prediction: We anticipate the limit could be hiked to ₹1,00,000.
• The Rationale: A ₹1 lakh deduction simplifies the calculation for the common man and provides an additional ₹25,000 tax-free buffer, effectively putting more cash into circulation.

Section 87A: The Zero Tax Threshold

The Section 87A rebate is the government's primary tool for providing relief to the lower-middle-income group. In 2025, the government made a historic move by raising the eligibility for a full rebate up to a taxable income of ₹12 lakh in the New Tax Regime.

What’s on the 2026 Horizon?

While the ₹12 lakh threshold is already generous, the Marginal Relief issue remains a pain point. Currently, someone earning just ₹12.01 lakh can end up with a significantly higher tax liability than someone earning ₹11.99 lakh.

Expectations for 2026:

1. Rebate Cap Hike: We expect the maximum rebate amount to be adjusted if slabs are widened, moving from the current ₹60,000 to approximately ₹70,000.
2. Smooth Transition: A more robust Marginal Relief mechanism to ensure that small salary increments don't lead to disproportionately higher tax outgoes.

Effective Tax-Free Income Table (Projections)

The 8th Pay Commission Alignment

With the implementation of the 8th Pay Commission, the basic pay for central government employees is expected to rise by a fitment factor of roughly 2.86x.

At Motilal Oswal, we believe the 2026 Budget must align the Standard Deduction and Rebates with this new pay scale. If the entry-level salary rises to approximately ₹51,000 per month, the tax-free limits must move upward to prevent the lower-income workforce from being dragged into the tax net prematurely.

Pensioners: A Focused Wishlist

For our Silver Generation, the Standard Deduction is the only major relief in the New Tax Regime.

• Expectation: A separate, higher Standard Deduction for pensioners perhaps ₹1.25 lakh.

• The Motilal View: Since pensioners do not have the same income growth potential as the working class, a higher deduction protects their purchasing power against medical inflation.

 Summary: Taxpayer Impact Analysis

Final Thoughts: The Wealth Creation Angle

While the Standard Deduction and 87A Rebates are about saving money, at Motilal Oswal, our focus is on what you do with those savings. A ₹25,000 increase in the Standard Deduction might save you a few thousand rupees in tax, but if invested in a high-quality equity fund via an SIP, that tax saving could grow into a substantial corpus over a decade.

The 2026 Budget is likely to reward the disciplined taxpayer. Our advice? Use the extra cash from these expected reliefs to strengthen your QGLP-aligned portfolio.