Finance Minister Nirmala Sitharaman will present the Union Budget 2026 for the financial year 2026-2027 (FY27) on February 1, with market participants anticipating measures that can drive economic growth without compromising fiscal discipline. Expectations center on announcements to boost consumption, support manufacturing, and accelerate economic growth, with markets favoring structural growth initiatives over short-term populist measures.

Fiscal Consolidation Takes Center Stage

Increased focus on fiscal consolidation represents a long-term positive for the economy and markets, as it boosts investor confidence, attracts foreign investments, improves sovereign credit ratings, and supports currency stability. India aims to narrow the fiscal deficit and bring central government debt towards 50% of gross domestic product (GDP) by FY31.

"From an investor's perspective, the key focus areas in this Budget will be fiscal discipline, continuity in capital expenditure, and policy stability. Markets will closely watch the government's commitment to its fiscal deficit roadmap, as that has a direct bearing on bond yields, currency stability, and overall sentiment," said Gaurav Bhandari, CEO of Monarch Networth Capital.

Capital Expenditure Roadmap

Government capital expenditure has served as the key driver of India's economic growth over recent years. Sustained focus on infrastructure projects will support market sentiment, with continued capex allocation towards infrastructure, defence, power, and manufacturing remaining critical for long-term growth.

Long-Term Capital Gains Tax Rationalization

Investors seek stability in taxation, particularly around capital gains and personal taxes. In Union Budget 2024, the government increased long-term capital gains (LTCG) tax to 12.50%, while raising the exemption limit to ₹1.25 lakh from ₹1.00 lakh. The market expects rationalization of LTCG tax and an increase in the exemption limit.

"If a person is selling equity based on mutual fund units after 5-7 years, ₹1.25 lakh tax exemption is a low threshold," said Mihir Tanna, Associate Director of Direct Tax at SK Patodia and Associate LLP.

Bhuvaneshwari A., Managing Director and CEO of SBICAP Securities, emphasized that the government should rationalize the LTCG tax regime for PAN-linked retail investors as a calibrated behavioral nudge. "Rewarding longer holding periods with reduced tax rates incentivises financial discipline, broadens participation, and supports market stability. With the right thresholds, such a move can be revenue-neutral while structurally aligning household savings with India's long-term growth."

Divestment Plans and Market Liquidity

Divestment initiatives will reduce government borrowing needs and increase system liquidity, boosting market sentiment. "Strong divestment (potentially ₹50,000-60,000 crore) could reduce borrowing needs, supporting equity markets by freeing up capital," said Vinit Bolinjkar, head of research at Ventura.

Infrastructure and Job Creation Push

Morgan Stanley expects the government to focus on sustained capital expenditure to support job creation, targeted social sector spending, and renewed structural reforms. Major announcements in these areas will provide long-term economic benefits.

Additional investor-focused measures may include:

• Clarity on transfer pricing and safe harbour rules
• Exemptions for IFSC units in GIFT City to attract FDI and FPI investments
• Extension of startup tax holidays to 2030
• MAT exemptions for foreign firms to spur venture capital inflows

Investment Strategy Recommendations

Experts recommend defensive strategies amid heightened market volatility. Santosh Meena, head of research at Swastika Investmart, identifies large-cap private banks and select public sector undertakings as attractive value opportunities.

"Private lenders have seen their valuations moderate significantly, offering a favourable entry point relative to their historical averages. Despite recent market pullbacks, the structural story for PSUs remains intact," Meena explained. The FMCG sector provides necessary defensive hedging with earnings visibility and stability during volatile periods.

Tax policy experts have presented comprehensive recommendations for Budget 2026 to enhance India's mergers and acquisitions environment, particularly with the Income-tax Act, 2025 scheduled for implementation from April 1, 2026. The suggestions aim to address existing regulatory gaps and improve the ease of doing business for M&A transactions.

Fast-Track Demerger Tax Neutrality

A primary recommendation involves extending tax neutrality to fast-track demergers under Section 233 of the Companies Act, 2013. Currently, the Income-tax Act, 2025 provides tax neutrality only to NCLT-approved demergers under Sections 230 to 232, excluding fast-track demergers that enable small or closely held companies to undertake demergers without court approval.

The finance ministry's rationale for excluding fast-track demergers centers on concerns about potential valuation manipulation without court oversight. However, experts argue this approach contradicts the ease of doing business agenda, forcing genuine taxpayers to choose between transaction efficiency and tax benefits.

Contingent Consideration Clarity

Experts emphasize the need for clear taxation guidelines on earn-out, profit-linked, or contingent consideration arrangements that have become increasingly common in M&A transactions. These arrangements tie part of the sale consideration to achieving specific profitability or financial milestones.

The current legal framework lacks clarity on:

• Taxability of contingent payments
• Timing of taxation for such arrangements
• Treatment of milestone-based considerations

Foreign Company Merger Anomalies

The recommendations address existing inconsistencies in foreign company merger taxation. While foreign companies enjoy capital gains tax exemptions on direct or indirect share transfers during mergers with other foreign companies, shareholders of the amalgamating company face potential capital gains liability on share swaps.

This creates an anomaly compared to domestic mergers, which provide exemptions at both company and shareholder levels.

Capital Gains Tax Rate Concerns

The recent capital gains tax regime rationalization introduced higher long-term capital gains tax rates, which experts suggest adversely impacts investor returns and exit efficiency. The increased rates potentially drive investors toward jurisdictions with more favorable tax regimes.

Key concerns include:

• Reduced post-tax returns for investors
• Decreased competitiveness with other investment destinations
• Impact on foreign capital attraction

Experts recommend reducing capital gains tax rates, suggesting restoration of the earlier 10.00% rate to improve India's competitive position in attracting foreign investment.

Strategic Implementation Timeline

With the Income-tax Act, 2025 set for April 1, 2026 implementation, Budget 2026 represents the final opportunity to incorporate these amendments before the new framework takes effect. The recommendations aim to position India as a preferred destination for cross-border M&A activities while maintaining regulatory integrity and supporting corporate growth objectives.