Vikas Khemani, Founder and CIO of Carnelian Asset Management & Advisors, has outlined comprehensive expectations for Budget 2026, emphasizing the need for sustained capex execution, enhanced R&D investment, and meaningful tax reforms to maintain India's growth trajectory. Speaking on market valuations and policy priorities, Khemani presents a measured outlook for India's economic prospects amid global uncertainties.

Capex Allocation Expected to Exceed ₹11 Lakh Crore

Khemani expects the government's capex allocation to surpass the previous ₹11.11 lakh crore benchmark, supported by higher tax collections and continued focus on capacity building. He emphasizes that government capex extends beyond direct budgetary allocations through SPV-led projects and PPP models.

"More than allocations, the real challenge today is execution capacity," Khemani noted, highlighting that India faces greater constraints in project implementation than in securing financing across private sector, PPP, and government-led initiatives.

SIP Growth and Financial Market Dynamics

With SIP contributions reaching ₹30,000-31,000 crore, Khemani acknowledges the positive trend in household savings financialization while noting structural challenges. He points out that household exposure to financial assets remains in single digits, with potential to reach 15-20.00%.

The shift toward SIPs, combined with new tax regimes, has reduced attractiveness of bank fixed deposits, creating challenges for the banking system. Banks' loan-to-deposit ratios are approaching peak levels, potentially constraining credit flow despite RBI rate cuts.

Equity Market Outlook for 2026

Khemani maintains an optimistic stance on India's equity markets, drawing parallels to the recovery pattern seen in 2022-2023. He views current Nifty PE ratios of 20-21 times as reasonable, neither expensive nor cheap.

"Fundamentally, there is nothing negative from a directional perspective," Khemani stated, citing strong monetary stimulus, supportive fiscal measures, robust government spending, and healthy GDP growth as positive factors.

Key Budget 2026 Expectations

Khemani has outlined four specific policy recommendations for the upcoming budget:

R&D Investment Initiative: Implementation of a CSR-like mechanism requiring companies to contribute a fixed percentage of profits toward research and development, supporting long-term nation-building objectives.

Capital Markets Tax Reform: Elimination of double taxation by removing either STT or capital gains tax, addressing the current burden on investors and market participants.

Dividend Taxation Relief: Revision of dividend taxation structure, suggesting either zero tax or a flat 10.00% rate instead of the current maximum marginal rate applied after corporate tax payments.

Export Sector Support: Provision of incentives, rebates, and credit support for sectors directly impacted by tariff uncertainties, particularly textiles and export-oriented segments, to prevent permanent damage and job losses.

Economic Fundamentals and Growth Prospects

Khemani emphasizes that India's long-term growth story remains intact, supported by multiple positive indicators including strong GST collections, pickup in private capex, and healthy insurance premium collections. He expects 2026 to outperform 2025, contingent on global conditions evolution.

The current market environment represents a "tug of war between strong domestic macros and global concerns," which historically tends to resolve favorably over time. Khemani notes India's significant underperformance versus other emerging markets creates opportunities for capital deployment, with the current vintage potentially delivering strong outcomes similar to the successful 2022 investment cycle.

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.