Pratik Gupta, CEO and Co-Head at Kotak Institutional Equities, has set modest expectations for the upcoming Union Budget 2026, citing limited government room for significant fiscal stimulus measures. Speaking about market outlook and budget expectations, Gupta emphasized that the focus may shift toward what he terms "governance stimulus" rather than traditional spending measures.

Budget 2026 Expectations and Reform Focus

Gupta outlined his expectations for the government's approach in the upcoming budget, highlighting structural reforms over direct stimulus measures.

According to Gupta, investors should "watch out for steps which would be rupee supportive," including specific measures designed to attract foreign direct investment and enhance portfolio flows into the country.

Market Risks and Global Factors

Gupta identified several key risk factors currently impacting Indian equity markets. Global bond yields emerged as a primary concern, with rising yields worldwide creating uncertainty for emerging market investments. He specifically pointed to the sharp rise in Japanese bond yields as a recent warning sign for broader market stability.

Foreign institutional investor outflows represent another significant challenge, with approximately ₹3.00 billion in selling recorded during the first 20 days of January. Gupta noted that India currently lacks the high-growth profile or attractive valuations that would draw international capital, particularly compared to markets with significant artificial intelligence-linked stocks in the US and parts of Asia.

IPO Market and Deal Pipeline

Despite challenging market conditions, the initial public offering landscape remains active with a robust pipeline of upcoming issues.

Gupta emphasized that domestic institutional investors, particularly mutual funds and insurance companies, continue to provide the primary source of demand for new issues. While valuation expectations have moderated and local investors are negotiating more aggressively on pricing, most companies are proceeding with their capital market plans without major delays.

Market Outlook and Investment Strategy

Regarding market positioning and investment approach, Gupta advised a cautious stance given current global uncertainties. He expects continued volatility over the coming months, driven primarily by uncertainty surrounding US trade policy and tariff implementations.

India's economic fundamentals remain relatively stable, with inflation under control and growth expectations in the 6.50%-7.00% range. However, Gupta stressed the importance of capital preservation, stating "protect your capital first" until greater clarity emerges on global policy directions.

Gupta's assessment suggests that while large-cap stocks have corrected to reasonable levels, mid-cap and small-cap segments may face additional pressure due to elevated valuations and recent earnings downgrades across various sectors.

India stands at a pivotal moment as Union Budget 2026 approaches, with expectations centered on comprehensive direct tax reforms aligned with the government's "VIKSIT BHARAT" vision. The budget is anticipated to focus on accelerating growth across sectors, promoting ease of doing business, and simplifying compliance, particularly in direct taxation. The significance of this year's budget is heightened by the imminent replacement of the six-decade-old Income Tax Act, 1961, with the Income Tax Act, 2025, effective from April 1, 2026.

Key Structural Reforms Expected

The proposed legislation introduces several fundamental changes designed to modernize India's tax framework. The most notable reform involves replacing the terms 'Assessment Year' and 'Previous Year' with a unified 'Tax Year' concept to eliminate confusion and make tax law more intuitive and accessible.

Consolidation of scattered provisions and clearer statutory language are expected to reduce interpretational disputes that have historically fueled litigation. The explicit recognition of virtual digital assets, including cryptocurrencies, within the statutory framework signals acknowledgment of evolving economic realities and the need for clarity in taxation.

Withholding Tax Rationalization

The current multiplicity of TDS and TCS rates has long been a source of compliance complexity and increased risks. Growing expectations suggest the budget will move towards a more streamlined structure, possibly by excluding transactions already subject to GST from withholding requirements and introducing standardized rates for remaining categories. Such changes would ease compliance burden and improve business cash flows without compromising revenue visibility for tax administration.

Significant Economic Presence Clarity

The existing Significant Economic Presence (SEP) provisions have raised concerns due to potentially wide coverage that risks including both physical and digital transactions within scope. Budget 2026 is expected to address these concerns by:

• Refining definitions to explicitly include "digital means"
• Clarifying disclosure and compliance obligations for non-residents
• Providing certainty where permanent establishments already exist in India

Investment and Innovation Incentives

Uniformity in deduction of stock-compensation expenses remains an area of uncertainty and litigation. Clear recognition of payments by Indian employers to foreign parents regarding share issuance to Indian employees as revenue expenditure would reduce disputes. The possible reintroduction of weighted deductions for research and development, extended beyond manufacturing to the service sector, is viewed as critical for fostering innovation.

Dispute Resolution Improvements

Expectations extend to resolving long-standing ambiguities in capital gains taxation, particularly for transactions involving contingent consideration. Procedural reforms such as prescribing timelines for disposal of first appeals could address prolonged litigation issues. The Dispute Resolution Panel (DRP), while constituted for settlement purposes, has not performed effectively as intended. A domestic settlement mechanism is needed to reduce litigation, building on India's successful unilateral APA program implementation.

Balanced Approach to Reform

As the budget date approaches, the underlying theme emerging from stakeholder expectations is balance. Rather than seeking blanket concessions, stakeholders want a coherent and predictable tax regime that supports growth while safeguarding revenues. Rationalizing tax provisions, extending concessional rates, and fostering research-driven enterprises can serve as key enablers for achieving the "MAKE IN INDIA" mission and the broader "VIKSIT BHARAT" vision.

The comprehensive nature of expected reforms reflects India's commitment to creating a modern, efficient tax system that meets contemporary business needs while maintaining fiscal discipline and revenue adequacy.