Nuvama Institutional Equities expects Budget 2026, set to be unveiled by Finance Minister Nirmala Sitharaman on February 1, 2026, to maintain a neutral stance from the market's perspective. The brokerage anticipates the FY27 budget will provide modest growth support without significantly disrupting the ongoing earnings downgrades cycle.

According to Nuvama's latest report, the key risk to earnings for FY27 will be margin mean reversion rather than top-line growth challenges. The budget is not expected to significantly favour any specific sector, prompting the brokerage to maintain its defensive investment approach.

Sector Preferences and Outlook

Nuvama's sectoral strategy reflects a cautious yet selective approach across different market segments.

Defence Sector Expectations

The defence sector presents significant growth potential according to Nuvama's analysis. The brokerage projects defence capital expenditure to increase by approximately 8% year-over-year, driven by ongoing modernization efforts and new reforms.

The brokerage emphasizes that success in defence investments will depend on selecting companies demonstrating quicker execution, greater localisation, and better cash conversion rather than merely focusing on order book growth. The anticipated budget increase is expected to accelerate the transition towards execution-driven earnings.

Agriculture and Infrastructure Allocations

For agriculture, Nuvama indicates the government intends to allocate approximately ₹1.5 trillion to the agriculture ministry to sustain PM KISAN and insurance initiatives. Due to crop damage from unpredictable weather patterns, the brokerage anticipates increased allocation for crop insurance, though this is expected to have neutral sector impact.

Railway capital expenditures are expected to see increased budget allocation after three years of relatively subdued growth. The focus will be on enhancing capacity, introducing new rolling stock, and undertaking safety projects. The overarching policy goal remains reducing logistics expenses, as India's logistics costs still exceed the 6-7% level typical of developed nations.

Power Sector Developments

Nuvama anticipates the government will provide robust insights to promote base load servicing for power demand and encourage broader private sector involvement through incentives. Power transmission and distribution stocks are expected to attract attention, along with stocks driven by private capital expenditure following favourable comments on Production Linked Incentive (PLI) scheme introduction.

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.