Fixed-income markets are drawing heightened attention from both retail and institutional investors as Budget 2026 approaches. Elevated bond yields, global rate volatility, and shifting fiscal-monetary dynamics have combined to make bonds an increasingly relevant asset class in portfolio construction. Market participants indicate the upcoming Budget could play a pivotal role in shaping sentiment across government securities, corporate debt, and broader capital markets.

Fiscal Discipline Key for Bond Stability

According to Saurav Ghosh, Co-founder of Jiraaf, investors are closely monitoring the government's commitment to fiscal consolidation. "As we look ahead to Budget 2026, retail and bond investors alike are keenly focused on fiscal consolidation and credible deficit guidance," Ghosh explains. He emphasizes that a disciplined approach toward lower fiscal deficits helps anchor government bond yields and reduces uncertainty in the rate environment.

Stable sovereign yields create cascading positive effects across debt markets. "It creates conditions for Indian corporates to tap the debt markets with greater confidence," Ghosh notes, adding that higher corporate bond issuance can meaningfully boost capital formation and support economic growth, particularly during periods of equity market volatility.

Regarding taxation expectations, Ghosh anticipates limited changes. "Both tax regimes have already seen significant reform over the last 12 months, so the Budget is more likely to focus on clarifications rather than major structural changes," he states.

Global Dynamics vs Domestic Resilience

While global developments continue influencing capital flows, economists argue that India's domestic fundamentals will ultimately guide bond markets. Pranjul Bhandari, Chief India Economist and Strategist at HSBC Global Investment Research, highlights the complex global backdrop affecting Indian markets, including bond index inclusion discussions and shifts in global monetary policy.

"There is a lot going on globally that impacts Indian markets, but we are focusing on India's domestic resilience, which we believe will guide markets once the dust settles," Bhandari observes. She points to strong domestic growth and benign inflation readings as indicators of a favorable economic phase, while acknowledging concerns around insufficient corporate investment and subdued foreign inflows.

Favorable Fiscal-Monetary Mix for Bonds

The current macroeconomic environment appears supportive for fixed-income investments. Bhandari believes the combination of tight fiscal policy and relatively easy monetary conditions could create an optimal balance for asset markets. "This mix should be positive for all asset classes," she explains.

Several factors are already supporting bond markets:

• Higher state government borrowing planned for Q1 FY26 is largely priced in
• Ongoing RBI bond purchases are helping contain yield volatility
• Expectations of fiscal prudence in Budget 2026 could reinforce market confidence
• Bond index inclusion developments may unlock incremental foreign flows

Bhandari emphasizes that bond index inclusion-related developments represent a potential additional tailwind that could unlock incremental foreign flows into Indian debt over the medium term, further strengthening the fixed-income market outlook.

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.