Nitin Agarwal, CEO of Mutual Funds at InCred Money, has outlined his expectations for Budget 2026, emphasizing the critical balance between fiscal discipline and economic growth stimulus. Speaking about India's economic trajectory amid global uncertainties, Agarwal highlighted the country's remarkable resilience, achieving robust 8% growth in the first half of FY26.

Budget 2026 Priorities and Fiscal Strategy

Agarwal expects Budget 2026 to prioritize three key areas while maintaining fiscal discipline. His recommendations focus on sustained investment, consumption revival, and export competitiveness.

The CEO emphasized that the transition from a $4.00 trillion to a $5.00 trillion economy depends on capital deployment willingness rather than risk containment. He stressed that the government must encourage private sector investment while maintaining fiscal discipline, even if it requires containing revenue expenditure growth.

Historic DII-FII Market Divergence

A significant shift in market ownership patterns emerged during 2025, marking a historic divergence between domestic and foreign institutional investors. The data reveals a fundamental change in Indian equity market dynamics.

Agarwal attributed FII outflows to competing attractions from US markets driven by AI investments, elevated US interest rates making emerging markets less attractive, and concerns about India's premium valuations. Conversely, DII inflows were sustained by robust SIP contributions and growing insurance and pension fund participation.

Mutual Fund Strategy Evolution

Current macro trends and global cues are reshaping mutual fund strategies significantly. Agarwal identified several key strategic shifts occurring in the industry.

Fund managers are increasingly adopting diversified and defensive allocations, with a major shift toward multi-asset allocation funds. These funds balance equity, debt, and other assets, delivering superior performance relative to many standard equity categories in 2025. The strategy benefits from precious metals rallies, with dynamic gold allocation serving as a natural hedge to equity volatility.

Debt fund positioning has adapted to the rate cycle scenario, with shorter-duration debt funds proving successful. Additionally, investments are focusing on India-specific stories as global trends move away from globalization toward protectionism.

Quantitative Investment Growth

The relevance of quantitative strategies is experiencing significant growth in India, representing a fundamental maturation of capital markets. Agarwal noted that quant investing, traditionally a Western phenomenon, has reached an inflection point in India.

The growth is evident across multiple dimensions, with smart beta funds experiencing substantial AUM expansion. Index providers have launched numerous smart beta and factor-based indices, offering investors richer portfolio construction options as active managers' ability to generate alpha in the large-cap segment has declined.

Gold as Strategic Asset Class

Gold's role has evolved significantly, transitioning from a purely defensive hedge to a more dynamic strategic asset class. Agarwal highlighted gold as one of the best-performing asset classes in 2025, driven by inflation concerns and ongoing central bank purchases.

Central bank behavior provides clear indicators of gold's institutional acceptance, with official sector purchases driving gold's proportion of global reserves above the euro for the first time in decades. This creates structural demand supporting sustained appreciation. Multi-asset funds now use dynamic gold allocation, with professional managers actively adjusting exposure based on market conditions rather than maintaining static positions.

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.