India's Union Budget 2026 is expected to prioritise defence-led capital spending while maintaining fiscal discipline, according to a budget preview by Motilal Oswal. The brokerage anticipates the February 1 exercise will focus on defence and allied industries, infrastructure-linked manufacturing, power, electronics, pharmaceuticals and critical minerals, while keeping revenue expenditure under control.

Fiscal Deficit and Growth Projections

Motilal Oswal expects the gross fiscal deficit to decline marginally to 4.3% of GDP in FY27 from 4.4% in FY26, marking a shift towards using debt-to-GDP as the primary fiscal anchor. The budget framework assumes nominal GDP growth of approximately 10.1%, providing limited room for growth support without compromising fiscal consolidation.

Capital Expenditure Focus

The brokerage forecasts capital expenditure to rise 10.3% year-on-year to ₹12.40 trillion in FY27, maintaining its share at around 3.1% of GDP. Defence and allied industries are expected to lead this capex push, with the Defence Acquisition Council already approving capital acquisition proposals worth ₹790.00 billion in its winter session.

The FY26 year-to-date defence approvals of approximately ₹3.30 trillion represent nearly double the budgeted defence capital outlay for the year. Other priority sectors include nuclear energy, electronics manufacturing, power, pharmaceuticals and strategic investments in critical minerals.

Revenue Projections and RBI Dividends

On the revenue front, Motilal Oswal projects steady growth with direct taxes expected to track nominal GDP growth, reaching ₹25.70 trillion in FY27. Indirect taxes, including GST collections, are likely to grow at a slower pace. Non-tax revenues will play a crucial role, with dividends from the RBI and public sector undertakings estimated to rise to ₹3.80 trillion in FY27, supported by RBI's dollar sales boosting central bank profitability.

Borrowing Requirements and Bond Yield Outlook

Despite marginal deficit improvement, borrowing requirements remain elevated. The Centre's gross market borrowings are forecast at ₹16.50 trillion in FY27, with net borrowings of ₹11.90 trillion. State governments are expected to add ₹13.20 trillion in gross borrowing, taking aggregate Centre plus state gross borrowing to ₹29.70 trillion.

This heavy supply, combined with subdued demand from banks, insurers and foreign investors, is likely to keep the 10-year government bond yield in the 6.5% to 6.7% range through FY27.

Investment Themes and Market Outlook

Motilal Oswal views Budget 2026 as a reaffirmation of existing strategy rather than a policy pivot. For equity investors, preferred themes remain defence and allied industries, infrastructure-linked manufacturing, power, electronics, pharmaceuticals and critical minerals. The budget arrives after a normalisation in government capital spending execution and cooling investor enthusiasm for capex-linked sectors, making it a test of policy credibility for sustaining India's capex-led growth narrative.

Industry experts are calling for significant tax relief for senior citizens in Budget 2026, emphasizing that current exemption limits have failed to keep pace with rising living costs and healthcare expenses. With India's 14 crore-plus senior citizens facing mounting financial pressures from medical inflation, static tax thresholds, and shrinking social security support, experts argue that targeted reforms are both practical and overdue.

Current Tax Structure Remains Static Since 2014

The basic exemption limit for senior citizens currently stands at ₹3.00 lakh, while very senior citizens aged 80 years and above enjoy a ₹5.00 lakh exemption threshold. These limits have remained unchanged since their last revision, creating a significant gap between tax policy and economic reality.

Vijay Bharech, Partner at Deloitte India, emphasizes the urgency of reform: "These provisions have remained static for years despite rising living costs. A revision in exemption limits would offer meaningful relief to retirees who rely largely on passive income and help reduce compliance burdens."

Medical Inflation Outpaces General Price Rise

Medical inflation in India is estimated at 12-14% annually, significantly higher than overall inflation, creating particular hardship for senior citizens who face the highest healthcare burden. This disparity has made existing tax structures increasingly inadequate for retirees managing fixed incomes and rising expenses.

Narendra Bharindwal, President of the Insurance Brokers Association of India, notes: "A calibrated increase in exemption limits is overdue, particularly for retirees dependent on fixed incomes and savings, and can be implemented without materially impacting the overall tax base."

Recommendations for Interest Income Relief

Experts are advocating for substantial increases in Section 80TTB limits, which currently allow senior citizens to claim deductions of up to ₹50,000 on interest income from savings accounts, fixed deposits, and recurring deposits. The proposed reforms address the reality that interest income remains a lifeline for retirees.

Kirang Gandhi, a Pune-based financial mentor, explains: "Interest income continues to be a lifeline for retirees, yet the rules around TDS and deductions remain outdated. Increasing the Section 80TTB limit to ₹75,000 or even ₹1.00 lakh would help prevent avoidable tax deductions that disrupt monthly cash flows for senior citizens."

Healthcare Deduction Updates Sought

With medical inflation running well ahead of general inflation, experts are pushing for enhanced Section 80D deduction limits specifically for senior citizens. The current structure fails to address the reality of healthcare costs that disproportionately impact older citizens.

Bahroze Kamdin, Partner at Deloitte India, advocates for regime-neutral benefits: "Health insurance premiums, including those paid for senior citizens, should be eligible for deductions regardless of the regime chosen. Extending similar benefits in India could improve insurance adoption while offering direct relief to retirees."

New vs. Old Tax Regime Considerations

The disparity between tax regimes creates additional complexity for senior citizens. While the new tax regime offers a universal ₹4.00 lakh exemption, it lacks age-based considerations and medical-related deductions that are crucial for retirees.

Experts suggest that if the government continues encouraging adoption of the new tax regime, senior citizens should retain access to essential medical-related tax benefits. Bharindwal proposes: "A simpler approach would be to introduce limited, senior-specific deductions within the new regime, particularly for health insurance or critical illness covers, without complicating the tax structure."

The consensus among financial experts is clear: Budget 2026 presents a critical opportunity to address long-pending gaps in senior citizen tax policy, ensuring that India's growing retiree population can maintain financial dignity amid rising costs and economic pressures.