Budget 26–27: Win or Worry?

The financial budget for F.Y. 2027 was a much anticipated event with experts speculating a higher allocation of funds towards the defense sector. We saw the rupee fall against the major global currencies, the prices of commodities like gold and silver surge and fall back down, and major economic disasters like the tariff wars. After witnessing all of this, investors and citizens alike looked forward to some relief from the center. The budget was delivered by finance minister Nirmala Sitharaman for a landmark 9th consecutive year.

Source: outlook business

Highlights of the Budget

What Are The Changes To Income Tax?

When a new budget is announced, the first question for most people is simple: how much tax will I pay on my income? Let’s start from here.The income tax slab rates introduced in F.Y. 2026 were designed to reduce income inequality by easing the burden on lower-income groups while increasing taxation on higher earners. In earlier years, the tax structure placed a disproportionate burden on the middle and lower-middle classes. The reforms in F.Y. 2026 sought to correct this imbalance. The current budget continues this approach and keeps the income tax slabs unchanged.

The economically weaker sections of society have a huge relief in the form of no income tax. This is a huge help to the nation as the income distribution in India is tilted towards the lower income sections, meaning that the majority of revenue from the income tax comes from the lower income sections of society.

Source: times of india

There have been major changes to the income tax refunds; earlier the tax refunds could be filed until the 31st of December of that fiscal year. However, under the new scheme the refunds can be filed until the 31st of March. 

Now that income tax has had its moment in the spotlight, here comes its sneaky cousin, capital gains tax, the one that waits patiently until you think you’ve won.

What Changes For The Equity Markets?

When the finance minister on 1st February 2024 announced that the capital gains tax on equity markets will now be 20% in the short term and 12.5% in the long term, chaos ensued in the markets. Everyone rushed to book their profits before they were forced to give nearly a 5th of them to the government.

Year	LTCG	STCG
2023	10%	15%
2024+	12.5%	20%

There was backlash from the investors who were understandably discontent with this change. The move was made by the government to prevent day trading, a major cause of losses among new and seasoned investors alike, and to promote long term investments which help both the investor and the company. The same momentum has been carried forward by the government in this fiscal year, keeping the long term and short term capital gains taxes unchanged. There has however been a major change in futures and options. According to a SEBI report 93% (as of 2024) of the investors lose their money in F&O due to market illiteracy. Despite being marketed as sophisticated financial instruments, futures and options have proven to be remarkably efficient at transferring money from retail investors to the market. In order to address this, the STT on futures has been changed from 0.02% to 0.05% and options from 0.10% to 0.15%. 

Year	Futures	Options
2025	0.02%	0.10%
2026	0.05%	0.15%

This caused massive selling of stocks and nearly 10 lakh crores were wiped out from the market in one day. The market saw the worst budget day in six years. 

Source: tradingview

The Budget for 2026 also changed the taxation of share buybacks. Under the earlier system, companies paid a buyback tax, while investors were taxed on the buyback proceeds as dividend income at their applicable income tax slab rates. This meant that for high income individuals, a tax of 30% would be levied on their buyback proceeds. The new system addresses this and taxes only the profit from these investments as capital gains tax. This effectively lowers the amount of tax paid by the investor. The elimination of share buyback tax also encourages companies towards share buybacks, as they can now produce higher profits for their investors with the same capital. This decision falls in line with the moves made by the government to limit short term trades by encouraging investors towards longer holding periods.

The foreign investor limits were raised from 10% to 24%. By doing this the new budget seeks to attract heavier and more stable long term foreign investments.

What Changes For Corporates?

Having navigated the maze of equity taxes, let’s step into the boardroom where corporate taxes play their own tricky game.

The MAT(minimum alternate tax) has been changed from 15% to 14% nudging companies towards the new regime and creating room for investments. MAT is the minimum amount of tax paid by a company which was introduced by the government as a result of companies booking profits and not paying the due taxes by taking advantage of the various income tax schemes available to them. In the earlier regime, companies could offset the MAT with the use of MAT credits by paying more tax than is due. This however has been curbed by the new regime which makes MAT a final tax. Companies now have until 31st of March to make use of their MAT credits and are restricted to only use 25% of it. This move prevents the misuse of government policies and forces fair competition between companies.

Transfer pricing in the IT sector also saw changes, the safe harbour was changed to 15.5% from the earlier 22%. Transfer pricing comes into effect when a company conducts transactions with its foreign counterpart. During such transactions if the company makes too little or very high profits, it could disrupt the company’s profits and move them out of India. To prevent this, a safe harbour of 15.5% is established for the IT sector which means that as long as the company makes a profit of at least 15.5% from overseas transactions, the government will not scrutinize such transactions. However if the profits from such transactions are lower, the company might receive a warning. This move provides for much more room for negotiation and fosters foreign trade by introducing flexibility in deals.

The budget also paved the way for several new subsidies. The foremost being that foreign companies using Indian data centres will have a tax holiday until 2047. This encourages foreign institutions and domestic competitors alike to invest in India driving the country towards becoming a manufacturing and AI giant. The government has been pushing for semiconductor production in India which is supported by the ample availability of suitable lands for these fabrication units. The government has provided 76000 crores in 2021 for the semiconductor industry in India paying for as much as 50% of the project cost of in house production of designs and chips. This has attracted competitors like Micron and TSMC into the country along with domestic players like L&T and Tata Electronics. This push towards becoming a manufacturing hub is well planned and if executed well would successfully provide millions of jobs to engineers not only from India but from abroad as well. 

The increased competition will drive revenue into the country thereby increasing the GDP and establishing India as a dominant force in the industry which currently dominates global economies. The budget seeks to nearly double the outlay under the ECMS scheme to 40,000 crores. These investments are meant to attract an inflow of investments instead of dependency on foreign institutions for chips and semiconductors. 

The pharmacy sector in India has seen robust growth over the past few years and now has a new SHAKTI scheme which allocates 10,000 crores over the course of 5 years towards research and development of medicines in India.

The agriculture sector of India which provides employment to 45-46% of India’s workforce has also received a heavy subsidy of 1.76 lakh crores for fertilizers. There is also a push for high value crops and tech oriented schemes like Bharat-VISTAAR integrating technology with agriculture providing a means of growth to both the tech and agricultural sectors.

Tariffs?

The tariff wars that started with the United States handing out tariffs to countries as if they are candies soon engulfed the global economic landscape with each country reciprocating tariffs. But why?

Source: cleartax

Tariffs work by imposing an extra tax on the goods imported from companies originating from a specific country, which means that these companies offset this extra tax burden by hiking their retail prices. So the final bearer of the tariff now becomes the consumer. Tariffs are a useful financial instrument which catalyzes domestic growth by making foreign products undesirable by forcing their prices up. However, exorbitant tariffs without a suitable domestic substitute means that the already taxed citizen now digs into savings to pay the government. 

When the United States started imposing tariffs across the globe, countries reciprocated by making it harder for American companies to sell their products by reciprocating these tariffs. The Indian government however had free trade deals with multiple countries which remained as such. The United States threatened to impose tariffs of 50% on India which has been addressed in the budget for 2026 and the American tariffs have now been set to 18%. India has also signed the “mother of all deals” with the European Union. Trades with 27 European countries will now see a reduced or eliminated tariff. It also provides for zero duty exports of 99% of Indian goods.

The budget has also lowered the Basic Customs Duty (BCD) on all personal imports from 20% to 10%. It has also reduced the BCD on 17 cancer drugs and 7 rare disease drugs to zero, making treatment cheaper and more accessible to the citizens. The BCD on parts for electronics has also been reduced in an effort to promote manufacturing within the country which has undeniably been the focus of the new budget. BCD has also been fully removed for the parts required for repair and maintenance of passenger aircrafts. This falls in line with the push for 2 new airlines which was announced earlier in 2026  by making it easier for upcoming and existing companies to stay afloat with their expenses.

GST Reforms

Let’s finally address the elephant in the room, the tax that chips away at your income silently. The GST slabs which had earlier become a spider’s web of categories and cost linked segregation has now been simplified. Products are mainly taxed at 5%, 18% and a “demerit/sin” slab has been created for items like tobacco. Luxury goods will now be priced at 40% instead of the earlier 28%, this includes items such as mid sized vehicles, private jets, yachts and bikes over 350cc. 

Provisional refunds of up to 90% are now being offered on inverted duty structure. Inverted duty structure refers to the situations where the taxes paid on raw material is more than the tax paid on the final product which results in tax credit. This system allows for the government to resolve matters quickly by having disposable provisional funds and allows for the government to have a safety bed of 10%. 

The export refund threshold of ₹1000 has now been removed. An export threshold meant that transactions less than a thousand rupees would be exempt from tax refunds which posed a threat to small courier companies. This limitation however has now been removed and companies can claim a tax refund for any transaction value. This provides a level paying field for companies of all magnitudes and fosters domestic competition.

Allocation of Funds For Defense

The Indian government has fairly responded to the rising tensions in south east Asia by allocating higher funds towards defense. The defense ministry has been provided the highest ever budget in its history of 7.85 lakh crore which is about 2% of the projected GDP for 2026-2027. This in turn means that more funds would be allocated towards r&d for defense projects. Putting into perspective the government’s push for drones and the various PLI schemes offered for the same, the competition in the manufacturing sector for defense is expected to become more active. Healthy competition would lead to innovations catalyzed by the government’s aid. 

Out of the 7.85 lakh crore, 2.31 lakh crore is allocated towards the modernization of the weapons and defense systems. The budget provides for nearly 60,000 crores for aircrafts and 25,000 crores for submarines. There is a focus on enhancing naval and aerial systems likely linked to regional security concerns. Companies like MTartech and BHARATFORGE closely linked to the defense sector are bound to see growth as r&d becomes the prime focus. The Indian defense sector has also seen robust growth in the past few years with deals being made across the globe with leading nations such as Russia, France and the United States.

Allocation of Funds to the Railways

Bullet trains are just as fast at catching headlines as they are on track. India is actively pushing to introduce bullet trains into their vast railway network to make the travel times drastically shorter. For this objective the government has allocated one of the largest ever amount of funds (2.78 lakh crore) for the railways and set aside 2.93 lakh crore for the development of railway tracks, gauge conversion, signalling upgrades and electrification. The railways have also received an additional 200 crores from the Nirbhaya Fund showing the emphasis of women’s safety in public transport. The government has announced the development of 7 new railway routes:

• Mumbai–Pune

• Pune–Hyderabad

• Hyderabad–Bengaluru

• Hyderabad–Chennai

• Chennai–Bengaluru

• Delhi–Varanasi

• Varanasi–Siliguri

This network will not only reduce the travel time between the major cities of India but also lead to the growth and development of the small towns that it passes through. The Indian railway network stands as the 4th largest railway network in the world and with the introduction of its new fleet of vande bharat trains, it is on the fast track to become the largest railway network across the globe through the collaborative efforts of the government and the people of India.

Conclusion

The union budget for 2026 is aimed at making India a manufacturing hub for semiconductors and a cloud service giant. It does so by offering subsidies to any company that sets up their plants in India, which has led to collaborations with foreign institutions, and by offering PLI’s to the companies that do so. The cabinet has addressed major concerns from last year and has made sensible efforts to improve the economic scope of our country.