Union Budget 2026–27: Markets, Sectors & Your Taxes

Union Budget 2026–27 continues the post-Covid pattern seen in the NDA government: fiscal prudence that unsettles equity markets in the short term but reassures bond markets over the medium term. Capital and revenue spending are restrained, revenue projections look achievable, and the fiscal consolidation path remains intact.

Neutral for Stock markets

Markets reacted sharply on Budget Day. Three factors drove the disappointment.

No FPI concessions: A strong pre-Budget narrative had built around potential tax relief on capital gains and withholding tax for foreign investors, given the persistent FPI selling. The Budget made no such move — and given the generous corporate tax, personal tax and GST cuts already delivered over the last five years, these expectations were, in hindsight, unrealistic.
STT hike on F&O: there has been an unexpected and sharp hike in Securities Transaction Tax (STT) on future & options trades. But the powers-that-be have been laser-focused on discouraging F&O trading for two years now. But this stillcaught the market off-guard in its magnitude.
Limited spending stimulus: After a fivefold ramp-up in capital expenditure post-Covid, the Centre now expects the private sector to lead on capex. Budgeted capital outlays of Rs 12.2 lakh crore (up 11.4% over FY26 RE of Rs10.95 lakh crore) are steady but not expansive. Central Ministries appear to be running against capacity constraints — FY26 capital spends already undershot the Budget estimate of ₹11.21 lakh crore.
Silence on 8th Pay Commission: Government revenue spending at Rs 41.25 lakh crore is just 6.6% above FY26 RE. This being lower than nominal GDP growth shows belt-tightening by the Centre. If this is a signal that the 8^th Pay Commission payouts won’t materialise this year, that is a negative for stock markets (consumption and consumer credit sectors).
No PSU disinvestment signal: The FM’s silence on disinvestment or ownership reduction in PSU banks weighed on that segment.

On the positive side, the Budget includes two capital market-friendly moves: NRI and PIO per-investor equity limits have been doubled (5% to 10%), with the aggregate foreign holding limit raised from 10% to 24% — a meaningful liquidity boost is expected from such a move. Additionally, buyback taxation has been clarified so that proceeds are treated as capital gains rather than dividends, removing an anomaly that disadvantaged retail investors after the previous Budget’s changes.

Benign for bond markets

The Budget is broadly positive for bond markets and should keep government security yields in check through FY27.

FY26 fiscal deficit held at 4.4% despite nominal GDP undershooting: Nominal GDP growth came in at 8% versus the 10.1% estimate — driven by low inflation. Ordinarily this would have pushed the deficit ratio higher. Instead, the government shrunk the absolute deficit from ₹15.68 lakh crore (BE) to ₹15.58 lakh crore (RE) — a historically rare occurrence.
FY27 target at 4.3% is achievable: The deficit is pegged at ₹16.95 lakh crore, marginally above the market’s 4.2% expectation. The 10% nominal GDP assumption (6.8% real + 3.2% inflation) is reasonable and in line with the government’s track record of setting realistic targets.
G-sec supply increase is moderate: Government borrowings for FY27 are ₹16.6 lakh crore versus ₹15.12 lakh crore RE in FY26. However, net G-sec issuances are budgeted to only rise from ₹10.4 lakh crore to ₹11.73 lakh crore — not a dramatic increase. The Centre under-borrowed in FY26 and can deploy small savings schemes to bridge any gap.
Shift to debt-to-GDP targeting: The move from a fiscal deficit anchor to a debt-to-GDP target — 50–51% by FY31, down from 55.6% now — is a structural positive. This is the metric global rating agencies focus on, and the commitment signals sustained consolidation.

Ministry-wise Capital Expenditure

Total central government capital expenditure is budgeted at ₹12.22 lakh crore for FY27, an 11.5% increase over FY26 revised estimates. The allocation is concentrated in infrastructure-heavy ministries, with notable step-ups in science & technology, communications, and defence. Two ministries — Finance and Atomic Energy — see capital outlays reduced year-on-year.

Science & Technology stands out with a 551% jump — reflecting the government’s push into advanced research and deep-tech. Communications capex nearly doubles (+94%), likely driven by next-generation telecom and digital infrastructure. Defence capital outlay rises 17% to ₹2.31 lakh crore, the largest single-ministry allocation after road transport. Railways and road transport, the two biggest capex consumers, grow at a moderate pace (10% and 8% respectively), consistent with the view that baseline infrastructure is now well-established and incremental gains require targeted deployment.

Sectoral Impact

Budget 2026 keeps the capex-led growth template intact but shifts the emphasis from broad-based giveaways to targeted support for manufacturing, energy transition and technology-driven services. It combines higher defence and infrastructure spending with deep customs-duty rationalisation for critical inputs (batteries, electronics, aircraft, rare-earths), a large CCUS outlay, and tax/treaty tweaks that reduce friction for IT exports and data-centre investments. The Production-Linked Incentive (PLI) framework has been recalibrated rather than expanded in aggregate: allocations rise sharply for autos/EVs, ACC batteries, IT hardware, white goods, APIs, medical devices and specialty steel, while mature schemes like large-scale electronics see lower budgeted outlay as they move into a disbursement phase.

For investors, the Budget’s impact is therefore uneven but clear: it reinforces existing themes (defence, renewables, EVs, import substitution, digital infra) and de-emphasises consumption-led or generic stimulus, with sector returns likely to track alignment with these policy priorities.

Defence & Aerospace

Budget 2026 continues the defence push with a capex outlay up from ₹1.86 lakh crore to ₹2.19 lakh crore, meaning defence capex is growing faster than overall capex. This is backed by customs-duty exemptions for aircraft parts, engines and MRO inputs extended to 31 March 2028, along with new, targeted BCD exemptions for raw materials and components imported by defence PSUs for aircraft manufacture and MRO, and nil duty for key nuclear-project equipment.

Impact on listed companies:

HAL, BEL, BDL, Bharat Forge, Mishra Dhatu, shipyards and other defence OEMs benefit from: (a) a visible order pipeline via higher defence capex, and (b) better project economics due to duty-free or concessional import of critical parts and materials.
Margins on long-cycle contracts look more defendable, and aerospace/MRO export competitiveness improves. Overall, the Budget is clearly positive for the entire defence & aerospace pack.

Electronics Manufacturing / Consumer Durables

The allocation for Electronics Manufacturing Services (EMS) is raised from ₹22,000 crore to ₹40,000 crore, reflecting the central role of mobile and electronics exports; India’s mobile production has risen from ₹18,000 crore in FY15 to ₹5.45 lakh crore in FY25. At the same time, the Budget extends low or nil BCD on a wide set of electronics inputs: parts for LED lights and drivers, MCPCBs, open cells and inputs for LCD/LED TV panels, and magnetrons for domestic microwave ovens, all up to 31 March 2028.

Impact on listed companies:

EMS players and branded OEMs (Dixon, Amber, Havells, Crompton, LG-listed entity, etc.) get a double tailwind: more PLI/sectoral funding plus lower input duties, which:
- support volume growth (especially in mobiles, TVs, lighting, appliances), and
- improve or at least protect gross margins against currency and commodity swings.
The Budget is positive for listed EMS and consumer-durable names, reinforcing the “China+1” and export-hub narratives.

Bio-pharmaceuticals & Healthcare

The Budget allocates ₹10,000 crore for the bio-pharma / biologics ecosystem, focusing on creating 1,000 accredited clinical trials, which is the backbone for biologic drug development. On the indirect side, customs exemptions are extended on inputs for various medical devices and implants (e.g., coronary stents, cochlear implants) and specific drugs, including rare-disease therapies.

Impact on listed companies:

Biologics-focused pharma (Biocon, Dr. Reddy’s, some MNCs) and CDMOs are positively placed: greater domestic trial capacity and state support lower ecosystem frictions and support more complex product pipelines.
Diagnostics and device-heavy hospital chains benefit from cheaper imported equipment and implants over time.
For mainstream generic players, the impact is modestly positive, but not thesis-changing: it marginally supports R&D/complex-product focus rather than plain vanilla generics.

Metals, Mining, Rare Earths & Capital Goods

The government is following up on the ₹7,280 crore PLI for rare earths (approved November 2025) with a push to create a rare-earth corridor spanning Odisha, Andhra Pradesh, Tamil Nadu and Kerala, positioning metal and mining PSUs as key players in this strategic ecosystem. Concurrently, a ₹10,000 crore outlay for domestic container manufacturing and an upcoming PLI-style scheme for tunnel borers, cranes, and other construction gear aim to substitute significant imports from China/South Korea, potentially in the ₹14,000–16,000 crore range.

Impact on listed companies:

PSU miners and metals (NMDC, Coal India, NALCO, etc.) get a structural opportunity in rare earths and critical minerals; this is medium-to-long term positive rather than immediate EPS accretion.
Capital-goods & construction-equipment makers (L&T, BEML, Escorts Kubota, ACE, Tata Hitachi/JCB through listed parents/associates) stand to gain from both:
- domestic demand for heavy equipment driven by infra and container manufacturing, and
- potential PLI-type support for localisation of high-value gear.

Overall, the Budget is positive for heavy engineering, mining and select capital goods, with the benefit likely front-loaded in order books and capex but realised gradually in earnings.

Auto, EVs & Batteries (including BESS)

The Budget’s customs and policy measures create a strong, coherent tailwind for the EV and battery ecosystem. BCD on a broad suite of critical battery minerals and advanced materials (natural and artificial graphite, lithium salts, cobalt compounds, rare-earth metals, etc.) is cut from 5–7.5% to nil or 2.5%; multiple concessions on Li-ion cell parts, PCBA inputs, and packs are extended to 31 March 2028. Capital-goods exemptions for Li-ion cell manufacturing now also cover stationary Battery Energy Storage Systems (BESS).

Impact on listed companies:

Auto OEMs with strong EV plans (4W, 2W, CV) and battery / cell makers gain via lower input and capex costs, improved project IRRs for cell plants and pack plants, and better economics for grid-scale storage (BESS) that feeds back into EV charging ecosystems.
Auto ancillaries in EV subsystems and high-value components (motors, power electronics, thermal management) are indirect beneficiaries as OEM investments accelerate.
For traditional ICE-heavy players, the Budget nudges capital allocation towards EV without directly penalising ICE; net impact is positive for the EV-levered subset of the sector.

Renewables & Power

Budget 2026 maintains and extends low or nil customs duty on solar-PV value-chain and allied equipment: components and chemicals used in PV cells/modules, Li-ion cells and packs, plus duty-free or concessional access to nuclear-project equipment and rods. There is also an explicit support structure for BESS via the Li-ion capital-goods exemption, and the broader public-capex push supports grid and transmission build-out.

Impact on listed companies:

Renewable IPPs (solar/wind) and EPCs benefit from lower project capex on imported high-tech components (where domestic manufacturing is still catching up) and better economics for storage-linked projects.
Grid/transmission and capital-goods players with exposure to renewables and BESS gain from a more investible pipeline.
Utilities with nuclear or advanced renewable plans also see marginal project-economics improvement. Overall effect: clearly positive for the listed renewables and power-equipment universe.

IT Services & GCCs / Outsourcing

On the tax and policy side, the Budget makes two key moves:

A tax-holiday style exemption for foreign companies procuring data-centre services from “specified data centres” in India up to 2047, provided India-facing services are routed through an Indian reseller and safe-harbour margins are respected.
A revamp of the safe-harbour framework: the eligibility threshold is raised from ₹300 crore to ₹2,000 crore of revenue, bringing a much larger set of IT and ITeS providers into the regime and reducing transfer-pricing uncertainty. It thus reduces the need for detailed transfer pricing studies and lowers the risk of prolonged tax audits and disputes. This comes at an opportune time when the interest to establish GCCs in India is booming.
Separately (via Finance Bill provisions), the place-of-supply rule for “intermediary services” under IGST has been aligned so that many cross-border support / agency services to foreign clients can now qualify as exports of services (zero-rated), reducing GST friction.

Impact on listed companies

Tier-1 and mid-tier IT services, ITeS, KPOs and GCCs benefit from:

lower TP litigation risk and compliance burden via expanded safe harbour,
better clarity and tax efficiency on cross-border “intermediary-like” services, and
a strong policy push to data centres, which supports demand for IT infra and cloud services.

This is structurally positive for the Indian IT services model as it improves net realisation for some service lines and makes India more attractive as a GCC and cloud-infrastructure hub.

Corporate Tax / MAT – Impact

The Budget proposes to make MAT a “final tax” in the old regime, with MAT credit no longer accumulating after 31 March 2026; existing MAT credit remains utilisable. The MAT rate on book profits is reduced from 15% to 14%, and set-off of brought-forward MAT credit is allowed only for companies opting into the new 22% regime.

Impact on listed companies:

For corporates still using the old regime, this nudges them toward the 22% new regime, where MAT credit can be set off; lower MAT rate slightly softens the blow.
Companies with large MAT credit balances need to plan regime shifts to avoid value erosion; this is company-specific rather than sector-specific but has implications for capital-intensive sectors with historically high book profits and low taxable profits (infra, power, real estate, some manufacturing).
Overall, the MAT change is mildly positive for clean, new-regime adopters and forces a one-time optimisation exercise for the rest.

Budget 2026 and your taxes

Budget 2026 didn’t make any big bold moves on the direct taxes front. However, smaller changes announced can impact your taxes. Here are the key announcements.

The positives

Let’s start with the proposals that could reduce tax impact or make things easier for you.

#1 TCS rate reduction on overseas remittances: One of the proposals of Budget 2026 is the reduction of multiplicity of TCS rates and rationalisation of the same. The stand outs here are outward remittances under the Liberalised Remittance Scheme (LRS)..

The TCS rates on remittances over Rs. 10 lakhs for education or medical treatment now stands at 2%. This used to be 5% earlier. This is a key positive for those of you sending your child overseas for further education, as it means you have to account for a lower initial tax outgo.
Sale of overseas tour packages too got a boost. While earlier these were subject to 5% TCS for amounts up to Rs. 10 lakhs and 20% for amounts exceeding that, this has been cut to flat 2%.
The TCS rate of 20% in all other cases for amounts over Rs. 10 lakhs remains the same.

These changes will come into effect from April 1, 2026.

#2 Exemption on compulsory acquisition of any land under RFCTLARR Act: Budget 2026 also introduces an exemption for compulsory land acquisition under the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act (RFCTLARR Act 2013). This proposal grants a full exemption on compensation received by individuals / HUFs under this act except if it was received under Section 46 of the same Act.

What does this mean? If your land is compulsorily acquired by the Government for projects like road widening or other infrastructure, the compensation you receive is fully tax exempt. The exception is, however, acquisitions made by private companies or PPP for industrial or infrastructure projects.

The RFCTLARR Act already had a provision for such income exemption. However, the IT Act did not explicitly provide this exemption, leading to a conflict in rules. The Budget 2026 now makes this clear. This proposal takes effect from April 1, 2026 and will apply in relation to the tax year 26-27 and onwards.

#3 Change in tax rules for compensation on motor accidents: In motor accident claims, payments may be delayed depending on how long the case takes to conclude. The victim or legal heirs are paid compensation along with interest for the period between filing the claim and the final payment.

Although this interest amount was not taxable earlier, tax was deducted at source if it exceeded Rs.50,000 in a financial year. From 1 April 2026, this limit has been removed, and no tax will be deducted at source on such payments.

#4 Enhanced accessibility to equity markets for PROIs: Another Budget proposal relating to investments by those resident outside India could ease the way for investments and encourage investments by the overseas community. The proposal enhanced access and limits for investments by Persons Resident Outside India (PROI which includes NRIs, OCIs and foreign nationals) in Indian equities via the Portfolio Investment Scheme (PIS) route.

Earlier the PIS route was available mainly to NRIs and OCIs but now this has explicitly been made available to all PROIs. Further, the investment limit for an individual PROI in a company has been raised from 5% to 10% and the over investment limit in a company for individual PROIs has been raised from 10% to 24%. Earlier, to build a substantial position in a company a PROI would usually have to take a route such as FPI but this opens up a new avenue to do so. This allows a broader set of investors direct access to the Indian equity markets.

#5 Change in buyback taxes: Another area that saw a meaningful change is the way in which share buybacks are taxed. Whether this is a positive or negative development depends on your own tax status!

In the past, shareholders had no tax liability toward share buybacks, it shifted to them being taxed as dividend income in Budget 2024. This meant that they would be taxed at your applicable slab rates.

This now changes to gains on buybacks being classed and taxed as capital gains (20% on short term capital gains where holding period is less than 12 months and 12.5% for gains in excess of Rs. 1.25 lakhs for holding over 12 months old). This is for non promoter shareholders.

For promoters that are domestic companies, the effective rate on gains in buyback will be 22%. It will be 30% for promoters other than domestic companies. This is a move clearly aimed to discourage / curb promoter driven buybacks and prevent tax arbitrage between dividends and buybacks. This proposal takes effect from April 1, 2026 and will apply in relation to the tax year 26-27 and onwards.

The negatives

#1 Capital Gains on SGBs : SGBs have always held a special allure for investors – not only do they allow one to invest in gold in a hassle free manner but they also provide exemption from capital gains tax on redemption.

However, one question that has come up time and again is whether you can get the benefit of capital gains exemption if you purchased SGBs in the secondary market. Budget 2026 finally cleared that up.

The exemption from capital gains tax in respect of SGBs will only be available where such bonds are subscribed to by an individual at the time of original issue and are held continuously until redemption on maturity. This exemption applies uniformly to all SGB issuances. That means, if you bought SGBs in the secondary market, you will have to pay long term capital gains at 12.5% and short term capital gains will apply at your slab rate. Here, a holding period of 12 months or more qualifies for LTCG.

This proposal takes effect from April 1, 2026 and will apply in relation to the tax year 26-27 and onwards.

#2 No tax set-off for dividends against interest paid: Until FY26, dividend income from securities or distributions from mutual fund IDCW (formerly called dividend plans)could be set off against interest expenditure incurred for acquiring these securities, subject to a limit of 20% of the dividend income.

This provision has been removed from 1 April 2026. Traders using strategies that involve borrowing and dividend income should now treat the entire dividend payout as Income from Other Sources, with no set-off for interest expenses.

#3 STT hike on futures and options: The Securities Transaction Tax (STT) rates for futures and options (F&O) have been revised. For the sale of options, the STT has increased from 0.10% to 0.15%. For exercised options, the STT has been revised from 0.125% to 0.15%. For futures, the STT has increased from 0.02% to 0.05% of the traded price.

While these changes mainly affect investors and institutions active in F&O trading, it remains to be seen whether they will have a meaningful impact on mutual funds and SIFs that use F&O as part of their strategies.

Other material proposals

Apart from the above, the Budget had a few other proposals that could ease procedural issues. Some of the more important ones are highlighted below:

Relaxed rules on importing goods: For those who use imported goods, there is some good news. Two announcements have been made on this front.

Reduced customs duty: This applies to tariff head 9804 – goods imported by post or air for personal use. This applies to ordering from ecommerce outside India or receiving a courier sent by a person. The customs duty for items under this head has been reduced from 20% to 10%, effective 1 May 2026.
New Baggage Rules: These will come into effect from midnight on 2 February 2026. The aim is to address passenger concerns and provide clarity on goods brought into or taken out of India.

While the Budget memo provides a list of items that fall under tariff head 9804 (Food, Chemicals which will attract the reduced duty for imports ordered from abroad), we are yet to find details on the goods covered under the new Baggage Rules.

Non-tax changes

While the changes that make the most impact in rupee terms usually get the most attention, Budget 2026 seemed to have an overarching theme of simplification and making it easier and simpler to comply for the tax payer.

This kicked off right at the start with the announcement that the new simplified Income Tax Act comes into effect from April 2026 bringing with it simpler language, forms and more.
The process for small tax payers to get a nil deduction certificate too will get simpler with effect from April 1, 2026 with rule-based automation as against making an application with the assessing officer.
Timelines for filing revised returns have been given a 3-month extension. While earlier the cut off was December 31, this has been extended to March 31 with the payment of a fee. This is with effect from April 1, 2026 for tax year 26-27 and onwards.
Submitting form 15G or 15H may stop being cumbersome. Currently, if you’ve invested in multiple stocks or funds, you would have to submit the form to each company individually for not deducting TDS on distribution (interest or dividends). The Budget proposes that this be brought under the depository – that is, you can hand over the 15G/15H form once to the depository who will in turn provide it to the various companies where the income is from interest or dividends from securities, or distribution in MF units (of course, for MFs, it will probably apply only on dematted MF units). The modalities of such submission to the DP remains to be seen.

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Disclosures & Disclaimers