Union Budget 2026: Expectations, Income Tax, Capital Gains & Key Reforms

The Union Budget 2026 is India’s annual fiscal plan for FY2026-27, outlining the government’s revenue and spending priorities. Article 112 of the Constitution defines the Budget as the government’s financial statement of estimated receipts and expenditures.

Finance Minister of India, Nirmala Sitharaman, will present the Budget on Sunday, February 1, 2026, at 11:00 AM.

Parliament’s Budget session begins on January 28 and ends on April 2, 2026, during which the Finance Minister will unveil tax and policy proposals to boost growth.

Key Expectations from Union Budget 2026

Budget 2026 is widely expected to prioritise sustainable growth by supporting key sectors, including the income tax union budget. Experts cite areas like manufacturing, climate action, digital technologies, MSME credit, and easing compliance. Let us first take a glance at the concise table of India's budget:

Now, let us understand each expectation in detail:

Direct Taxes & Personal Income

• Most analysts agree sweeping slab changes are unlikely in 2026, given the big overhaul in Budget 2025. However, targeted relief is expected. 
• For example, many hope the 30% tax bracket threshold could be raised (from ₹24 lakh to ₹35 lakh), and the standard deduction for salaried taxpayers could be increased.
• Industry bodies have proposed tax incentives like higher deductions or easing Section 24(b) interest limits. Deloitte notes personal-tax reforms could include clarifying taxation of stock options for cross-border employees, car-perquisite valuation for EVs, and allowing foreign tax credit at source.
• Importantly, remember that under the new regime, no tax is due up to ₹12 lakh income only for normal income

Capital Markets Taxes (LTCG/STCG/STT)

• Equity investors are keenly watching for changes in capital gains and securities taxes. Currently, long-term capital gains (LTCG) on listed shares above ₹1 lakh are taxed at 12.5% (raised from 10% in 2018).
• Experts suggest the Budget might rationalise holding periods or marginal relief to encourage long-term investing.
• However, Securities Transaction Tax (STT) is unlikely to be lowered (any increase in STT would hurt market liquidity).
• Dividend distribution tax (DDT) is not expected to return; dividends will continue to be taxed in the hands of recipients under the classical regime, with only minor compliance tweaks for small investors.

GST, Customs & Trade Reforms

• After rolling out “GST 2.0” measures, further simplification is anticipated.
• Deloitte and experts recommend unlocking working capital by easing ITC rules and rationalising exemptions.
• The Budget should continue to simplify GST input credits and reduce litigation.
• On customs and foreign trade, analysts urge a comprehensive overhaul: rationalise duty slabs, resolve classification disputes, and digitise procedures to boost exports. Simplification of customs tariffs and liberalisation of export rules can reduce costs and strengthen India’s trade competitiveness.
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MSME & Manufacturing Support

• Supporting the domestic industry is a core focus.
• Experts expect new incentives and PLI enhancements for strategic manufacturing (electronics, defence, renewables, etc.) to make Indian products globally competitive.
• Industry groups like Assocham are pushing to reintroduce a lower corporate tax regime (similar to old Section 115BAB) for new manufacturing and service firms.
• More finance and credit support for MSMEs is likely.
• For example, expanded credit guarantee schemes and faster loan disbursal to offset global volatility.
• Steps to ease input costs (like raw material subsidies) and streamline regulations are also expected to boost “Make in India” industries.

Technology, AI & Innovation Push

• The government is expected to double down on AI, robotics, and related tech.
• According to Mint, AI may get “the pride of place” in Budget 2026, with a long‑term blueprint and higher R&D funding.
• Cross-ministry AI initiatives (defence, space, telecom, etc.) and increased allocations for deep tech are anticipated.
• Deloitte likewise advocates incentives for emerging sectors (renewable energy, AI, R&D). 
• Support for data centres (with green energy), 5G, space tech, and digital public infrastructure (like accelerated computing resources) could feature prominently.

Green Energy & Sustainability Focus

• Analysts see Budget 2026 as a defining moment for India’s clean-energy goals.
• Major green initiatives expected include larger PLI and tax incentives for solar, wind, biomass and green hydrogen production, accelerated depreciation benefits and viability gap funding for renewables, and investment in grid modernisation and energy storage.
• The Budget may also expand support for EVs and clean transport.
• For example, higher subsidies for electric vehicles, charging infrastructure expansion, and incentives for battery manufacturing.
• Encouraging decentralised renewables (rooftop solar) via low‑interest loans or grants is another likely focus.

Infrastructure & Urban Development

• Continued emphasis on physical infrastructure is expected. Analysts note that railways, roads, metro transit and rural roads will likely get higher budgetary allocations.
• The Budget may also extend support for urban projects.
• For example, more interest-free loans for state capex. Improving supply chains (logistics, ports), strengthening Digital Public Infrastructure (like the national logistics policy), and focusing on smart cities could be among the highlights.

Defence & Security Allocation

• Rising geopolitical tensions suggest another boost to defence outlays.
• The government is expected to raise capital expenditure for indigenous defence manufacturing, including incentives for local production of weapons, ammunition and technology.
• Recent commentary highlights the need for linking defence with infrastructure and tech, so Budget 2026 may announce higher spending on domestic defence R&D and procurement.

Healthcare & Pharma Expectations

• The pharma and health sectors have clear asks.
• Budget 2026 is likely to continue encouraging domestic drug and medical device production via PLI and tax breaks.
• Healthcare bodies want greater focus on tier-2/3 and rural hospitals. For example, higher depreciation or deductions for hospital infrastructure investment. 
  Pharma industry experts seek rationalisation of GST on critical raw materials (to remove inverted duty), restoration of R&D tax incentives, and expansion of PLI for active pharma ingredients.
• The Budget may also ease duties on essential medicines and equipment to make healthcare more affordable.

Agriculture & Rural Economy Support

• Rural and farm relief measures are expected. A Seeds Bill 2025 is reportedly in the works to regulate seed quality and pricing, with penalties for inferior seeds. 
  Farmers have urged lowering GST on agri-inputs.
• For example, cutting GST on pesticides to 5% (from 18%) so they’re taxed like medicines.
• Expanded rural credit, fertiliser subsidies, and investment in rural infrastructure (roads, irrigation) could also be announced to bolster the farm sector.

Proposed Reforms and Policy Changes

Several structural reforms are anticipated as follows:

New Tax Code Implementation

• The Income-tax Act 2025 comes into force in April 2026.
• Experts stress clear rules on complex issues.
• For example, taxation of stock options for employees working abroad, and foreign tax credit at source.
• Greater simplicity and dispute reduction (e.g. faster appellate tribunals) are expected to ease compliance.

GST and Customs Reforms

• Building on GST 2.0, the Budget may push further digitalisation (e-invoicing, e-filing) and faster GST refunds to improve cash flow.
• On customs, analysts urge comprehensive tariff rationalisation to correct inverted duties and simplify slabs.
• They also call for better dispute-resolution (mediation/arbitration) for legacy cases.
• Expanding Advance Rulings and reducing exemption notifications will boost trade predictability.

Ease of Doing Business

• Measures like decriminalising more tax offences (continuing the trend from Budget 2025) and rationalising TDS/TCS rates are expected.
• Deloitte highlights the need to unlock working capital (e.g. faster tax refunds) and simplify admin procedures.
• The Budget may also include digital reforms in corporate law (fast-track demergers, etc.) to smooth business activities.

Financial Sector

• Possible moves include further banking recapitalisation and incentives for FinTech and digital payments.
• Authorities have also floated ideas like a presumptive tax scheme for foreign entities providing consultancy or digital services in India, to attract global investment under a simpler regime.

Agriculture Acts

• Besides the Seeds Bill, there may be announcements on crop insurance, support for climate-resilient farming, and continued focus on rural livelihoods. For example, expanded MGNREGA or new schemes
• Overall, the reform agenda is expected to stress predictability and ease, aligning with priorities like attracting investment and formalizing the economy.

₹12 Lakh Tax Exemption: Myth vs Reality

One major tax highlight from Budget 2025 was the “no tax up to ₹12 lakh” claim for the new regime. It is important to clarify this for 2026 planning. Officially, no income tax is payable on annual income up to ₹12 lakh under the new tax slabs.

For salaried individuals, the effective threshold is ₹12.75 lakh (after the ₹75,000 standard deduction). However, this exemption applies only to ordinary income (salary, pension, business, etc.) and excludes “special rate” income.

Special incomes, notably long-term or short-term capital gains, dividends, and other “perquisites” - are taxed at fixed rates and do not benefit from the slabs.

In practice, if your total income of ₹12 lakh comes entirely from salary (₹12.75 L gross minus ₹75k standard deduction), your taxable income is ₹12 lakh, which falls in the rebate and yields zero tax.

But if part of the ₹12 lakh is long-term capital gain, that portion is taxed separately (the ₹12 lakh rebate doesn’t apply to it).

In short, the “₹12 lakh tax-free” benefit is real but conditional. It was intended to give relief to middle-class earners on a regular income.

Capital gains and other incomes above slab rates remain taxable even if the total income is under ₹12 lakh. Ahead of Budget 2026, taxpayers are watching whether this structure will be further simplified or if additional clarity (for example, on dividends and gains) will be provided.

Conclusion

Investors are particularly interested in how Budget 2026 will treat equity markets. As noted above, capital gains taxes are key. After recent hikes, LTCG (above ₹1L) stands at 12.5% and STCG at 20%.

Any reduction or exemption (as lobbied by some) could boost long-term participation. The Budget may rationalise holding periods or offer marginal relief for small investors. Meanwhile, securities transaction tax (STT) is likely to remain unchanged, since altering it could hurt trading volumes.

Dividend taxation is also expected to stay in the classical mode (taxed in shareholders’ hands) with only minor compliance easing. In summary, the Union Budget 2026 is expected to reinforce the gains of 2025 while targeting growth sectors. It will likely prioritise sustainable development (green energy, infrastructure, AI) and ease the tax regime for middle-class taxpayers and businesses.

By focusing on key reforms (GST/customs overhaul, digitalisation, farm support) and measured tax adjustments (broadening bases, targeted relief), the Budget aims to balance fiscal prudence with growth needs.

All eyes will be on concrete announcements on income-tax thresholds, incentives for new industries, and sectoral allocations when the Finance Minister takes the podium on Feb 1, 2026

FAQs on Union Budget 2026

What can be expected in the Union Budget 2026?

Union Budget 2026 is expected to focus on manufacturing, green energy, MSME credit, and tax simplification.

What is the budget of India in 2025-2026?

India’s Union Budget 2025-26 had a total outlay of ₹47.66 lakh crore with ₹11.11 lakh crore for capital expenditure.

Will India face a recession in 2026?

India is not expected to face a recession in 2026, with Union Budget 2026 supporting steady GDP growth around 6.8%.

क्या भारत 2026 में मंदी का सामना करेगा?

नहीं, भारत बजट 2026 के अनुसार 6.5%-6.8% की विकास दर के साथ मंदी का सामना नहीं करेगा।

बजट 2026 में हमें क्या मिलेगा?

बजट 2026 में टैक्स राहत, MSME समर्थन, ग्रीन एनर्जी और इंफ्रास्ट्रक्चर विकास की उम्मीद है।

Will income tax slabs change in Union Budget 2026?

Major slab changes are unlikely in the Union Budget 2026, though minor reliefs may be introduced.

Is ₹12 lakh income completely tax-free under the Union Budget 2026?

Yes, under the new regime in Union Budget 2026, normal income up to ₹12 lakh is tax-free (excluding capital gains/dividends).

What are the capital gains tax changes in the Union Budget 2026?

Union Budget 2026 may tweak LTCG/STCG rules, but no major tax rate change is expected for investors.

What is the Union Budget 2026-27 date and time?

Union Budget 2026-27 will be presented on 1 February 2026 at 11:00 AM in Parliament.

What are the new MSME benefits in the Union Budget 2026?

Union Budget 2026 is expected to offer easier credit access, faster disbursal, and tax relief for MSMEs.

Disclaimer: Budget expectations are based on expert analysis and media reports. Final provisions may differ from estimates.

Author: Diwakar Kumar Singh

Diwakar Kumar Singh is a finance writer and BFSI specialist with 7+ years of experience in financial content and research. He has authored hundreds of finance articles, published multiple books internationally, and contributed to research publications. A Gold Medalist MBA from IMT, he brings a strong analytical understanding combined with clear, reader-focused communication. His work focuses on simplifying complex financial topics, including IPO analysis, unlisted shares, financial ratios, and company evaluations, providing well-researched and evidence-based insights to help readers make informed financial decisions.