Expect a growth-oriented Budget without major tax reliefs

Every section of society has expectations from the Budget. The corporate sector wants a lower corporate tax rate; income taxpayers want income tax relief; import-intensive industries want lower import duties, economists exhort the government to stick to fiscal discipline… and so on.

However, times have changed. India has a long-term fiscal policy now. Corporate tax and income tax rates are fair. GST rates, though outside the purview of the Budget, have been reduced and rationalised. And the government has done a good job of fiscal consolidation by reducing the fiscal deficit from the COVID high of 9.2 per cent of the GDP in FY21 to 4.5 per cent in FY25 and, hopefully, will stick to the FY26 target of 4.4 per cent in FY26. The only clamour for relief now comes from stock market investors who want the FM to provide relief in the Budget to boost market sentiment.

2025: Year of reforms
​​The year 2025 was a year of bold reforms: Budget 2025 raised the income tax exemption limit to ₹12 lakh; GST rates were cut and rationalised in September 2025; and four new labour codes consolidating the existing 29 labour laws were implemented in November. The RBI gave a big push to growth by cutting interest rates four times in 2025 by an aggregate 1.25 per cent. These fiscal and monetary stimuli have succeeded in pushing growth to an estimated 7.4 per cent in FY26.

However, the low inflation rate has dragged the nominal growth rate down to an estimated 8.2 per cent in FY26 against the Budget estimates of 10.1 per cent. This low nominal GDP growth has impacted revenue buoyancy in FY26. The government is likely to face a revenue shortfall of around Rs 3 lakh crores in FY26. Given revenue constraints, it would be unrealistic to expect significant tax relief.

Income tax relief unlikely
​The income tax relief provided last year by raising the exemption limit to ₹12 lakh was much better than expected. It is important to understand that India’s per capita income is around ₹2.4 lakh. The exemption limit of Rs 12 lakhs means that even if a person earns five times the per capita income, she need not pay tax. This is fair taxation, and therefore, it would be unrealistic to expect further relief in income tax. Corporate tax, too, is fair and changes are unlikely.

Tweaking of capital gains tax?
​The Long-Term Capital Gains (LTCGs) tax was rationalised in the 2025 Budget by fixing the rate at 12.5 per cent, thereby making the tax uniform across all asset classes, such as equity, equity-oriented mutual funds, gold, and real estate. A change in this tax rate is unlikely within a year. However, there is scope to raise the tax-exemption limit for LTCGs from the current ₹1.25 lakh.

Fiscal consolidation to continue
​Fiscal consolidation has been a major success of the NDA government. The fiscal deficit has been brought down from 9.2 per cent in FY21 to 4.5 per cent in FY25. The target for FY 27 is likely to be 4.3 per cent in FY27. From FY27 onwards, the government will change the fiscal discipline matrix, moving from the current fiscal deficit-to-GDP ratio to a debt-to-GDP ratio. The FM is expected to target 55.5 per cent debt to GDP with a commitment to bring it down to 50 per cent by 2030.

Expenditure priorities
The Budget will be carefully watched for the expenditure priorities. In the context of ‘Operation Sindhoor’ and global geopolitical tensions, the defence outlay is likely to be substantially increased by above 20 per cent. From the market perspective, this will again put defence stocks in the limelight. In the context of languishing private capex, the FM will continue increasing public capex, even under revenue constraints.

Kerala's expectations
​Kerala has requested a special package of ₹21,000 crore to manage its fiscal crisis. Given the political equation between the BJP and the LDF and the fact that Kerala's fiscal crisis is its own doing, the FM is unlikely to oblige. There can be surprise announcements regarding the proposed Thiruvananthapuram-Kannur high-speed railway.

Given the volatile global geopolitical context, the continuing high 50 per cent US tariffs on India and the elusive US-India trade agreement, the FM has to do a fine balancing act to sustain high growth in the economy by increasing expenditure wherever required, while sticking to fiscal discipline in the process. FM Nirmala Sitaraman has proved through her previous Budgets that she has the economic acumen and political savvy to deliver a fine balancing act.

(The author is the Chief Investment Strategist at Geojit Financial Services Ltd)