Budget 2026 Highlights: Capex Boost, Tax Relief & Key Reforms

Finance Minister Nirmala Sitharaman presented her ninth consecutive Union Budget on February 1, 2026, outlining the government's fiscal roadmap for the financial year 2026-27. The budget continues the government's focus on fiscal consolidation while pushing for growth through higher capital expenditure and simplifying the tax framework. Key announcements centered on providing relief to taxpayers, boosting infrastructure, and supporting key sectors to align with the long-term vision of a 'Viksit Bharat' by 2047.

A Look Back at Budget 2025

To understand the context of the new announcements, it is useful to recall the key measures from the Union Budget 2025. Last year, the government provided significant relief to the middle class by making income up to ₹12 lakh tax-free under the new tax regime. For salaried individuals, a standard deduction of ₹75,000 effectively raised this limit to ₹12.75 lakh. The budget also rationalized tax slabs, simplified TDS and TCS rules, and introduced customs duty cuts on several items to boost manufacturing, particularly in the electronics and EV sectors. The fiscal deficit for FY25 was pegged at 4.8%, with a clear path towards fiscal consolidation.

Direct Tax Reforms and Simplification

A central theme of Budget 2026 is the simplification of direct tax laws. The Finance Minister announced that the new Income Tax Act, 2025, which is a comprehensive review of the 1961 Act, will come into effect from April 1, 2026. This new law aims to reduce ambiguities and litigation by simplifying the text and reducing the number of sections by nearly 50%. While income tax slabs and rates remain unchanged from the previous year, several measures were introduced to ease the compliance burden. Taxpayers will be allowed to update their returns even after reassessment proceedings have been initiated by paying an additional 10% tax. The prosecution framework is also being rationalized, with minor offenses decriminalized and attracting only fines.

Relief for Taxpayers and Businesses

Several specific relief measures were announced. The Tax Collected at Source (TCS) on overseas tour packages has been significantly reduced to a flat 2%, from the earlier slabs of 5% and 20%. To support small businesses and exporters, the value cap of ₹10 lakh per consignment for e-commerce exports has been completely removed. For honest taxpayers facing litigation, the quantum of prepayment required before filing an appeal is being reduced from 20% to 10% of the core tax demand. Furthermore, no interest will be levied on the penalty amount during the appeal period before the first appellate authority.

Attracting Global Investment

In a major move to attract global investment and establish India as a data center hub, the government has proposed a tax holiday until 2047 for any foreign company providing cloud services globally by using data centers located in India. This incentive is expected to boost critical digital infrastructure in the country. Additionally, to promote home-grown accounting firms, the definition of accountants for safe harbour rules has been rationalized, and the threshold for availing safe harbour for IT services has been increased from ₹300 crore to ₹2000 crore.

Fiscal Outlook and Capital Expenditure

The government remains committed to its fiscal consolidation path. The fiscal deficit for FY27 is projected at 4.3% of GDP, an improvement from the 4.4% estimated for FY26. To fuel economic growth, the capital expenditure (capex) outlay has been increased to ₹12.2 lakh crore for FY27, which is 4.4% of the GDP. The total budget size is estimated at ₹53.5 lakh crore, with net tax receipts projected at ₹28.7 lakh crore. The government plans to borrow ₹11.7 lakh crore from dated securities to fund the fiscal deficit.

Infrastructure and Sectoral Initiatives

The budget reinforces the government's focus on infrastructure development. Prime Minister Narendra Modi highlighted initiatives such as dedicated freight corridors, the expansion of national waterways, and the construction of high-speed rail corridors. The budget also emphasizes developing infrastructure in Tier II and Tier III cities to turn them into new growth centers. For the textile sector, a new National Fibre Scheme was announced to achieve self-reliance in natural and man-made fibres. Other key initiatives include the creation of Rare Earth Corridors for mining and processing, and continued support for MSMEs and startups.

Expert and Market Reactions

The budget was described by Prime Minister Narendra Modi as 'historic' and a foundation for the journey towards a 'Viksit Bharat'. He stated that it balances high capital expenditure with robust economic growth while containing inflation and the fiscal deficit. Uday Kotak, Founder and Director of Kotak Mahindra Bank, welcomed the increase in defence spending and the continued fiscal discipline. Analysts noted that the sustained focus on infrastructure, with a roughly 9% increase in capex, signals continuity and a long-term vision for upgrading India's logistics ecosystem.

Conclusion

The Union Budget 2026-27 presents a clear strategy focused on stability, simplification, and sustained growth. By avoiding major changes in tax rates while overhauling the underlying tax law, the government aims to create a more predictable and less litigious environment for taxpayers. The significant allocation towards capital expenditure is intended to drive infrastructure development and create jobs. The measures to attract foreign investment in high-tech areas like cloud services and the continued support for domestic manufacturing underscore the government's ambition to make India a global economic powerhouse. The successful implementation of these proposals, particularly the new Income Tax Act, will be crucial in shaping India's economic trajectory in the coming years.