Union Budget 2026: Capex Boost, Tax Reforms, and Growth Roadmap

Finance Minister Nirmala Sitharaman presented the Union Budget for the financial year 2026-27 on February 1, 2026, outlining the government's fiscal priorities amid steady economic growth and low inflation. The budget emphasizes long-term capital investment, manufacturing, and job creation while maintaining a path of fiscal consolidation. Key announcements include a significant increase in capital expenditure, reforms for startups and MSMEs, and a continued push for infrastructure development, without any changes to personal income tax slabs.

Fiscal Prudence and Economic Outlook

The government has projected a fiscal deficit target of 4.3% of GDP for FY 2026-27, signaling its commitment to fiscal discipline. This is a slight improvement from the 4.4% projected for the current financial year. The total size of the Union Budget is estimated at ₹53.5 lakh crore, with net tax receipts projected at ₹28.7 lakh crore. Supported by strong GST collections and a stable macroeconomic environment, the government anticipates a robust GDP growth rate of 7-8% for the upcoming fiscal year. Inflation remains under control, with CPI hovering between 2% and 2.6%, providing the Reserve Bank of India with room for supportive monetary policies.

A Major Push for Capital Expenditure

A central pillar of Budget 2026 is the substantial increase in capital expenditure (capex). The allocation has been raised to ₹12.2 lakh crore for FY27, a notable increase aimed at driving infrastructure development across the country. This investment is expected to have a multiplier effect on the economy, creating jobs and improving logistics. The focus remains on developing infrastructure in Tier II and Tier III cities, which are emerging as new centers of economic growth.

Personal Taxation and Compliance Simplification

Contrary to widespread expectations, the Finance Minister announced no changes to the personal income tax slabs for the financial year 2025-26 (Assessment Year 2026-27). The existing tax structure under both the old and new regimes will continue. However, the budget reinforces the benefits of the new tax regime, where salaried individuals with an income of up to ₹12.75 lakh effectively pay no tax, including the standard deduction.

A significant development is the confirmation that the new Income Tax Act, 2025, will come into effect from April 1, 2026. This new act aims to simplify the direct tax code, reduce litigation, and create a more taxpayer-friendly environment. To further ease compliance, the deadline for filing revised ITRs has been extended from December 31 to March 31 of the year following the tax year. A nominal fee will be applicable for returns revised after December 31.

Key Sectoral Allocations and Reforms

Indian Railways: The Railways received a record capital expenditure allocation of ₹2.93 lakh crore, an increase of 5.4%. The budget announced seven new high-speed rail corridors, including Mumbai-Pune and Pune-Hyderabad, alongside plans for new lines, track doubling, and rolling stock upgrades. The Dankuni-Surat dedicated freight corridor was also announced to enhance logistics efficiency.

MSMEs and Startups: To support small and medium enterprises, a ₹10,000 crore SME Growth Fund was announced. For startups, the budget introduced a major reform in ESOP taxation, shifting the tax liability to the time of share sale, which eases the burden on employees. Furthermore, the Angel Tax has been permanently removed for DPIIT-recognized startups, providing clarity and encouraging foreign investment.

Manufacturing and Strategic Minerals: The government announced the establishment of three dedicated chemical parks and four rare earth corridors in Odisha, Kerala, Andhra Pradesh, and Tamil Nadu. These initiatives are designed to boost domestic manufacturing capacity and reduce import dependency on critical minerals.

New Schemes and Job Creation Initiatives

Several new schemes were introduced to target specific sectors and demographics. The 'Biopharma Shakti' scheme, with an outlay of ₹10,000 crore, aims to boost biopharmaceutical manufacturing. The 'Divyangjan Kaushal Yojana' was launched for skill development among persons with disabilities. To address employment, a high-powered 'Education-to-Employment and Enterprise Committee' will be formed to focus on services exports, AI skills, and healthcare jobs. Tourism has also been identified as a key sector for employment generation.

Market-Related Announcements

In a surprise move, the Finance Minister announced a hike in the Securities Transaction Tax (STT) on futures and options contracts. This could potentially impact trading volumes and increase costs for frequent traders in the derivatives market. Additionally, the budget proposes rationalizing Tax Collected at Source (TCS) rates for certain transactions, including remittances under the Liberalised Remittance Scheme (LRS) and the sale of overseas tour packages, to ease cash flow issues for taxpayers.

Conclusion

Union Budget 2026-27 charts a course for sustained economic growth driven by public investment in infrastructure. By prioritizing capital expenditure over populist measures, the government aims to build long-term productive assets. While taxpayers did not receive direct tax cuts, the focus on simplifying compliance and providing targeted support to crucial sectors like MSMEs, startups, and manufacturing sets a clear direction for the economy. The upcoming implementation of the new Income Tax Act will be a key milestone in India's journey towards a more efficient and modern tax system.