Union Budget 2026: Tax Relief for Salaried and Investors?

Introduction: A Budget for Stability and Growth

Finance Minister Nirmala Sitharaman is set to present the Union Budget for 2026-27 on February 1, 2026, marking her ninth consecutive budget. The presentation comes against a backdrop of a stable domestic economy, characterized by strong GDP growth projections of 6.8% to 7.2% for FY27 and controlled inflation. With global economic conditions remaining uncertain, the budget is expected to prioritize policy continuity, fiscal consolidation, and targeted support for key sectors. Key expectations are centered on providing relief to individual taxpayers, rationalizing capital gains taxes, and creating a more favorable environment for investments, particularly in the debt market.

The Critical Need to Reform Debt Fund Taxation

A significant point of discussion ahead of the budget is the tax treatment of debt mutual funds. Following the removal of indexation benefits in 2023, gains from debt funds, regardless of the holding period, are now taxed at the investor's marginal income tax rate. This has placed them at a considerable disadvantage compared to equity funds, which still enjoy a more favorable long-term capital gains tax structure. The current tax rules have diminished the appeal of debt products, which are crucial for channeling long-term household savings into the corporate bond market. Industry bodies like the Association of Mutual Funds in India (AMFI) have strongly advocated for the restoration of Long-Term Capital Gains (LTCG) benefits with indexation for debt funds to revive investor interest and support the development of a deeper bond market.

Personal Income Tax: What Salaried Individuals Expect

For millions of salaried taxpayers, expectations from Budget 2026 are focused on tangible relief to counter rising living costs. While Budget 2025 provided substantial benefits under the new tax regime, there is a strong demand for further enhancements.

One of the primary expectations is an increase in the standard deduction under the new tax regime from the current ₹75,000 to ₹1,00,000. This move would provide direct relief to salaried individuals and pensioners. Additionally, with medical inflation in double digits, there are widespread calls to increase the deduction limits for health insurance premiums under Section 80D and potentially extend this benefit to the new tax regime.

The Old vs. New Tax Regime Debate

The government has been actively encouraging taxpayers to shift to the simpler, exemption-free new tax regime, which is now the default option. Over 72% of taxpayers have already made the switch. However, a notable portion, around 28-29%, continues to find the old regime more beneficial due to deductions for home loans and investments under Section 80C. It is unlikely that the old regime will be phased out completely in this budget. Instead, the government may introduce further incentives to make the new regime more attractive, ensuring a gradual and smooth transition.

Key Taxpayer Expectations at a Glance

Capital Gains and Investor Sentiments

Investors are closely watching for potential changes in capital gains taxation. A key demand is to increase the tax-free limit for Long-Term Capital Gains (LTCG) on equities from ₹1.25 lakh to ₹2 lakh. This would encourage more retail participation and promote long-term investment in the stock market. As mentioned, the reintroduction of indexation for debt instruments is another critical expectation that would level the playing field between asset classes and boost inflows into debt funds. Such a move would be seen as a major positive for Asset Management Companies (AMCs) and the overall mutual fund industry.

Sectoral Demands and Economic Priorities

The budget is also expected to address the specific needs of various sectors to fuel economic growth. The startup ecosystem is seeking rationalization of LTCG on unlisted shares and simplified compliance for Alternative Investment Funds (AIFs) to improve capital flow. The real estate sector is demanding 'industry' status to access cheaper financing and enhanced tax benefits on housing loans to stimulate demand.

Furthermore, the government is likely to continue its focus on capital expenditure, with increased allocations for railways, renewable energy, and defence. The Production-Linked Incentive (PLI) schemes may also be refined to further boost domestic manufacturing, create jobs, and reduce import dependence in strategic areas.

Market Impact and Analysis

For the first time since 2017, the budget will be presented on a Sunday, with both the NSE and BSE holding special trading sessions. This allows for an immediate market reaction to the policy announcements. Any positive announcements regarding debt fund taxation could lead to a rally in bond markets and benefit fixed-income funds. Similarly, tax relief for individuals could boost consumption-driven sectors. The government's fiscal deficit target will also be a key metric, as a lower-than-expected deficit could lead to a decline in bond yields, positively impacting the Net Asset Value (NAV) of debt funds. The overall tone of the budget will be crucial in shaping investor confidence for the upcoming fiscal year.

Conclusion: A Balancing Act

Union Budget 2026 is expected to be a carefully crafted balancing act. The Finance Minister will need to navigate the path of fiscal prudence while providing targeted relief to taxpayers and strategic support to key industries. The focus will likely be on consolidating the economic gains of the past few years and laying a stable policy foundation for the 'Viksit Bharat 2047' vision. While sweeping reforms are unlikely, incremental changes aimed at simplifying taxes, boosting savings, and encouraging investment will be critical for sustaining India's growth momentum in a challenging global environment.