Union Budget 2026: Key Tax Changes & Sectoral Impact

Introduction to Union Budget 2026

The Union Budget for the fiscal year 2026-27, presented on February 1, 2026, signals a continued focus on fiscal consolidation while pushing for sustained economic growth. Instead of major populist announcements, the budget emphasizes policy stability, increased capital expenditure, and targeted reforms. For market participants, the key takeaways revolve around specific tax adjustments in capital markets and a clear directional push for sectors like infrastructure, railways, and domestic manufacturing. The government's approach appears to be one of strengthening the underlying economic framework to support long-term growth rather than providing short-term stimuli.

Major Tax Proposals for Market Investors

The budget introduced several notable changes to the taxation structure for capital market instruments, impacting traders and investors directly. One of the most significant moves was the increase in Securities Transaction Tax (STT). The STT on futures contracts has been raised from 0.02% to 0.05%, while the tax on options trading has been increased from 0.1% to 0.15%. These hikes are expected to increase the cost of trading, particularly for high-frequency trading (HFT) firms and active retail traders who rely on high volumes.

Adjustments in Buyback Tax Rules

In a significant shift, the budget has revised the tax treatment of share buybacks. For retail investors, gains from participating in a listed company's buyback can now be classified as capital gains. This change could potentially lower their effective tax outgo from 20% to 12.5%, making buybacks a more attractive exit route. However, the tax burden has been increased for promoters. Corporate promoters will now face a 22% tax on their buyback gains, while non-corporate promoters will be taxed at 33%. This move aims to create a more equitable tax structure for different classes of shareholders.

Key Tax Changes at a Glance

Enhanced Opportunities for NRI Investors

The government has also introduced measures to attract more investment from Non-Resident Indians (NRIs). A special portfolio investment scheme is being proposed to simplify the investment process for NRIs looking to enter the Indian market. Furthermore, investment limits have been expanded. The individual NRI investment limit in a listed company is set to increase from 5% to 10%, and the overall aggregate NRI limit for a single company has been raised from 10% to 24%. These changes are designed to deepen foreign participation in Indian equities.

Unchanged Capital Gains and STT Relief

Contrary to widespread market expectations, the budget did not provide any relief on long-term capital gains (LTCG) tax, which remains unchanged. Similarly, hopes for a reduction in the overall STT on equity delivery transactions were not met. The government also refrained from announcing any new sops for investors in mutual funds or alternative investment funds (AIFs), indicating a preference for maintaining the current tax framework for these investment vehicles.

Sectoral Focus: Infrastructure and Railways

Capital expenditure remains the government's primary tool for driving growth. The budget continues the strong push for infrastructure, with significant allocations for roads, railways, and defence. The capital outlay for railways is expected to see a calibrated 5% increase to approximately ₹2.65 lakh crore. This funding will support the construction of new bridges, the expansion of rolling stock, and the introduction of new trains, including 50 Namo Bharat and 200 Vande Bharat trains. Companies like RVNL and IRCON International are expected to be key beneficiaries. For roads and highways, analysts anticipate a 9-10% higher allocation, benefiting construction and engineering firms like Larsen & Toubro.

Continued Push for Defence and Manufacturing

The defence sector remains a strategic priority, with a focus on the 'Make in India' initiative. While a major surprise in allocations is unlikely, geopolitical developments continue to support a steady rise in defence spending. The market is factoring in budget growth of around 8-10%. The emphasis on domestic procurement is expected to benefit Indian original equipment manufacturers (OEMs) and their supply chains. Alongside defence, the Production-Linked Incentive (PLI) scheme continues to support manufacturing in sectors like textiles and food processing, aiming to boost exports and domestic production.

Outlook for Other Key Sectors

The budget's impact extends to several other areas. The real estate sector, particularly affordable and mid-income housing, anticipates support through extensions of schemes like PMAY-Housing for All. For the automobile industry, a stable tax regime and improved affordability are expected to support a gradual recovery in demand. In technology, the focus is shifting from announcements to the implementation of initiatives like the India Semiconductor Mission. The government's consistent support for electric mobility through the PM E-DRIVE scheme is also expected to sustain momentum in the EV ecosystem.

Market Analysis and Investor Strategy

Analysts view the budget as one focused on continuity and execution rather than radical changes. The emphasis on fiscal discipline and capex is seen as a positive for long-term market stability. While the STT hikes may cause short-term volatility and impact trading volumes, the medium-term market direction will likely be driven by corporate earnings growth and liquidity conditions. Investors are advised to align their portfolios with the government's long-term priorities, focusing on sectors like infrastructure, capital goods, and domestic manufacturing that are poised to benefit from sustained policy support. A balanced approach, focusing on quality companies with strong execution capabilities, is recommended to navigate the post-budget market environment.