Expectations from Union Budget 2026: What the Investor Community Is Watching Closely
As the Union Budget 2026 approaches its February 1 presentation, the Indian investor community is navigating a phase of heightened uncertainty. Equity markets have turned volatile, foreign investor outflows remain elevated, and sentiment has weakened in the run-up to the Budget.
The Nifty corrected nearly 2.5 percent in the week ending January 23, while foreign portfolio investors sold equities worth over ₹33,000 crore in January alone. Against this backdrop, expectations from the Union Budget 2026 are high, particularly around measures that can revive confidence, improve post-tax returns, and support long-term market stability.
Here is a structured look at what investors are realistically expecting from the upcoming Budget and how it could influence Indian markets.
Capital Gains Taxation Remains the Biggest Investor Demand
Long-Term Capital Gains Relief
Among all expectations from the Union Budget 2026, capital gains taxation stands out as the most debated issue. The changes introduced in 2024 altered investor calculations significantly, and both retail and institutional investors are now seeking moderation.
A key demand is reducing the Long-Term Capital Gains tax on equities from 12.5 percent back to 10 percent. Investors are also pushing for an increase in the tax-free exemption limit from ₹1.25 lakh to ₹2 lakh, which would directly benefit long-term retail investors and mutual fund participants.
Rethinking the Holding Period
Some market experts have proposed increasing the holding period for long-term capital gains qualification from one year to two years. The intent is to encourage genuine long-term investing rather than short-term speculation, while still offering meaningful tax efficiency to disciplined investors.
STCG and Securities Transaction Tax
While a reduction in the 20 percent short-term capital gains tax is on investor wish lists, most analysts believe the government may retain it to protect revenue collections. However, there is growing pressure to review the Securities Transaction Tax.
Investors argue that STT adds to a layered tax burden, as equity transactions already attract capital gains tax and GST on brokerage. Any reduction or rationalisation here could improve trading volumes and liquidity.
Personal Tax Relief and Consumption Revival
Why Consumption Matters for Markets
Weak urban consumption has weighed on corporate earnings over recent quarters. Investors expect the Union Budget 2026 to address this through targeted personal tax relief, which could increase disposable income and support demand across sectors.
Section 87A Rebate Adjustment
A specific demand from middle-class investors is allowing the Section 87A rebate of ₹60,000 to apply to income including capital gains for individuals earning under ₹12 lakh. Currently, many retail investors fall into a situation where they pay tax solely due to capital gains, despite being in the zero-tax bracket otherwise.
This change could encourage broader participation in equity and mutual fund investments.
Standard Deduction Increase
An increase in the standard deduction, currently at ₹75,000, is also widely expected. Even a modest hike would put additional money in the hands of salaried individuals, potentially boosting consumption-linked sectors such as FMCG, retail, and discretionary spending.
Creating a Level Playing Field for Bank Deposits
A unique expectation this year comes from SBI Research, which has suggested taxing fixed deposit interest in line with equity capital gains rather than at slab rates.
Currently, FD interest can be taxed as high as 30 percent for investors in the top tax bracket. Aligning FD taxation with long-term equity rates could help stem the decline in household financial savings flowing into bank deposits and restore balance between traditional savings and market-linked instruments.
While this proposal is structurally significant, analysts remain cautious about its immediate implementation.
Sector-Specific Themes Investors Are Positioning For
Agriculture and Rural Economy
Market action in stocks such as Coromandel International and Tata Consumer indicates expectations of a rural-focused Union Budget 2026. Increased allocations toward agriculture, irrigation, fertilisers, and rural welfare schemes could revive rural demand and improve earnings visibility for consumer-facing companies.
Manufacturing and PLI Expansion
Investors are watching closely for extensions of Production-Linked Incentive schemes into emerging areas such as artificial intelligence, space technology, robotics, and advanced electronics. Any clarity here could benefit domestic manufacturing plays and strengthen India’s global competitiveness.
Infrastructure, Defence, and Power
The government’s capital expenditure strategy remains a cornerstone of market expectations. With anticipated outlays exceeding ₹12 trillion, sectors such as railways, defence manufacturing, power, green energy storage, and EV infrastructure remain firmly in focus.
Companies linked to execution through government orders often benefit from multi-year revenue visibility and improved balance sheets.
FII Sentiment and the Bigger Market Picture
Can the Budget Reverse the Trend
Market veterans such as Dr. V.K. Vijayakumar and Naveen Kulkarni caution that while the Union Budget 2026 may spark short-term sentiment rallies, it may not be sufficient on its own to reverse broader market trends.
Foreign investor flows are closely tied to earnings recovery, global interest rate expectations, and geopolitical clarity. For a sustained FII comeback, investors are watching Q4 FY26 earnings and progress on international trade agreements, including India-US trade discussions.
Portfolio Positioning Ahead of the Budget
Given potential post-Budget volatility, many experts suggest a balanced allocation approach. A commonly discussed framework includes exposure across large-cap equities, precious metals such as gold and silver, and allocation to cash or high-quality bonds as a volatility buffer.
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