Budget 2025-26

 

Overview of Indian Economy

Budget 2025 continues on the path to a ‘Viksit Bharat’ with a balanced growth objective across agriculture, consumption, manufacturing and infrastructure. In the backdrop of slowing economic growth, it walked the tightrope of stimulating growth while maintaining macro-stability. Importantly, it laid out the fiscal roadmap for next 5 years in terms of lowering India’s Debt to GDP by 6-7% to 50% (+-1%) by FY31.

• A Budget focused on 3Cs: Consumption, Consolidation and Capex
• Focused meaningfully on reviving consumption. No income tax payable on income up to ₹12 Lakh. This is a big change and a very forward looking one. This should help accelerate formalization as well. Revenue expenditure is projected to grow at 7% in FY26 vs 6% in FY25 and 1% in FY24.
• The Gross Fiscal Deficit (GFD) for FY26 is targeted at 4.4% of GDP against 4.8% of GDP in FY25.
• The capex is expected to grow at 10% to ₹11.2 trillion in FY26, an acceleration from the current low of 7% growth in FY25. Allocations to critical areas like defense, renewables, urban transport and technology appears impressive. Support to state governments: 50-year interest free loan to state governments for infra investments; ₹1.5 trillion to be spent on projects. Each ministry will come with three years of infrastructure pipeline for public-private partnership (PPP) projects
• In the budget, government has provided strong emphasis on the four key drivers of growth—Agriculture, Micro, Small and Medium Enterprises (MSMEs), Investments, and Exports. This is a welcome step. This focus is likely to revitalize these crucial sectors and stimulate overall economic expansion.
• Gross borrowings and net borrowings for FY26 at ₹14.8 trillion and ₹11.5 trillion respectively which is higher by 50,000 cr market expectation.
• Beyond the fiscal math, the deregulation/ease of doing businesses has been the key theme of the Budget. The Budget has emphasized that there is a need to ease permissions, documentation, certifications and licenses specifically for MSMEs, which would work to increase employment as well.
• Simplification of the tax structure via the introduction of a new direct tax code will likely structurally increase disposable incomes, improve compliance and drive consumption through a wider swathe of the middle class.

Overall, the budget’s macro narrative is one of measured optimism. It seeks to drive sustainable growth through a balanced mix of fiscal prudence, consumption, tax simplification while simultaneously investing in the critical areas of infrastructure, human capital, and digital transformation

 

 

Amendments in Direct Taxation

PERSONAL TAXATION

• As per the Budget, there will be no Income Tax payable up to income of ₹12 lakh under the new regime
• Income Tax Slab:

Earlier Taxation		Proposed Taxation
Income tax slab	Tax Rate	Income tax slab	New Tax Rate
Upto Rs. 3 lakh	Nil	Rs. 0-4 lakh	Nil
Rs 3-7 lakh	5%	Rs 4-8 lakh	5%
Rs. 7-10 lakh	10%	Rs 8-12 lakh	10%
Rs. 10-12 lakh	15%	Rs 12-16 lakh	15%
Rs. 12-15 lakh	20%	Rs 16-20 lakh	20%
Above Rs. 15 lakh	30%	Rs. 20-24 lakh	25%
–	–	Above Rs. 24 lakh	30%

 

Income	Tax on Slabs and rates		Benefit of	Rebate benefit	Total Benefit	Per Month Benefit	% of Total Income
	Present	Proposed	Rate/Slab	Full rebate upto Rs.12L
Up to 8 lakh	30,000	20,000	10,000	20,000	30,000	2500	3.75%
9 lakh	40,000	30,000	10,000	30,000	40,000	3333	4.44%
10 lakh	50,000	40,000	10,000	40,000	50,000	4167	5.00%
11 lakh	65,000	50,000	15,000	50,000	65,000	5417	5.91%
12 lakh	80,000	60,000	20,000	60,000	80,000	6667	6.67%
16 lakh	1,70,000	1,20,000	50,000	0	50,000	4167	3.13%
20 lakh	2,90,000	2,00,000	90,000	0	90,000	7500	4.50%
24 lakh	4,10,000	3,00,000	1,10,000	0	1,10,000	9167	4.58%
50 lakh	11,90,000	10,80,000	1,10,000	0	1,10,000	9167	2.20%

 

• For the Salaried Class, No Income Tax is applicable for annual income of ₹12.75 lakh, due to standard deduction benefit of ₹75,000 available to salaried class.
• No rebate on Special Income like short term and long term capital gain under section 87 (A). For example if person has 8 lakhs of normal income and 4 lakhs income from short term capital gain, he will be required to pay 80,000/-

 

TDS AND TCS

• The limit for tax deduction on interest for senior citizens is being doubled from the present ₹50,000 to ₹1 lakh.
• Annual limit of ₹2.40 lakh for TDS on rent is being increased to ₹6 lakh. This will reduce the number of transactions liable to TDS, thus benefitting small tax payers receiving small payments.
• The threshold to collect tax at source (TCS) on remittances under RBI’s Liberalized Remittance Scheme (LRS) is proposed to be increased from ₹7 lakh to ₹10 lakh.
• Govt has proposed to remove TCS on Remittances for Education Purposes, where such remittance is out of a loan taken from a specified financial institution.
• It is proposed to extend the time-limit to file updated returns for any assessment year, from the current limit of 2 years, to 4 years.
• A number of senior and very senior citizens have very old National Savings Scheme accounts. As interest is no longer payable on such accounts, therefore govt has proposed to exempt withdrawals made from NSS by individuals on or after the 29^th of August, 2024.
• Govt also has proposed to allow similar Tax treatment to NPS Vatsalya accounts as is available to normal NPS accounts, subject to overall limits.
• To reduce the litigation, the annual value of a property (for maximum 2 house properties) will now be considered NIL if the owner occupies it for residence or cannot occupy it for any reason.
• TDS limit on Dividend for an individual shareholder increased from 5000 to 10,000.
• TDS limit from income from units of mutual fund increased from 5000 to 10,000.
• TDS limit on insurance commission increased from 15,000 to 20,000.
• TDS limit on Brokerage commission increased from 15,000 to 20,000.

 

CAPITAL GAIN

• Clarification regarding concessional capital gains tax rates in Business Trust : Clarification is now given that concessional tax rate at 12.5% on STT paid on long term capital gains arising on transfer of shares of Indian listed company is provided to Business Trusts i.e. REITs/ INViTs.
• Taxation of ULIP gains: Profit from the redemption of ULIPs is taxed as capital gains if the premium exceeds ₹2.5 lakhs. It is now proposed that such redemption will be taxed as capital gains even in other scenarios such as when the premium exceeds 10% of the sum assured.
• Clarification for Category I and Category II Alternate Investment Fund (“AIFs”):

Earlier there was an uncertainty on characterization of income (business income vs capital gains) from transaction in securities held by Cat I and Cat II AIF. To provide certainty, it is clarified that any securities held by these AIFs will be treated as capital asset. Consequently, sale of securities by the AIFs will be treated as capital gains in the hands of unit holders (as a passthrough income) and not as business income in the hands of AIF.

• Change in Tax Rate for FIIs and Category III AIFs in IFSC: Long-term capital gains arising to FIIs or category III AIF based in IFSC on transfer of securities shall be calculated at the rate of 12.5%.

 

GIFT CITY

 

• Sunset clause for IFSC extended: The deadline to start operations in IFSC to qualify for tax benefits has been extended to 31 March 2030. This applies to offshore banking units, SEZ-approved IFSC units, aircraft leasing companies, Category III AIFs based in IFSC, and fund relocations to GIFT IFSC from overseas jurisdiction.
• Tax Exemption on Life Insurance Proceeds: Life insurance proceeds received from an IFSC insurance intermediary will be tax-exempt, with no cap on premium limit. For policies outside IFSC, payouts are taxable if annual premiums exceeds ₹5 lakh (non-ULIP) / ₹2.5 lakh (ULIP) or 10% of sum assured.
• Capital Gains & Dividend Exemptions for Ship-Leasing Entities: Similar to Aircraft leasing, capital gains exemptions provided to non-residents or units of IFSCs on transfer of equity shares of a ship-leasing domestic company. Dividends paid by a unit of IFSC engaged in ship leasing, to a unit of IFSC engaged in ship leasing shall be taxexempt.

 

• Exclusion of Loans/Advances from Deemed Dividend: Loans or advances between group entities not to be considered as dividends if one entity is an IFSC finance company/unit serving as a global or regional treasury center, and the parent or principal entity of such group is listed on a foreign stock exchange (except specified jurisdictions). Conditions for group, parent, and principal entities shall be prescribed by government.

 

Other Key Changes :

 

• New Presumptive Tax Regime for Non-Residents:

A new presumptive tax regime is proposed for non-residents providing services or technology to electronics manufacturers in India (for set-up or otherwise) under a government-notified scheme.

Flat 25% of receipts will be considered as taxable profits.

 

• Extension of Registration Validity of Charitable Trust:

Validity of registration certificate to increase to 10 years from 5 years for certain small charitable trusts having total income below ₹ 5 crores subject to certain conditions.

 

• Clarity on incomplete registration application of Charitable Trust:

An incomplete registration application of charitable trust will no longer lead to cancellation of registration and charitable trusts will be allowed to rectify and complete their applications before final order by income tax office.

 

• Extension of Sunset Clause for Start-ups:

Sunset clause for deduction of 100% profits of an eligible start-up has been extended from 01 April 2025 to 01 April 2030.

 

• Set-off of Predecessor Company’s Losses:

In case of mergers and amalgamation, accumulated losses of predecessor company shall be available to successor company for set-off upto 8 years. The time limit to calculate 8 years shall now start from the year in which such predecessor company has incurred loss and not from the date of merger / amalgamation, which used to be the case earlier

 

 

 Equity Market Outlook

 

• The equity markets have corrected over the past couple of quarters following a sustained period of strong gains over the last five years. The Nifty 50 index valuations post the recent market correction at 17 times FY 27 is reasonable versus the 10 year averages. Earning growth is broad based providing better certainty.

 

• The global economic scenario remains fragile and requires close monitoring. While India is largely an inward-facing economy, a slowdown in global growth could have an impact. Additionally, volatility is likely to persist due to policy uncertainty in the U.S. Despite global economic uncertainty, India’s growth trajectory remains resilient and stands out in an environment of subdued global expansion. India’s structural growth story remains intact, supported by a steady improvement in rural consumption, robust household capex (real estate), strong external sector with comfortable forex reserves. Additionally, banks and corporate balance sheets remain healthy, despite some localized weaknesses, further strengthening the foundation for sustained growth. Policy and political stability continue to provide confidence, reinforcing a favourable economic environment.

 

• The current budget builds upon past policy initiatives and adopts a countercyclical approach. By providing targeted tax relief, it aims to address the cyclical slowdown in urban consumption, thereby supporting overall economic growth.

 

• Long-term growth drivers such as increasing affluence, low penetration, and strong demographics continue to provide structural tailwinds. However, key risks—including global economic uncertainty, rising capital costs, and geopolitical tensions—may contribute to market volatility.

 

• Overall, the long-term growth prospects for India remain encouraging. Investors with a long-term perspective and the ability to tolerate short-term volatility may benefit from maintaining a disciplined and systematic approach to investing.

 

• We prefer large cap oriented funds and hence fresh allocations can be made to diversified equity funds like Largecap, Flexicap and Multicap. Hybrid Funds given their flexibility in asset allocation can also be made part of core portfolio.

 

 

Fixed Income Market Outlook

 

• The Union budget for FY26 was presented in the backdrop of declining inflation and increasing expectations of a first rate cut in this cycle by the RBI. While FY26BE fiscal deficit target was largely in line with market expectations at <4.5% of GDP, gross and net borrowing numbers projected were higher than market expectations. Moreover, aggressive growth estimate for personal income tax (buoyancy of 1.4x despite relaxation in tax slabs), poses an upside risk to the fiscal deficit, in our view. Further, state governments have been given leeway of additional borrowing (0.5% subject to certain reforms), although historically it has been seen that they tend to undershoot the target.

 

• Overall, in our view, yields are likely to remain rangebound with a downward bias. We believe that while in the near term, the yields might rise in view of higher than expected market borrowings but are likely to drift lower in the coming quarters as inflation approaches target and as RBI starts rate cut cycle. Thus, in view of convergence of elevated short-term rates, attractive corporate bonds spreads (over Gsec), expectations of rate cuts and improved liquidity, one may consider investment in medium duration (schemes with duration of upto 5 years) categories especially corporate bonds focussed funds. Further, investors with a relatively longer investment horizon, could continue to increase allocation to longer duration funds in line with individual risk appetite.