As India prepares for the Union Budget 2026, market participants and corporate entities are aligning their expectations around a central theme: the urgent need for clarity, predictability, and reform-driven stability in the fiscal framework. This collective call comes at a time when India's capital markets are navigating a complex global landscape marked by shifting investor sentiments and domestic valuation concerns.
Navigating Global Headwinds and Domestic Valuations
In recent months, institutional investors have notably reduced their exposure to Indian equities, a development that poses challenges for market liquidity. Analysts attribute this pullback to multiple factors, including escalating geopolitical tensions worldwide and stretched valuations in domestic markets. The strong U.S. dollar and a volatile rupee have further eroded returns for overseas investors, while higher yields on U.S. bonds have enhanced the attractiveness of American assets.
Following a prolonged rally, Indian equity markets are now trading at significant premiums compared to other emerging economies. This valuation gap has triggered profit-taking activities by Foreign Portfolio Investors (FPIs), especially as global investment opportunities become more accessible. Sectors such as information technology and financial services have seen valuations outpace earnings growth, adding a layer of caution among market participants.
From a corporate perspective, businesses are advocating for greater tax clarity, simplified compliance procedures, and operational ease. Measures that support liquidity are also high on the agenda. Given that economic growth remains intricately linked to capital market efficiency, the forthcoming Budget is anticipated to address these structural challenges while maintaining fiscal discipline.
Tax Policy Reforms: A Key Determinant for Investment
Tax policy continues to be a critical factor influencing investment decisions by institutional players. Investors are seeking definitive assurances against retrospective amendments, a practice that has previously undermined confidence. There is a strong expectation for a rollback of the long-term capital gains (LTCG) tax on listed equities from the current 12.5 percent to 10 percent.
Rationalising Transaction Costs and Harmonising Regimes
Additionally, stakeholders are calling for the rationalisation or abolition of the Securities Transaction Tax, which inflates transaction costs, particularly for high-frequency participants. Simplifying the capital gains regime by harmonising holding periods and tax treatment across various asset classes is another priority. Extending wider tax exemptions—currently available to sovereign wealth funds—to pension and endowment funds, especially for infrastructure investments, is also on the wish list.
Debt Market and Banking Sector Expectations
Recent regulatory changes that eliminated indexation benefits for debt mutual funds have raised concerns among FPIs. A stable tax regime on interest income from bonds is now deemed crucial. With India's inclusion in global bond indices, clarity on withholding tax rates, streamlined fund registration processes, and automated trading workflows are essential to attract sustained inflows.
Banking Sector's Focused Demands
The banking sector has outlined specific expectations for Budget 2026. A key demand is a reasonable increase in the tax deduction available for provisions made for Non-Performing Assets (NPAs) from the current 8.5 percent to 15 percent. This adjustment would provide much-needed tax relief to offset potential credit losses. Banks are also advocating for tax incentives for depositors, such as higher deduction limits on interest earned from bank deposits and a reduction in tax deduction at source. These measures could help attract stable, low-cost funding, addressing the widening credit-deposit ratio and ensuring funding stability in a tight liquidity environment.
NBFCs, IFSC, and Mutual Fund Reforms
Non-Banking Financial Companies (NBFCs) continue to push for parity with banks on several fronts. Key demands include exemption from Tax Deducted at Source (TDS) on interest income and an increase in the deduction threshold for NPA provisions to at least 8.5 percent, aligning with banks. A specific deduction for individuals on interest paid for education loans is also expected to boost the education financing ecosystem.
IFSC and Mutual Fund Segment Priorities
For the International Financial Services Centre (IFSC), clarity and simplicity in taxation top the list of critical priorities. Industry stakeholders recommend a one-layer taxation system for retail schemes involving resident investors and family investment funds, along with a blanket exemption from deemed dividend provisions for entities dealing with corporate treasury centres.
In the mutual fund segment, key recommendations include revising the definition of equity-oriented funds to include Fund of Funds (FOFs) investing predominantly in equity funds and incorporating the term 'specified mutual fund' in consolidation provisions. These changes aim to eliminate structural mismatches and ensure tax neutrality.
Streamlining Compliance and Operational Ease
Beyond taxation, several measures are proposed to simplify processes and frameworks. Restoring the due date for filing revised returns to March 31 and enabling tax payments or refunds through overseas bank accounts would significantly ease operational difficulties. Rationalising TDS and Tax Collected at Source (TCS) provisions is another key demand.
The industry also advocates for enabling foreign tax credit at the TDS stage, introducing uniform TDS rates to eliminate classification disputes, and reinstating the six-year rectification window for TDS returns. A reduction in the TCS rate on Liberalised Remittance Scheme transactions is expected to provide relief from working capital constraints.
FPIs are seeking streamlined compliance norms, including simplified Know Your Customer (KYC) processes, digitised registration, and reduced cumbersome information requirements.
The Big Picture: Building a Resilient Financial Ecosystem
India requires a stable and transparent framework to drive long-term growth. A forward-looking tax regime, streamlined compliance processes, and rational policies can boost market confidence and attract long-term investments. These measures will strengthen India's financial resilience and position the country as an appealing destination for growth and opportunity.
