On Sunday, February 1, 2026, Finance Minister Nirmala Sitharaman will present the Union Budget 2026–27 at 11:00 AM. The NSE and BSE will operate during normal hours, allowing markets to respond in real-time, for the first time in Indian fiscal history. With major global desks in New York and London closed for the weekend, liquidity will likely be thin, and early price movements can be exaggerated.
The budget speech will outline the government’s economic priorities and sector-wise allocations, signaling where capital deployment will be concentrated, whether in infrastructure, manufacturing, or emerging sectors. These allocations shape investment flows, sectoral valuations, and the multiplier effect over the fiscal year.
But for investors, the structural questions run deeper. India’s equity markets operate under a tax framework that hasn’t kept pace with current valuations or trading infrastructure. Bond markets are watching whether fiscal targets can hold while the government manages significant wage commitments from the 8th Pay Commission.
Whether the finance minister adjusts outdated thresholds, maintains borrowing discipline, or signals sectoral priorities, these details shape returns far more than any single announcement. As the countdown to 11:00 AM begins, the speculation isn’t just about what might change, but also about how these structural shifts will redefine the cost and return of capital in a maturing economy in the months to follow.
Equity Markets: From Complexity to Clarity
India’s equity markets have witnessed unprecedented retail participation, strengthening market depth in remarkable ways. Yet this democratization has also exposed a growing disconnect: an aging tax framework struggling to keep pace with market realities.
The LTCG Threshold: Protecting Real Returns
Currently, Long-Term Capital Gains (LTCG) above ₹1.25 lakh are taxed at 12.5% on the basis of rates and limits established in the July 2024 Budget. But here’s the problem: in today’s high-valuation environment, even modest middle-class SIP portfolios are breaching this threshold with surprising ease. Industry bodies like FICCI and ASSOCHAM have repeatedly flagged this misalignment as the Nifty continues its record-breaking ascent.
- What we expect: A move to raise the LTCG exemption limit to ₹2 lakh
- Why it matters: Beyond the immediate tax savings, this would send a clear policy signal—the government prefers patient capital over speculative churning. It would effectively de-tax long-term wealth creation for the common investor, reinforcing the “hold, don’t trade” philosophy that builds sustainable market depth.
Solving the Holding-period Maze: The Case for a Unified Clock
India’s fragmented definition of “long-term” remains a persistent source of friction for even the most sophisticated investors. While the 2024 Budget simplified the structure into two buckets, 12 and 24 months, illogical inconsistencies linger that distort the very nature of asset allocation.
- Listed equities: Qualify as long-term after 12 months
- Real estate, unlisted shares, and gold: Now qualify after 24 months (a welcome reduction from the 36-month rule prior to 2024)
- Non-equity units: Hybrid instruments, certain Gold ETFs, and international funds also currently sit in the 24-month bracket
Tax experts at KPMG have highlighted that these remaining complexities, particularly the gap between listed and unlisted securities, force investors to make decisions based on tax clocks rather than business fundamentals.
- What we expect: A bold move toward a unified 12-month holding period across all financial assets
- Why it matters: Such a reform would eliminate “tax-induced inertia”, that psychological and financial hesitation investors feel when rebalancing a portfolio purely because of a pending holding-period penalty. A universal one-year rule would dramatically enhance India’s appeal to domestic HNIs and Foreign Portfolio Investors (FPIs), positioning the nation as a truly efficient global capital market.
Beyond the Portfolio: The Great Personal Tax Reset
While capital gains dictate the “how” of investing, personal income tax dictates the “how much”. In Budget 2026, we expect the finance minister to move beyond minor slab tweaks and toward a fundamental redesign of the Indian taxpayer’s relationship with the State.
1. The Sunset of the Old Tax Regime
The old tax regime, with its complex web of 80C and 80D deductions, has lost popularity since it was made the non-default option. With roughly 72% of taxpayers already migrated to the new regime, experts from Grant Thornton speculate that the old regime may finally be scrapped or at least restricted to those earning below a certain threshold.
- The logic: Maintaining two parallel systems is an administrative burden. Phasing out the old regime allows the government to focus on a “low-rate, no-exemption” model that reduces litigation and simplifies compliance for millions.
2. The “Joint Filing” Revolution
Perhaps the most discussed proposal from the Institute of Chartered Accountants of India (ICAI) is the introduction of optional joint tax filing for married couples.
- The innovation: Currently, a family with a single earner making ₹20 lakh pays significantly more tax than a dual-earner family making ₹10 lakh each, even though the total household income is the same.
- The expectation: An optional scheme where couples can combine income and benefit from a doubled basic exemption limit (potentially up to ₹8 lakh). This would be a game-changer for single-income middle-class families, providing them with the same tax efficiency as dual-income households.
3. The Pay Commission “Bracket Creep” Buffer
As the government prepares for the 8th Pay Commission’s implementation, a significant risk for salaried employees is “Bracket Creep”, where a salary hike pushes them into a higher tax bracket, effectively neutralizing their raise.
- The expectation: A hike in the standard deduction from ₹75,000 to ₹1,25,000 under the new tax regime.
- The strategy: This move serves as a “consumption kickstart”. By increasing the standard deduction, the government can provide immediate relief to the middle class to offset inflation, ensuring that the liquidity from the upcoming wage revisions translates into real spending power rather than just higher tax collections.
Debt Markets: Navigating the Fiscal Glide Path
For debt investors, budget day is about the government’s borrowing plan. As the government’s lenders, bond investors obsess over one variable above all: the fiscal deficit.
The Fiscal Target: 4.3% or Bust
Credit rating agency ICRA projects the government will aim for a fiscal deficit of 4.3% of GDP for FY27, down from the 4.4% target of FY26. This may seem like statistical hair-splitting, but the implications run deep.
Why it matters: Any overshoot forces more aggressive borrowing from the market, crowding out private borrowers and pushing bond yields higher. A contained fiscal deficit path is the primary anchor for corporate bond yields in India; when the government reduces its demand for capital, it lowers the “benchmark” yield. This, in turn, allows Indian corporations to issue their own bonds at more attractive rates, directly reducing their cost of capital. A credible 4.3% target helps anchor interest rates, protects corporate profit margins, and keeps home loan EMIs from creeping upward.
The Global Index Discipline
India’s inclusion in the J.P. Morgan Global Emerging Market Bond Index has fundamentally changed the game. Fiscal slippage is no longer just a domestic concern; it’s instantly scrutinized by global bond traders. Any deviation from the glide path risks immediate currency volatility and capital outflows. The government knows this, and that knowledge alone provides a powerful disciplining mechanism.
The Debt Mutual Fund Renaissance
Here’s where things get interesting. Currently, for all debt funds purchased on or after April 1, 2023, gains are treated as short-term capital gains and taxed at slab rates—regardless of holding period. This has essentially killed debt mutual funds as a tax-efficient vehicle.
The speculation: There’s confident chatter about restoring long-term capital gains status at 12.5% (without indexation) for debt units held beyond 24 months.
Even a partial restoration of tax efficiency would revive debt mutual funds as a serious asset class, unlocking liquidity for India’s corporate bond market and reducing the dangerous overdependence on bank credit.
The Invisible Constraint of the 8th Pay Commission
One of the most underappreciated forces shaping Budget 2026 is the 8th Central Pay Commission. While January 1, 2026, marks the traditional 10-year implementation milestone, the commission’s recommendations are currently under evaluation.
The Fiscal Shadow
The Finance Ministry must provision for a projected 20–25% increase in salaries and pensions for nearly 1.2 crore employees and pensioners. Because the 8th Pay Commission is likely to be effective from January 2026, the government may face a massive arrears payout in 2027.
This creates a hidden liability that sharply constrains the fiscal room available for popular tax cuts in 2026.
The investor insight: Don’t mistake a conservative budget for a lack of intent. Fiscal restraint in 2026 is a deliberate strategy to build a buffer for the impending wage bill. The government is playing a longer game than most market participants realize.
The “T+0” Tax Evolution
One of the more intriguing possibilities in Budget 2026 lies at the intersection of taxation and market infrastructure.
The expectation: Introduction of a “holding-hour” rule to redefine Short-Term Capital Gains in a T+0 settlement environment
The context: With India now rolling out T+0 (same-day) trade settlement for the top 500 stocks, the legal distinction between “Intraday” (business income) and “Delivery” (capital gains) is blurring. In T+0, you can buy and sell delivery stock within hours.
Why it could happen: To preempt litigation, the finance minister may formally classify trades held for less than one full trading session as speculative income, while anything held overnight qualifies as a capital asset. It’s a technical fix, but one with meaningful implications for active traders.
Final Thoughts: Read Between the Lines
A budget session on a Sunday can create unusual optics, but the real test will come the following Monday. And then Tuesday. And the weeks that follow.
If the rupee stabilizes, if bond yields hold steady, if FPI flows continue—that’s when you’ll know whether global investors found credibility in the fiscal math. If retail investors adjust their SIP strategies based on clearer tax rules, that’s when you’ll know the simplification worked.
Markets react to speeches, but they adjust to substance. The substance of Budget 2026 will reveal itself not in Sunday’s volatility, but in the months of market behavior that follow.
Watch the Sunday session if you want, but don’t let it dictate your strategy. The investors who navigate Budget 2026 best might not just be the ones who predicted it correctly, but also the ones who built portfolios resilient enough to handle whichever version of it actually arrives.
