With the Union Budget 2026-27 approaching, investors and taxpayers are once again assessing whether fresh tax measures could influence sentiment and household wealth creation. However, following last year’s substantial overhaul of personal income taxation and capital gains rules, expectations of sweeping new concessions appear restrained.
Tax experts suggest that Budget 2026-27 is more likely to focus on fine-tuning, simplification, and ironing out inconsistencies, rather than announcing large-scale tax cuts.
Tempered Expectations for Individual Taxation
In an interaction with CNBC-TV18, a tax expert noted that the previous Budget delivered significant and largely unexpected relief to individual taxpayers, particularly through revisions to income tax slabs and rebates.
The effective exemption of income up to ₹12 lakh under the new tax regime, he observed, was a transformative measure that has substantially reduced pressure for further personal tax relief this year.
Given the scale of last year’s reforms, the expert said expectations for major announcements in Budget 2026-27 have naturally moderated.
Capital Gains Rationalisation Simplifies Compliance
The expert also highlighted the streamlining of capital gains taxation introduced in the previous Budget. Clearer holding-period definitions across asset classes, such as equities, real estate, and bullion, have materially improved clarity and compliance for investors.
This rationalisation, he noted, has made the tax framework easier to navigate and reduced ambiguity in investment planning.
New Tax Regime: The Default Option
Another structural shift identified by experts is the rapid adoption of the new concessional tax regime, which is increasingly emerging as the default choice for taxpayers.
Unless an individual has substantial deductions available under provisions such as HRA or Section 80C, the new regime generally results in a lower tax liability. As a consequence, the relevance of the old tax regime continues to diminish for a large segment of salaried taxpayers.
LTCG Hike Seen as Manageable
Addressing concerns around the increase in long-term capital gains (LTCG) tax from 10% to 12.5%, another tax expert noted that the impact is limited for long-term investors with realistic return expectations.
For investors targeting double-digit annual returns, a marginal increase in tax rates does not materially erode long-term wealth creation. However, he acknowledged that dissatisfaction tends to surface during periods of weaker market performance, when tax costs feel more pronounced.
Budget 2026 May Emphasise Convenience and Product Neutrality
Rather than further rate changes, experts expect the next phase of reform to focus on operational convenience and tax neutrality across investment products.
One key area flagged is the taxation of Category III Alternative Investment Funds (AIFs). These funds are currently taxed at the fund level, often at the highest marginal rate. Experts argue that investor-level pass-through taxation, similar to that available for Category I and II AIFs, would promote fairness and consistency.
Mutual Fund Switching: A Persistent Tax Friction
Experts also pointed to a practical challenge faced by mutual fund investors: capital gains tax triggered when switching between fund options, such as:
- Dividend to growth plans
- Regular to direct plans
Despite no actual withdrawal of funds, such switches currently attract tax, creating friction and discouraging efficient portfolio adjustments.
By contrast, Unit Linked Insurance Plans (ULIPs) allow fund switching without immediate tax implications. Experts suggest that extending similar treatment to mutual funds could simplify investor experience.
Debt Vs Equity: Tax Differentials Influencing Behaviour
Both experts acknowledged that the widening tax gap between equity and fixed-income products is increasingly influencing investor behaviour.
There is concern that some investors, including senior citizens, may tilt excessively towards equity solely due to tax efficiency, potentially overlooking risk tolerance and income stability.
Tax considerations, experts emphasised, should remain secondary to risk management and asset allocation discipline. While tax parity for fixed income is often discussed, the government appears more inclined towards broad-based simplification, such as slab rationalisation, rather than product-specific concessions.
What to Watch in Budget 2026
As Budget 2026-27 approaches, experts expect the government to maintain policy continuity, while addressing narrower structural frictions, particularly around:
- Tax treatment parity across investment products
- Flexibility in switching investment options
- Uniformity in capital gains application
For investors, the core message remains unchanged: sound portfolio construction should not be compromised for tax efficiency.
A balanced approach to risk, return, and liquidity continues to be essential, irrespective of incremental tax changes.
Source: CNBC TV18