Ahead of the Union Budget 2026–27, expectations focus on tax relief, a simpler income tax structure, and measures to boost household consumption as inflation continues to squeeze disposable incomes.
The government is likely to continue welfare and demand-stimulus measures, such as higher allocations for MGNREGA, PM-KISAN and PMAY, along with possible MSP hikes, but at a moderate pace due to fiscal constraints, with gains largely supporting essential consumption.
Rising capital expenditure and interest costs have tightened fiscal space despite buoyant non-tax revenues, requiring the government to balance fiscal consolidation with infrastructure spending while gradually reducing the fiscal deficit and debt-to-GDP ratio.
As preparations gather pace for the Union Budget 2026–27, expectations among common citizens and market participants are firmly anchored around tax relief, simplification, and measures to revive consumption, amid rising living costs and a prolonged slowdown in household spending.
With inflationary pressures squeezing disposable incomes, taxpayers are hoping for enhanced tax rebates, wider income slabs, and a mandatory shift to the new income tax regime to reduce compliance complexity. The push is towards a simpler, transparent, and predictable tax structure, even if it comes with fewer exemptions.
Senthil R. Kumar, Managing Director & CEO, Nitstone Finserv Pvt Ltd, said: “While a dramatic overhaul may be unlikely, measures such as increasing the standard deduction threshold, currently at Rs 75,000 under the new tax regime, or refining slab thresholds and rebates can meaningfully reduce tax outgo for millions of employees. Additionally, tax simplification and improved clarity around deductions will help salaried taxpayers plan better and potentially unlock greater savings over time. These kinds of pragmatic changes could translate into real benefits for working professionals and support household financial resilience.”
Welfare Push Likely, But Fiscal Constraints Remain
According to a report by financial services company Motilal Oswal, the government is expected to continue with populist and welfare-oriented measures in the Budget 2026, though at a slower pace compared to the previous year due to fiscal constraints.
The report highlighted that the government has been attempting to revive consumption by boosting disposable incomes through steps such as GST rationalisation, simpler tax slabs, and higher income tax exemptions. However, muted consumption, especially for essentials, continues to weigh on economic momentum.
Policy focus is expected to remain on demand stimulation across rural and urban markets, with expectations that there is likely to be higher allocations for MGNREGA, PM-KISAN, PMAY, and potential MSP hikes. Motilal Oswal noted that increased income flows would primarily support essential consumption, particularly FMCG, given ongoing weakness even in basic spending categories.
Fiscal Math Tightens as Capex Rises
Fiscal data for April–November FY26 shows that the Centre’s gross fiscal deficit, as a share of the budget estimate, was higher than in the same period last year. This was mainly due to a sharp increase in capital expenditure, especially on roads and railways, highlighting the government’s continued focus on physical infrastructure.
Revenue expenditure remained broadly under control, although interest payments increased, offsetting lower subsidy spending. Tax collections stayed weak, with both direct and indirect taxes falling short, partly due to slower growth in nominal GDP. In contrast, non-tax revenues, including dividends from PSUs, financial institutions and the RBI, remained strong, providing some fiscal support.
Weaker tax inflows and the lack of adequate GST compensation cess collections in recent months have also led the government to restrain spending rather than raise market borrowings. This has helped it remain on track to meet the 4.4 per cent fiscal deficit target for FY26.
Looking ahead, the government is expected to adopt a new debt-to-GDP glide path from FY27, in line with global best practices. The objective is to ensure fiscal decisions reflect both past and future liabilities, with a target of reducing the debt-to-GDP ratio to 50% (±1%) by FY31.
The pace of fiscal consolidation in FY27 is likely to be gradual, with the central fiscal deficit expected at around 4.2-4.3 per cent of GDP. Budget assumptions on tax collections are also likely to be more conservative, with nominal GDP growth pegged at around 10 per cent, supported by easing monetary conditions and a gradual inflation pickup.
As the Budget countdown begins, the balancing act before the government remains delicate, providing tax relief and welfare support to revive consumption, while maintaining fiscal discipline and sustaining capital expenditure-led growth.
