The Union Budget for 2026–27, presented on February 1, 2026, marks an important step in India’s long-term economic journey. Coming at a time of global uncertainty, fragmented trade relationships, and rising geopolitical tensions, the budget focuses less on short-term relief and more on strengthening the economy’s foundations. It aligns closely with the broader vision of building a developed India by 2047, with an emphasis on growth, capacity creation, and inclusion.
With a total expenditure of ₹53.47 lakh crore, the government has clearly signalled that public investment will remain the primary driver of economic momentum. This approach reflects a conscious decision to prioritise durability and resilience over headline-grabbing populism, especially when private investment sentiment is still measured.
Fiscal Strategy: Gradual Consolidation Without Disruption
The fiscal framework for FY27 remains disciplined. The fiscal deficit target has been set at 4.3% of GDP, a modest improvement from last year’s revised estimate of 4.4%. This steady glide path reflects the government’s intent to balance growth support with debt sustainability. Public debt is projected at 55.6% of GDP, with a longer-term objective of moving towards the 50% mark by the end of the decade.
Revenue assumptions are deliberately conservative. The budget works with a nominal GDP growth estimate of 10%, combining real growth expectations of around 7% with moderate inflation. This cautious approach improves credibility and reduces the risk of revenue shortfalls that could otherwise strain fiscal math.
Capital expenditure has been raised to a record ₹12.2 lakh crore, up 11.5% year-on-year. The government continues to rely on capex as a multiplier, aiming to stimulate private investment and support medium-term growth, particularly in infrastructure and manufacturing.
How the Nation Manages Its Money
Overall Size and Spending Mix
For FY 2026–27, the government plans to spend ₹53.47 lakh crore, divided broadly into:
- Revenue expenditure: ₹41.25 lakh crore (around 77%)
- Capital expenditure: ₹12.22 lakh crore (around 23%)
- Interest payments: ₹14.04 lakh crore (about 26% of total spending)
The key shift this year is the pace of growth in capital expenditure, which has risen by 11.5%, much faster than revenue expenditure growth of 6.6%. This clearly shows the government’s intent to invest more in assets like roads, railways, defence equipment, logistics rather than expanding recurring costs.
Where the Government’s Money Comes From
Excluding borrowings, government receipts are estimated at ₹36.52 lakh crore. Taxes continue to be the main source of revenue, supported by steady economic activity and improved compliance.
Gross tax revenue is estimated at ₹44.04 lakh crore, with the following composition:
- Income tax: ₹14.66 lakh crore (33%)
- Corporation tax: ₹12.31 lakh crore (28%)
- GST (CGST): ₹10.19 lakh crore (23%)
- Union excise duties: ₹3.89 lakh crore (9%)
- Customs duties: ₹2.71 lakh crore (6%)
Together, income tax and corporate tax contribute over 61% of total tax revenue, making budget health closely linked to economic growth and corporate profitability. The sharp rise in excise collections reflects continued reliance on consumption-linked taxes.
Where the Government’s Money Is Spent
Total Union Government expenditure for FY 2026–27 is budgeted at ₹53.47 lakh crore, with spending largely driven by committed obligations and growth-oriented priorities.
- Transfers to states: ₹11.76 lakh crore (22%)
Supports state-level spending on health, education, infrastructure, and welfare programmes. - Interest payments: ₹14.04 lakh crore (26%)
Non-discretionary expenditure, reflecting the rising cost of servicing public debt. - Central sector schemes: ₹9.09 lakh crore (17%)
Fully funded central programmes covering infrastructure, defence procurement, and national digital platforms. - Defence expenditure: ~₹5.9 lakh crore (11%)
Focused on modernisation, indigenisation, and capital-intensive defence equipment. - Centrally sponsored schemes: ₹4.28 lakh crore (8%)
Jointly funded with states, primarily for health, education, housing, and rural development. - Finance Commission grants and other transfers: ₹3.74 lakh crore (7%)
Targeted transfers to support regional development and fiscal balance among states. - Subsidies (food, fertiliser, LPG): ₹3.21 lakh crore (6%)
Socially essential spending, broadly stable to avoid fiscal slippage. - Pensions: ₹1.07 lakh crore (2%)
Statutory payments to retired government employees.
Together, transfers to states, interest payments, pensions, and subsidies account for over 60% of total expenditure, highlighting limited fiscal headroom and the importance of sustained economic growth.
Fiscal Deficit: Where We Stand and What the Budget Expects
The fiscal deficit is the amount the government needs to borrow in a year after meeting its income. For investors, the key point is whether this borrowing is increasing faster than the economy or staying under control.
Where the Deficit Was Earlier
In FY 2024–25, the fiscal deficit was 4.8% of GDP. This was still influenced by higher government spending after the pandemic years.
For FY 2025–26, the government had planned a fiscal deficit of 4.4% of GDP. As per the revised estimates, the deficit is expected to remain at 4.4%, not higher. This shows that tax collections were strong enough to support spending without extra borrowing.
In simple terms, the government did not overshoot its borrowing plan last year.
What the Budget Projects for FY 2026–27
For FY 2026–27, the Budget has set the fiscal deficit at 4.3% of GDP.
In rupee terms, borrowing will increase to ₹16.96 lakh crore, mainly because the economy is expected to grow in size. The Budget assumes 10% nominal GDP growth, which helps keep the deficit ratio slightly lower even with higher spending.
This tells us that:
- The government is continuing with higher spending on infrastructure
- At the same time, it is keeping borrowing in check
- Borrowing is growing slower than the economy
A Closer Look at the Numbers
Some supporting indicators give more clarity:
- The primary deficit, which excludes interest payments, is expected to fall to 0.7% of GDP from 0.8% last year. This suggests some improvement in the government’s current-year finances.
- The revenue deficit remains steady at 1.5% of GDP, while the effective revenue deficit is much lower at 0.3%, showing that a larger part of spending is going towards creating assets rather than only day-to-day expenses.
Infrastructure, Defence and Manufacturing Priorities
Infrastructure continues to be the main focus of government investment. Higher capital allocations support roads, railways, logistics corridors, ports, and urban infrastructure. Planned high-speed rail corridors, national waterways, and freight improvements aim to reduce logistics costs and improve efficiency.
Defence has emerged as the single largest ministry allocation at ₹7.85 lakh crore, supported by a sharp rise in capital spending. The emphasis is on equipment upgrades and domestic production.
Strategic manufacturing sectors such as electronics, semiconductors, biopharma, and critical minerals continue to receive policy support. The objective is to reduce import dependence and build domestic capability over time.
Income Tax Structure and Compliance Changes
For individuals, the Budget focuses on simplification rather than tax rate changes.
Income tax slabs under the new regime remain unchanged, with zero tax up to ₹12 lakh (₹12.75 lakh for salaried individuals after standard deduction). The structure provides stability and predictability, though effective tax outgo will rise gradually with income growth.
Several compliance-related measures have been introduced to make filing, revision, and disclosures easier, reducing administrative friction.
Market-Related and Transaction-Level Changes
Key changes affecting financial activity include:
- Increase in STT on derivatives, raising the cost of frequent trading
- Equity LTCG continues at 12.5%, with a ₹1.25 lakh annual exemption
- Share buybacks are now taxed as capital gains
- Interest deduction on borrowed investments has been removed
On the household side, TCS on overseas education, medical expenses, and travel has been reduced, easing cash flow for such payments. Customs duty on certain personal imports has also been lowered.
Overall View of the Budget
Union Budget 2026–27 reflects a government that is focused on stability, execution, and long-term outcomes rather than short-term announcements. The emphasis is clearly on maintaining steady growth, improving the quality of spending, and keeping borrowing under control while continuing to invest heavily in infrastructure, defence, and capacity building.
An important aspect of this Budget is also what it does not attempt. There are no broad-based income tax cuts or large GST rate reductions. This should be seen in the right context. Over the past year, significant relief has already been provided outside this Budget cycle. The earlier expansion of the new tax regime made incomes up to ₹12 lakh effectively tax-free for many individuals, while GST rate rationalisation through GST Council decisions reduced tax rates on several commonly used goods. These were meaningful measures and had a direct impact on household finances and consumption.
Against that backdrop, Budget 2026–27 signals that tax breaks cannot be expected every year. The government’s current expectation is that growth, compliance, and a stable tax base should support revenues, allowing fiscal resources to be directed towards asset creation rather than repeated tax reductions. The focus has therefore shifted from rate cuts to simplification, predictability, and steady implementation.
Overall, the Budget assumes that sustained economic growth, rather than frequent fiscal giveaways, will be the primary driver of higher incomes and improved living standards over time.
Disclaimer:
This article should not be construed as investment advice, please consult your Investment Adviser before making any sound investment decision.
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