Budget 2026: No change expected in capital gains tax; capex push, fiscal discipline to anchor markets, says MOFSL's Nandish Shah

Ahead of the Union Budget 2026, Nandish Shah, AVP – PCG Research & Advisory (Fundamental), Wealth Management at Motilal Oswal Financial Services Ltd (MOFSL), expects continuity on equity taxation, a renewed thrust on capital expenditure (capex) and a calibrated approach to fiscal consolidation, even as market volatility remains elevated.

In an emailed interaction with Business Today, Shah said there is little expectation of any changes to equity-related taxes in the upcoming Budget. "There has been no expectation of any tinkering with long-term capital gain tax, short-term capital gains and STT. FY27 budget is likely to see a tightrope walk between showing the intended fiscal consolidation and providing a push for capex growth, which we believe is the need of the hour."

FULL COVERAGE:  Union Budget 2026

Disinvestment strategy to evolve

On divestment, Shah expects a marginally lower target for FY27, alongside a shift in the government's approach toward public sector assets. "We assume a disinvestment target of Rs 45,000 crore, marginally lower than last year's Rs 47,000 crore. On the public sector front, we anticipate continued evolution of the government’s disinvestment & PSU strategy, shifting from outright asset sales toward business revamps and selective stake monetisation; this includes the anticipated restructuring of IDBI Bank, potential stake changes in LIC, and consolidation of smaller PSU banks to create larger, more robust entities akin to SBI and HDFC."

Capex to remain the dominant theme

Shah believes investors should focus on the capex theme, with government spending expected to remain a key growth driver in FY27. "For FY27E, we see the government pressing the pedal once again on capex. We see capex as a percentage of GDP to be at 3.1% in FY27E, unchanged from FY26 but clocking a higher growth of 10.3% YoY vs. 6.6% YoY in FY26. This implies a capex budget of Rs 12.4 lakh crore."

He added, "We expect the upcoming budget to place a strong emphasis on emerging priority sectors that can drive long-term growth and strategic resilience. In particular, defence and allied industries are likely to receive heightened focus, building on recent momentum in start-ups and the Centre’s formation of a dedicated committee to nurture allied defence capabilities. Digital technologies, especially solutions that integrate advanced tech into agriculture, healthcare, and related social sectors, should remain key pillars of reform-oriented allocation."

Fiscal deficit likely to edge lower

Shah expects the government to stay committed to fiscal consolidation. "We expect the FY27 Union Budget to mark a pivotal moment in India's fiscal framework, with the gross fiscal deficit targeted at 4.3% of GDP, lower than 4.4% in FY26."

He noted that the Budget would likely be framed around nominal GDP growth of about 10.1%, providing some headroom to balance discipline with growth support. "Given the emphasis on fiscal discipline, we do not expect any populist measures or large tax giveaways in this budget."

Markets may find support

Addressing the volatility in benchmark indices ahead of the Budget, Shah said macro and policy tailwinds remain supportive for equities. "We believe that Indian equity markets are entering 2026 with tailwinds outnumbering headwinds."

He highlighted easing monetary conditions, fiscal support measures and improving earnings visibility as key positives. "Multiple rate cuts by the RBI (repo by 125bp), accompanied by several rounds of liquidity injections (CRR cuts of 150bp + OMO + FX swaps), have definitely eased the monetary conditions. On the fiscal side, the government has infused money through personal tax forbearance and GST 2.0 cuts. These, plus the regulatory reforms and capex momentum, have helped create a strong platform for double-digit earnings growth. We expect a 15%/12% PAT CAGR over FY25-27 for the MOFSL universe/Nifty. The earnings revision trajectory has distinctly improved, and we see limited risks of meaningful earnings cuts barring any major six-sigma event, which is more likely to emerge exogenously.

He also cited resilient macro indicators, contained inflation and steady GDP growth as factors that could underpin market sentiment. "Macro numbers are holding up well, with GDP growth continuing to surprise materially on the upside. Inflationary impulses are well-contained and provide more room for the RBI to stimulate if need be. Valuations are reasonable, with the Nifty-50 trading at 21.2x, which can expand with strong earnings support and any improvement in the geopolitical situation. We estimate the MOFSL Universe/Nifty-50 earnings to grow 16%/8% YoY in Q3 FY26. Barring Financials, we expect earnings to increase 19%/9% YoY. Further, ex-Metals and O&G, we project the earnings to rise 14%/11% YoY for the quarter."