Union Budget 2026: Why FM Nirmala Sitharaman should deepen direct tax certainty

Union Budget 2026 arrives at a moment when India’s direct tax system is already delivering strong outcomes from reforms implemented over the last decade. Corporate tax rationalisation, faceless assessment, and technology-led compliance have expanded the tax base and reduced discretion while maintaining competitiveness. In this context, the smartest policy signal Budget 2026 can send is predictability in direct taxes, paired with administrative upgrades that raise efficiency without reopening core structures. A stable direct tax framework is not “doing nothing”; it is a deliberate choice to let reforms compound, reduce dispute risk, and improve the quality of revenue.

Compliance Momentum

The government’s compliance and digitisation push has clearly shifted taxpayer behaviour. For Assessment Year (AY) 2024–25, more than 7.28 crore income tax returns (ITRs) were filed by 31 July 2024, up from 6.77 crore filed by the same date in the previous year.

Collections have also remained buoyant. In the government’s own early-year update for FY 2024–25, gross direct tax collections were reported to be up 22.19% year-on-year, with net collections rising 20.99%, alongside significant refund issuance. While these are intra-year numbers rather than full-year totals, they reinforce the underlying point: the system continues to absorb recent reforms and deliver incremental compliance gains.

A continuity signal in Budget 2026 would help protect this momentum. When taxpayers and employers face frequent structural adjustments in slabs, surcharges, deductions, thresholds, or definitions, compliance costs rise, payroll systems churn, and interpretational disputes increase. Conversely, stability allows the ecosystem—taxpayers, intermediaries, and the department—to internalise the rules and comply with less friction.

Policy Risk Premium

Tax policy affects investment primarily through expectations around effective tax rates, treatment of losses, and certainty over post-tax returns. Even when headline rates remain unchanged, frequent redesign of the tax architecture can raise the “policy risk premium,” increasing the cost of capital.

This is particularly relevant as the government’s growth strategy is anchored in sustained public capital formation and the crowding-in of private investment. For FY 2025–26, the Budget earmarked ₹11.21 lakh crore for capital expenditure, equivalent to 3.1% of GDP. A predictable direct tax environment makes it easier for private investors to underwrite long-gestation projects alongside this public capex push.

On the household side, private consumption remains the largest component of GDP. Private Final Consumption Expenditure (PFCE) is estimated at 55.8% of GDP in FY 2023–24, down from 58.1% in FY 2021–22. Stability in personal tax structures supports medium-term household planning and helps sustain consumption without repeated policy resets.

Next Reform Frontier

If Budget 2026 aims to be reformist without being disruptive, administration and dispute reduction offer the highest-return opportunity.

Parliamentary data placed in the Rajya Sabha shows that, as of 31 December 2024, there were 71,453 direct tax disputes pending across the Supreme Court, High Courts, and ITAT, with an estimated ₹11.84 lakh crore locked in litigation. This is precisely where policy can deliver outsized gains without altering statutes: faster dispute resolution, improved risk triage, cleaner drafting of subordinate rules, consistent departmental positions, and continued use of monetary limits and withdrawal policies to reduce low-value litigation.

A Budget that prioritises certainty in law and speed in administration can therefore strengthen trust, protect revenue buoyancy, and reinforce India’s investment narrative—while remaining aligned with the broader objective of stable, predictable, and growth-supportive economic governance.

The author is the founder and CEO of Aikyam Capital Group. Aikyam Capital Management LLP is a specialised alternative investment firm focused on opportunities within India’s stressed assets landscape.