Budget 2026: ISB professor calls it 'broadly reasonable', flags risks of high LTCG, rising STT

Union Budget 2026 has managed to hold the fiscal deficit line, but it also risks distorting market incentives through a combination of higher securities transaction taxes and already-elevated capital gains taxes, according to Prasanna Tantri, Associate Professor of Finance and Executive Director of the Centre for Analytical Finance at the Indian School of Business (ISB).

Tantri called the budget broadly balanced on the fiscal front, but flagged three concerns - including the contradiction of having both high capital gains taxes and a rising STT. "Given the challenging macroeconomic environment, this is a broadly reasonable budget. The most notable positive is the government’s ability to maintain a fiscal deficit of 4.4 per cent of GDP despite meaningful tax cuts. This signals fiscal discipline rather than cosmetic accounting," Tantri said in his reaction to the Budget.

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The professor said consolidation is visible in spending trends as well. "Government expenditure as a share of GDP continues to decline, from 13.9 per cent this year to a projected 13.7 per cent next year, reinforcing the consolidation path," he said. "The stated intent to reduce the central government debt to GDP ratio to 55 per cent over time is also welcome and long overdue."

Tantri said the step-up in defence capital expenditure is another positive in the Budget, though he suggested the real increase could have been sharper given currency and import conditions.

"The increase in defence capital expenditure is another positive, although given the depreciation of the rupee and India’s import dependence in defence, a larger real increase would have been justified," he said.

In Budget 2026-27, Finance Minister Nirmala Sitharaman allocated Rs 7,84,678 crore as the overall defence outlay, compared with last year's allocation of Rs 6,81,210 crore. The total capital outlay has been pegged at Rs 2,19,306 crore, while revenue expenditure has been placed at Rs 5,53,668 crore, including Rs 1,71,338 crore for pensions.

Under capital expenditure, Rs 63,733 crore has been allocated for aircraft and aero engines, while Rs 25,023 crore has been set aside for the naval fleet. In 2025-26, the government had allocated Rs 6,81,210 crore for defence, with capital outlay pegged at Rs 1,80,000 crore, later increasing to Rs 1,86,454 crore at the revised estimate stage.

However, the finance professor said the fiscal consolidation narrative carries risks in how the Centre has adjusted expenditure to achieve targets. "That said, there are three concerns. First, fiscal consolidation has been partly achieved by sharply cutting capital grants to states, by over Rs 1 lakh crore in FY 2025–26. This risks merely shifting borrowing from the Centre to the states, weakening the quality rather than the level of fiscal adjustment," he said.

Tantri also took aim at the logic of raising the Securities Transaction Tax at a time when capital gains taxes remain high. "Second, the increase in the Securities Transaction Tax is defensible in isolation, but it contradicts the original logic of STT as a substitute for capital gains taxation. India now has both high capital gains taxes and a rising STT, which distorts market incentives," he said.

In her Budget speech, Sitharaman raised the STT on Futures to 0.05 per cent from per cent 0.02 per cent. "STT on options premium and exercise of options are both proposed to be raised to 0.15 per cent from the present rate of 0.1 per cent and 0.125 per cent, respectively."

Sitharaman had raised LTCG from 10 per cent to 12.5 per cent in the last Budget. Many market participants had expected the decision to be revisited, but the finance minister did not make any changes this year.

Tantri's third concern was the Budget's limited focus on building advanced capabilities through education and research. "Third, while the budget acknowledges innovation, it remains largely silent on the creation of high-quality human capital. Without sustained investment in advanced skills, research, and higher education, innovation policy will remain rhetoric rather than reality," he said.