Budget 2026 Decoded: Where the Money Goes

Recently, the International Monetary Fund released a chart that made Elon Musk tweet: “The balance of power is changing.” The data said that India will contribute 17% to global economic growth in 2026, ahead of the United States (9.9%), and second only to China (26.6%). Together, India and China now account for 43.6% of all global growth.

The Union Budget 2026–27, presented on February 1, fits right into that pattern. This Budget tells a very clear story about what the government wants to build, where it wants to spend, and how it’s thinking about India’s next phase of growth.

Let’s break it down.

The Big Picture

The Union Budget is built on one core insight: India’s window to capture global manufacturing. China is getting expensive. Supply chains are breaking up. Western countries are paranoid about dependence on single sources. India has young workers, improving skills, and government support. 

India’s Economic Trajectory 

The government is betting big on converting India from an import-driven country to an export hub of the world. It’s the one true goal of becoming a developed country, the ‘Viksit Bharat’ 2047 goal. From semiconductors, electronics, defence equipment, containers, to textiles, India commits to scaling up manufacturing in seven key sectors. 

Top Headlines that Matter

Fiscal Deficit on Track: The government will borrow a little less relative to GDP this year. The fiscal deficit for 2026–27 is pegged at 4.3% of GDP, trimming down from 4.4% last year. In plain words, it’s a sign of sound financial management that avoids overspending.

Record Capital Spending: India is investing heavily in infrastructure again. Capital expenditure will be ₹12.2 lakh crore this year, about 11% higher than last year’s spending and the highest ever in at least a decade. This massive spending on roads, rails, and other projects is like the government paving the way for future growth and jobs.

Share Buybacks Become More Attractive: The government has changed how buybacks are taxed. 

Before: When a company bought back your shares, you were taxed as if you’d received a dividend. Depending on your income bracket, that could mean paying 10%, 20%, or even 30% tax on the entire amount you received, even if you had originally bought the shares at a loss.

Now: Buyback proceeds are taxed as capital gains. This means you only pay tax on your actual profit, not the entire amount. For long-term holdings (more than a year), that’s just 12.5%. For short-term, it’s 20%.

The Orange Economy: Budget boosts the creator economy, like media, entertainment, and design, with tax incentives and easier funding. This “orange” push aims to grow India’s cultural exports, jobs in films/gaming/arts, and tourism tie-ins for a vibrant creative sector.

Rise of Data Centres: Tax holiday till 2047 for foreign cloud companies. This 100% deduction on profits for 20+ years draws global players like AWS/Google, fueling India’s digital boom with cheaper cloud storage, AI data needs, and tech jobs.

Follow the Money: Key Spending Priorities

Broadly, Budget 2026–27 pours money into four crucial areas: 

(1) Infrastructure & Urban Development, 

(2) Defence & Strategic Manufacturing, 

(3) Digital Public Infrastructure & AI, and 

(4) Energy Transition & Climate initiatives.

• Infrastructure & Urban India

With ₹12.2 lakh crore outlay, Infrastructure spending is the cornerstone of Budget 2026. This money goes into building highways, railways, ports, affordable housing, and urban development projects. In fact, the Ministries of Road Transport and Railways together have around ₹5.9 lakh crore allocated (Roads ₹3.10 lakh cr; Rail ₹2.81 lakh crore). City infrastructure isn’t left out either. The Housing and Urban Affairs allocation jumped nearly 50% to ₹85,522 crore, aiming to upgrade city amenities and affordable housing.

The chart above shows how India’s capital expenditure has been rising each year from FY20 to FY27, reflecting a clear priority on building assets. Importantly, the Budget also plans to crowd-in private investment. It will set up an Infrastructure Risk Guarantee Fund to encourage private developers to invest alongside the government in big projects.

Urban development is another focus. The Budget talks about creating “City Economic Regions,” identifying clusters of economic activity in cities and funding them (₹5,000 crore each over five years) to boost urban growth poles. Projects like seven high-speed rail corridors between major cities and the development of new waterways for inland transport initiatives could be game-changers in how we travel and move goods.

• Defence & Strategic Manufacturing

At ₹7.8 lakh crore, defence is the single largest allocation for any ministry this time in the Budget. Of this, nearly ₹2.2 lakh crore of the Defence Budget is earmarked for capital outlay, i.e. buying new weapons, aircraft, ships, and equipment. The noteworthy part is the government’s continued push for these to be made in India whenever possible. In fact, defence and aerospace companies in India are likely to see steady order flows in the coming years as the military upgrades.

Defence outlay also rose to cover modernisation and emergency arms buys post Operation Sindoor.

The government mentions, “In addition to the modernisation of the Armed Forces and financing their regular requirement, the significantly enhanced allocation will also cater for the financial requirements that have arisen due to the emergency procurement of arms and ammunition made subsequent to Operation Sindoor under both the categories viz. Capital and Revenue.” 

• Digital Public Infrastructure & AI

₹20,000 crore is allocated to the BharatNet program to bring broadband to every village, and another ₹20,000 crore is set aside for a Research, Development and Innovation (RDI) Scheme. The funds are likely to support research in areas like artificial intelligence, machine learning, electronics, and other emerging tech that can keep India competitive. 

In addition, the Electronics Manufacturing incentive scheme’s outlay is being nearly doubled (from ~₹22,900 crore to ₹40,000 crore) to encourage more production of components and gadgets in India. The bBudget also announces a Semiconductor Mission 2.0, a renewed drive to set up semiconductor fabrication and chip-making facilities in India, crucial for tech self-reliance in an era of chip shortages.

For AI, a Standing Committee is being set up to study the impact of artificial intelligence on jobs and how to prepare our workforce. 

• Energy Transition & Climate

India is acutely aware of its energy needs and climate commitments, and the Budget backs this with concrete funding. A notable allocation is ₹22,000 crore for the “PM Surya Ghar Muft Bijli Yojana”, which roughly translates to a plan for solar power for homes. This likely means subsidies or support for installing solar panels on households, aiming to provide free/cheap solar electricity to families (and reducing their grid dependence). 

There’s also a ₹20,000 crore provision over the next five years for Carbon Capture, Utilisation & Storage (CCUS) research. CCUS is cutting-edge climate tech, capturing carbon emissions from industries/power plants and either using it in other forms or storing it underground so it doesn’t heat the planet. 

The Budget also talks about establishing Dedicated Renewable Energy and Rare Earth mineral corridors in states like Odisha, Kerala, Andhra Pradesh, and Tamil Nadu. Rare earths are essential for batteries, electronics, and electric vehicles. Additionally, the government is putting money into 4,000 new electric buses for public transport in certain regions, and continuing support for the National Green Hydrogen Mission and other schemes (from earlier budgets) to promote green hydrogen as an alternative fuel.

The Fine Print You Shouldn’t Miss

Income tax slabs haven’t changed: No change to income tax slabs. However, the government has made the new regime the default, pushing more people away from claiming deductions and into a simpler, more transparent system. For most salaried employees earning ₹10-20 lakh a year, the new regime remains simpler and more beneficial.

STT on options and futures went up: Securities Transaction Tax on futures and options contracts increased from 0.02% to 0.05%. It sounds tiny, but for active traders in derivatives, this is a cost increase. The government’s message: we want long-term investors, not day traders.

Foreign asset disclosure: The government introduced the “Foreign Assets of Small Taxpayers Disclosure Scheme” (FAST-DS 2026), basically, a one-time amnesty window for people with undisclosed foreign assets like dormant bank accounts, old insurance policies, or inherited assets. If you’ve got unexplained foreign wealth, this is your last chance to come clean with a reduced penalty.

Lower TCS on foreign travel: One of the biggest consumer wins is the sharp cut in TCS on overseas tour packages, now a flat 2% with no threshold, compared with the earlier 5% and 20% slabs. Eg: If your family books a foreign tour package for ₹5 lakh, earlier TCS could be ₹25,000 (5%). Now it will be just ₹10,000 (2%). The TCS rate on remittances for education and medical purposes under LRS will also fall from 5% to 2%, easing the cash burden on families.

Macro Math Check

Big budgets come with big numbers. Let’s do a reality check on the math that underpins Budget 2026–27, and what it signals to markets and investors:

Growth Assumptions: The Budget is built on the expectation of about 10% nominal GDP growth in 2026–27. In simpler terms, if inflation is say ~4-5%, they’re hoping for real GDP growth of ~5-6% (which is plausible given India’s current trajectory). A 10% nominal growth means the economy’s total output (in money terms) would be around ₹427 trillion (₹427 lakh crore). 

Fiscal Deficit and Debt: We noted the fiscal deficit is set at 4.3% of GDP. The government announced a record gross market borrowing of ₹17.2 lakh crore for 2026–27. Meanwhile, the total public debt is around 55-56% of GDP, which, while high, has stabilised and even edged down slightly as a percentage of GDP thanks to growth. 

Revenue Projections: The government expects its total revenue receipts (tax + non-tax) to rise about 7.2% this year. The government’s gross tax revenue is set at a target of ₹44.04 lakh crore for FY27, up from ₹42.70 lakh crore for FY26. Moreover, GST revenue is projected at ₹11.78 lakh crore in FY26, up 11% year-on-year. The disinvestment target (selling stakes in public companies) is set at ₹80,000 crore. This is one line item where the government has often missed targets in previous years. Last year, they targeted ₹47,000 crore but managed only about 72% of that. 

Market Reaction: So far, the deficit number shows commitment to fiscal prudence. However, the stock market’s reaction to the Budget was a bit mixed. Initially, markets dipped, largely because some investors had hyped themselves up expecting big tax cuts or consumption boosters, which didn’t materialise, and due to the surprise STT hike on equity trades. But this disappointment was more about expectations vs. reality, not because the Budget was fiscally unsound. In fact, analysts mostly lauded the Budget’s balance of ambition and restraint. 

The Bottom Line

This Budget is less about giving you money back and more about reshaping where India will grow in the next decade. The implications are:

Manufacturing sectors get tailwinds: Semiconductors, defence, electronics, containers, chemicals, textiles.

Regional economies will develop faster: Tier-2 and Tier-3 cities become viable alternatives to metro expansion.

Investors get cleaner tax rules: Buyback taxation finally makes sense.

The government prioritises long-term growth over short-term relief: Fiscal discipline matters to policymakers.

Investor Lens

You might be wondering: “Okay, this Budget sounds good for India. But what does it mean for my investments?”

Simple answer: Budgets set the direction companies grow in—and that’s where investor opportunities come from.

This Budget clearly doubles down on long-term themes: infrastructure, manufacturing, defence, digital growth, and clean energy. If the government is building roads, ports, fibre networks, and EV infra, companies linked to these areas are likely to see steady demand over time.

This is where diversified, theme-based investing helps. Instead of betting on one stock reacting to Budget headlines, you spread your bets across a theme, say, infra, defence, green energy, etc. Some companies will execute better than others, and diversification reduces the risk of getting that call wrong.

Interested to navigate Budget-focussed sectors, themes or ideas? Here’s a collection of model portfolios built around key Budget announcements on smallcase. 

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Disclaimer: This analysis is for educational purposes and does not constitute investment advice. Market conditions can change, and past performance is not indicative of future results. Investors should conduct their own research and/or consult a certified financial advisor before making investment decisions.