Budget 2026 expectations: BFSI sector looks for tax clarity and liquidity support

LTCG rollback to broader exemptions

Tax policy remains one of the determinant factors for investment decisions by the institutional investors. Investors are expecting a definitive assurance against retrospective amendments which is a practice that has previously dented their confidence. They would also like to see a rollback of long-term capital gains (LTCG) tax on listed equities from 12.5 percent to 10 percent as well as rationalisation or abolition of the Securities Transaction Tax, which inflates transaction costs especially for high-frequency participants. Investors are also hoping for simplification of the capital gains regime by way of harmonising holding periods and tax treatment across asset classes. Wider tax exemptions, currently available to sovereign wealth funds should be extended to pension and endowment funds, particularly for infrastructure investments.

Debt market clarity

Recent changes that eliminated indexation benefits for debt mutual funds have increased concerns among FPIs, thereby prompting a stable tax regime on interest income from bonds. With India’s inclusion in global bond indices, measures such as clarity on withholding tax rates, ease in fund registration processes and automated trading workflows are crucial to attract sustained inflows.

Banking sector expectations

The banking sector has a focused wish list from Budget 2026. A key demand is a reasonable increase in the tax deduction available for provisions made for Non-Performing Assets (NPAs) from the current 8.5 percent to 15 percent, which would provide tax relief to offset the potential credit losses. In addition, the banks demand introduction of tax incentives for depositors such as higher deduction limits on interest earned from bank deposits and reduction in tax deduction. As a result, this could help banks attract stable, low-cost funding, which is vital to address the widening credit-deposit ratio and ensuring funding stability, especially in a tight liquidity environment.

NBFCs seek parity

NBFCs continue pushing for parity with banks on several dimensions. Key demands include exemption from TDS on interest income and increase in the deduction threshold for provisions made for NPAs to at least 8.5 percent, aligning with banks. A specific deduction for individuals on interest paid for education loans is also expected to provide a meaningful boost to the education financing ecosystem.

IFSC reform agenda

For the IFSC, clarity and simplicity in taxation top the list of critical priorities. Industry stakeholders recommend a one-layer taxation system for retail schemes in case of resident investors and family investment funds, along with a blanket exemption from deemed dividend provisions for entities dealing with corporate treasury centres.

Fixing fund rules

On the mutual fund segment, key recommendations include revision in the definition of equity-oriented funds to include FOFs investing predominantly in equity funds and inclusion of the term ‘specified mutual fund’ in consolidation provisions. This would aim at eliminating structural mismatches and ensuring tax neutrality.

Simplified processes and framework

Beyond taxation, measures such as restoration of the due date for filing revised returns to March 31 and enabling tax payments / refunds through overseas bank accounts, would significantly ease operational difficulty. Rationalisation of TDS and TCS provisions is another key demand. Industry also demands enabling foreign tax credit at the TDS stage, introducing uniform TDS rates to eliminate classification disputes and reinstating the six-year rectification window for TDS returns. A reduction in the TCS rate on Liberalised Remittance Scheme transactions is also expected to provide relief from working capital constraints.

FPIs also seek streamlined compliance norms which include simplified KYC processes, digitised registration and reduced cumbersome information requirements.

The big picture

India needs a stable and transparent framework to drive long-term growth. A forward-looking tax regime streamlined compliance processes and rational policies can boost market confidence and attract long-term investments. These measures will strengthen India’s financial resilience and pose as an appealing destination for growth and opportunity.