The Union Budget for 2025-26, set to be presented on February 1, is expected to focus on measures aimed at stimulating economic growth, with an emphasis on boosting private capital expenditure, simplifying the tax system, and reducing personal income tax, particularly for lower-income groups. According to EY India, the proposed budget should take steps to provide relief to individuals and incentivize demand-driven growth.
One of the key concerns highlighted by EY India is the backlog of over ₹31 lakh crore in income tax disputes as of 2023-24. EY emphasizes the urgent need for clearing the Commissioner of Income Tax (Appeals) backlog and strengthening alternative dispute resolution mechanisms, such as advance pricing agreements and safe harbours, to reduce litigation. A comprehensive review of the direct tax code may take time, but EY expects initial steps toward implementation in the 2025 Budget.
In addition, EY anticipates the Budget will include reforms aimed at simplifying the tax system, improving taxpayer services, reducing litigation, and enhancing overall tax compliance. With the government already working to simplify income tax laws, EY suggests that a consultative approach with public comments on draft proposals should be followed. The Budget is expected to focus on fiscal consolidation, enhancing public spending, and incentivizing private sector investment, which would contribute to sustained economic growth.
Further, EY expects the government to address anomalies in the capital gains structure. For example, the holding period for capital assets, such as business undertakings in slump sales, may be reduced from 36 months to 24 months, and unlisted shares in IPO offers for sale (OFS) may be aligned with listed securities by reducing the holding period from 2 years to 1 year.
For businesses, particularly SMEs, EY stresses the importance of reducing tax compliance complexity to help drive growth. To achieve sustainable growth in FY26, the government must prioritize reducing the fiscal deficit to 4.5% of GDP and lowering the debt-to-GDP ratio, which is currently at 54.4%, well above the fiscal responsibility and budget management (FRBM) target of 40%.
EY also suggests that the government aim for a real GDP growth target of 6.5% or higher, achieved through increased capital expenditure, improved capital efficiency, and greater investment spending by states. To stimulate private sector investment, a gradual reduction in interest rates and the fast-tracking of targeted employment schemes could further support economic momentum.
As India navigates its path toward sustained growth, the 2025-26 Budget is expected to play a crucial role in laying the foundation for a more robust economic future.
