The Budget is expected to focus on boosting private capex, tax simplification and reduction in personal income tax, particularly for the lower-income groups, to stimulate demand, EY India said.

The Union Budget for 2025-26 is scheduled to be presented in Parliament on February 1.

EY India, in its Budget expectation note, said with over Rs 31 lakh crore stuck in income tax disputes as of 2023-24, there is an urgent need to clear Commissioner of Income Tax (Appeals) backlog and bolster alternate dispute resolution mechanisms like advance pricing agreements and safe harbours.

“While a full comprehensive review of the direct tax code may take time, we might see some initial steps towards its implementation in this Budget. I also hope for a reduction in personal income tax, particularly for the lower-income groups, to provide relief and stimulate demand,” said Sameer Gupta, National Tax Leader, EY India.

EY said the expectations from Budget are focused on a set of strategic reforms that can propel the economy forward. With an emphasis on fiscal consolidation, tax system simplification, and investment-driven growth, the Budget is expected to lay a solid foundation for sustained economic development.

EY anticipates significant reforms to simplify the tax system and improve taxpayer services, reduce litigation, and enhance tax compliance.

The government is already working on simplifying the Income Tax laws. It should follow a consultative approach and invite public comments on the draft proposals, EY said.

“Key areas of focus are likely to include enhancing public spending, reducing the fiscal deficit, incentivising private sector investment, and introducing targeted tax reforms that foster business innovation,” EY said.

In the last Budget, government had rationalised the capital gains structure in terms of holding period of assets and tax rates. The government may further address some of the unintended anomalies to make the rationalisation of capital gains more complete, EY said.

For instance, 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 offer for sale (OFS) from 2 years to 1 year, aligning them with listed securities.

Gupta further said for businesses, particularly SMEs, reducing the complexity of tax compliance is critical.

To achieve sustainable growth in FY26, the government must prioritise reducing the fiscal deficit to 4.5 per cent of GDP in FY26 while reducing the debt-to-GDP ratio, which stands at 54.4 per cent, well above the fiscal responsibility and budget management (FRBM) target of 40 per cent.

A medium-term real GDP growth target of 6.5 per cent or higher will require boosting the aggregate investment rate (GFCF) measured at constant prices to 34 per cent.

This can be achieved by increasing the government’s capital expenditure, improving capital efficiency and encouraging states to enhance their investment spending.

To stimulate private sector investment, a progressive reduction in interest rates should be considered. Additionally, targeted employment schemes should be fast-tracked to uplift urban demand and support economic momentum in FY26, EY said.