As the Union government readies Union Budget 2026, the big question on everyone’s mind is a familiar one: will the middle class finally get some breathing room on taxes, or will the government stick to its longer-term game plan? Early signals suggest expectations of sweeping tax relief may once again run into the reality of fiscal discipline and growth-focused spending.

Pre-Budget notes from brokerages such as Jefferies, Citi and Axis Direct point to a clear theme – the focus is likely to stay on defence, infrastructure and capital expenditure, even if that means limited near-term comfort for salaried taxpayers. The emphasis, analysts say, is on keeping the economy stable and investment momentum intact rather than offering headline-grabbing giveaways.

Sticking to the consolidation path is expected to be a non-negotiable in Budget 2026. Citi estimates the Centre will place the revised fiscal deficit for FY26 at around 4.4 per cent of GDP, with the target for FY27 budgeted slightly lower at about 4.3 per cent. Jefferies is slightly more optimistic and projects the FY27 fiscal deficit closer to 4.2 per cent, reflecting a continued commitment to consolidation. Jefferies however notes that the government could choose to keep the deficit closer to 4.4 per cent to support near term growth. Such a move could support equity markets but may also result in firmer bond yields due to higher borrowing.

Capital expenditure is expected to remain the backbone of the government growth strategy. Jefferies estimates central government capex growth of over 10 per cent in FY27 with a strong tilt towards defence spending. Citi expects total public capex including Centre states and public sector undertakings to grow by about 12 per cent year on year. Axis Direct also anticipates continued focus on infrastructure particularly in urban development logistics power and manufacturing as the government looks to crowd in private investment and support job creation.

Defence is widely expected to emerge as the biggest beneficiary of Budget 2026. Citi has identified defence as a preferred theme ahead of the budget citing strong order visibility and long term policy support.

Despite rising expectations brokerages do not anticipate major changes to income tax slabs for the middle class. Citi expects limited consumption support largely directed towards affordable housing health insurance and select welfare objectives rather than broad based tax cuts. Axis Direct echoes this view suggesting relief may come through tax system simplification faster refunds and targeted incentives. Jefferies adds that while equity markets would welcome tax relaxation it does not form part of its base case for Budget 2026.

Investors are expected to closely track taxation related announcements. Jefferies says any capital gains tax benefit for foreign portfolio investors would be positive though it is not expected. Citi highlights that any changes to buyback taxation dividend taxation or securities transaction tax would have a direct impact on capital markets. Citi also expects the government to review the custom duty structure to improve domestic manufacturing competitiveness.

Jefferies sees potential opportunities in renewable energy electronics manufacturing services and consumer durables depending on announcements linked to production incentives renewable schemes and government pay revisions. Citi preferred themes ahead of the budget include defence and affordable housing while Axis Direct highlights infrastructure power and manufacturing as medium term beneficiaries.

For investors sustained capital expenditure fiscal discipline and defence led spending could provide confidence and earnings visibility. For the middle class relief is more likely to come through targeted schemes housing support and a simpler tax system than through large headline tax cuts.