Fiscal Federalism and 16th Finance Commission Recommendations
- The 16th Finance Commission retained the 41% vertical devolution of central taxes to States.
- The Union Government accepted the recommendation in the Budget 2026–27.
- ₹1.4 lakh crore was provided as Finance Commission Grants to States for the year.
- Grants include Rural Local Body, Urban Local Body, and Disaster Management allocations.
- The formula for horizontal distribution was revised, altering inter-State shares.
- Five Southern States, i.e., Tamil Nadu, Kerala, Andhra Pradesh, Telangana, and Karnataka, have gained higher shares.
- The move reflects demographic performance and fiscal capacity adjustments in allocation criteria.
- Panchayats will directly receive over ₹55,900 crore, strengthening grassroots governance financing.
Capital Markets and Financial Sector Reforms
- Equity and Derivatives Market Measures
- The Budget prioritised long-term capital instruments over speculative short-term trading.
- Securities Transaction Tax (STT) on futures raised from 0.02% to 0.05%.
- STT on options premium and exercise increased to 0.15%.
- The Stock market reacted with an initial 2% decline, reflecting short-term investor sentiment.
- The policy intent is to shift retail investors toward long-term investment strategies.
- High-frequency and scalping strategies face reduced profitability due to higher trading costs.
- Brokers may experience lower transaction volumes and commissions in derivatives segments.
- Brokers are expected to offer investor education and compliance-driven platform upgrades.
- Buyback taxation now treats proceeds as capital gains instead of dividend income.
- Retail investors face 20% tax on short-term gains and 12.5% on long-term gains.
- NRI Investment Liberalisation
- Persons Resident Outside India (PROIs) allowed to invest in listed equities.
- Individual PROI limit increased from 5% to 10%.
- Aggregate PROI investment cap raised from 10% to 24%.
- Bond Market Deepening
- ₹100 crore incentive for municipal bond issuances above ₹1,000 crore.
- Proposal for corporate bond indices and total return swaps.
- Measures aim to strengthen urban infrastructure financing and secondary debt markets.
- A High-Level Committee on Banking for Viksit Bharat proposed.
- Mandate includes financial stability, inclusion, and consumer protection alignment.
- Government highlighted 98% village coverage by banking services.
- Critics cautioned against privatisation risks to priority-sector lending and rural credit.
- Power Finance Corporation (PFC) and Rural Electrification Corporation (REC) to be restructured.
- Objective is to improve efficiency, scale, and alignment with renewable and nuclear transitions.