Deloitte India Union Budget 2025-26 Report: Tax Expectations and Key Growth Drivers

As Finance Minister Nirmala Sitharaman prepares to present her eighth consecutive Union Budget on February 1, 2025, Deloitte has outlined its expectations for the upcoming fiscal year. The consultancy anticipates the government will prioritise measures to boost growth, address inflation, enhance exports, and continue its strong focus on infrastructure development.

Deloitte Suggests Simplified Tax Compliance for NRIs

To improve the ease of doing business for Non-Resident Indians (NRIs), Deloitte’s Divya Baweja has recommended measures to streamline tax payment and e-verification processes.

Currently, tax payments in India are restricted to Indian bank accounts through methods like net banking, debit cards, NEFT/RTGS, and UPI. This limitation creates challenges for NRIs, especially those who do not have Indian bank accounts or find it inconvenient to transfer funds from abroad.

Baweja has proposed allowing NRIs to pay taxes directly from their overseas bank accounts. This change would simplify the tax payment process and make compliance more accessible for NRIs worldwide.

Clarity in Taxation of Stock Options

Taxation of stock awards for non-resident (NR) employees continues to be a complex area due to ambiguity in existing rules under Section 17(2) of the Income Tax Act. While the section provides for taxing stock award benefits as a prerequisite, it does not offer clear guidance on cases where NR employees have rendered part of their services overseas during the grant-to-vesting period. Court rulings and OECD guidelines suggest that the benefit accrues over the vesting period, yet the lack of explicit rules leads to inconsistent treatment.

At the assessment stage, tax officers often deny taxpayer claims for apportionment of stock awards, forcing employees into unnecessary litigation. Although these claims are generally accepted at the appellate level, taxpayers endure significant hardship before reaching a resolution.

To address this, experts have proposed that the government issue clear guidelines on apportioning stock award benefits based on the grant-to-vesting period. These guidelines could follow the precedent set by FBT Circular No. 9/2007, which provides clarity on similar matters. Additionally, it is suggested that only the location where services were rendered be considered for apportionment.

Key Growth Pillars Identified

Deloitte highlighted private consumption and investment activity as the primary drivers of economic growth in FY2025, given the ongoing global uncertainties weighing on net exports. “Private consumption has shown a notable increase, and investment activity has modestly improved. These two will form the foundation of growth,” said Rumki Majumdar, Economist at Deloitte India.

The budget exercise for FY26 commenced in September 2024 with a circular from the Finance Ministry. Following meetings with central ministries and stakeholders, Sitharaman will engage with industry representatives, economists, trade unions, and states to incorporate their views.

Four Major Expectations From Union Budget 2025-26

1. Employment Generation and Skill Development

Deloitte expects a continued focus on employment and skill initiatives such as employment-linked incentives and internship programs, which were emphasised in the previous budget. The Periodic Labour Survey for June 2024 reported a rise in the Labour Force Participation Rate (LFPR) for both men (74.7%) and women (25.2%) compared to 73.5% and 23.2%, respectively, in June 2023. A declining unemployment rate underscores the need to sustain these efforts to drive economic growth and boost incomes.

2. Inflation Control with Structural Solutions

Inflation remains a critical challenge, with CPI inflation peaking at 6.21% in October 2024 before easing to 5.48% in November. Deloitte anticipates long-term solutions to strengthen the agricultural value chain, incentivise production, and address supply-side issues. Short-term measures such as Direct Benefit Transfers (DBTs) and food coupons are expected to support rural consumption, where inflation has been particularly severe.

The Economic Survey 2024 suggested excluding food prices from India’s inflation targeting framework, arguing that supply-side measures, rather than RBI’s demand-side tools, would better address food inflation.

3. Boosting Export Competitiveness Amid Global Risks

Global trade volatility, exacerbated by U.S. President-elect Donald Trump’s stance on reciprocal tariffs, poses risks to Indian exports. To achieve its $2 trillion export target by 2030, Deloitte expects the government to implement tariff rationalisation, duty exemptions, and simplified compliance procedures to lower export costs and enhance competitiveness. These measures are critical to offset potential disruptions in global supply chains and trade relations.

4. Infrastructure Development as a Growth Driver

The government’s emphasis on infrastructure spending is expected to continue, with capital spending increasing from 1.63% of GDP in FY2019 to 3.4% in FY2025. Deloitte predicts sustained investment in social, physical, and digital infrastructure, including expanding road networks, developing multi-modal logistics parks, and improving logistical efficiency. Health, education, and skill development will also receive focused attention.

Economic Outlook: Risks and Opportunities

Deloitte identified both upside and downside risks for the Indian economy in FY2025.

Upside Risks

• Consumer Spending: Rural consumption remains resilient despite geopolitical uncertainties.
• Credit Growth: Strong growth in MSME credit indicates increased investment in expansion.
• Services Sector Resurgence: Robust growth of 7.6% in FY24, with services exports rising 21.3% year-over-year.

Downside Risks

• Inflation Pressures: Persistent high food prices have kept CPI inflation above RBI’s target, posing risks to purchasing power and demand.
• Geopolitical Concerns: The Israel-Iran conflict and U.S. trade policy changes could disrupt global supply chains, capital flows, and oil prices, adversely impacting exports and the current account balance.

Infrastructure and Reforms Central to Vision 2025

The Union Budget 2024-25 laid the groundwork for achieving the “Viksit Bharat” vision. Continuing reforms in infrastructure and balancing objectives will be pivotal in driving India’s economic transformation. With Deloitte’s insights, stakeholders will closely watch Budget 2025-26 for strategies to navigate global uncertainties and sustain long-term growth.

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