Budget 2026 expectations: How tax rules changing investor behaviour

As Budget 2026 approaches, household investors are not looking for dramatic tax cuts or new exemptions. What they want instead is clarity, tax rules that allow them to invest according to their risk profile. Over the past two years, industry experts say changes in the taxation of investment products have quietly altered investor behaviour. While some of these measures were introduced in the name of parity or simplification, the result for many retail investors has been confusion and, in some cases, higher risk-taking. Debt funds and the conservative investor dilemma One of the clearest examples is debt mutual funds. After indexation benefits were removed in 2023, debt funds lost much of their appeal for long-term investors seeking stability and tax efficiency. Rahul Bhutoria, Director and Co-founder of Valtrust, says the impact was swift. “When indexation benefit for debt mutual funds was removed in March 2023, long-term investors stepped back, leading to weakening of inflows,” he notes. For conservative households, debt funds no longer serve as a reliable low-risk allocation in the way they once did. Importantly, the change did not significantly alter bank deposit behaviour. According to Dr. Gaurav Kulshreshtha, Chief Investment Officer, Nexedge Capital, bank deposit growth has continued at around 10-12 percent year-on-year. What has changed is where conservative money is going. “In the pursuit of better post-tax returns, conservative capital is increasingly moving toward higher credit risk or unintended equity exposure,” Kulshreshtha says. This shift, driven largely by tax outcomes rather than suitability, undermines traditional asset allocation principles in personal finance. Restoring capital gains taxation for debt mutual funds and similar products is therefore a key expectation from Budget 2026, not to boost returns, but to re-establish debt as a sensible option for low-risk investors. Equity investing: STT plus Capital Gains Burden Tax complexity is not limited to debt. Equity investors today deal with multiple layers of taxation across the investment lifecycle, from Securities Transaction Tax at purchase to expense ratios during holding and capital gains tax at exit. Manish Kothari, CEO of ZFunds, believes simplification is long overdue. “A more streamlined tax structure across these layers would improve transparency, reduce confusion, and ease the overall burden on investors,” he says. For retail investors, understanding true post-tax returns remains a challenge. Hybrids and pension funds: similar goals, different tax outcomes Hybrid mutual funds add another layer of inconsistency. Two hybrid schemes with similar risk-return profiles can face very different tax treatment due to technical classification thresholds. “Two products delivering similar outcomes should not face different tax outcomes,” Kothari argues, adding that taxation should reflect the economic nature of the product rather than rigid definitions. A similar mismatch exists in retirement planning. He explains, “Pension-oriented mutual funds and the National Pension System (NPS) both aim to provide post-retirement security, yet differences in tax treatment often push investors toward one product purely for tax reasons.”