Budget 2026: Tax Experts Seek Clarity on M&A, Stock Options and Relief for Middle-Class Earners

With the Union Budget 2026 scheduled to be presented on February 1, expectations are centred less on dramatic tax rate reductions and more on addressing long-standing structural and interpretational gaps. Tax professionals say the government’s approach in recent budgets, which has been to broaden the base, simplify compliance, and provide targeted relief, may continue.

According to Chirag Chauhan, CA & Founder, C A Chauhan & Co., the middle class has already seen substantial relief in recent years. “With rebate and standard deduction, income up to Rs 12.75 lakh is effectively tax-free for salaried individuals,” he noted, adding that the 2025 Budget had already increased exemptions and put more disposable income in taxpayers’ hands.

Cross-Border M&A and ESOP Taxation

From a corporate taxation perspective, one of the key demands ahead of Budget 2026 relates to tax treatment in cross-border mergers and acquisitions.

Vaibhav Gupta, CA, Partner at Dhruva Advisors, highlighted that while share swaps undertaken through tax-neutral mergers enjoy exemptions, employee stock options often do not. “In cross-border share swaps, many times, employee stock options are also swapped. While share swaps done by way of tax-neutral mergers enjoy a tax exemption, stock options do not enjoy a similar exemption, which raises issues around taxability for employees on the swap, especially when the options are already vested,” he said.

This mismatch, experts argue, creates uncertainty for employees and acquirers alike and can complicate deal structuring. Extending similar tax treatment to ESOP swaps could add predictability, thus, making India a more attractive jurisdiction for cross-border transactions.

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Fast-Track Demergers

Another area of concern is the tax treatment of fast-track demergers. Traditionally, mergers and demergers approved through High Courts, and later the NCLT, have enjoyed tax neutrality. However, amendments in law have explicitly recognised fast-track mergers as tax neutral, while fast-track demergers remain unaddressed.

“While this may not be intended, the language of the law has cast a shadow on the tax neutrality of fast-track demergers,” Gupta cautioned. He added that, unless clarified, this ambiguity could undermine the government’s objective of simplifying and deregulating internal corporate reorganisations.

For businesses looking to restructure quickly without prolonged court processes, clarity on fast-track demergers could be critical in Budget 2026.

Earn-Outs and Performance-Linked Consideration

Earn-outs, where part of the sale consideration depends on future performance, are increasingly common in M&A deals, especially in technology and startup transactions. However, their tax treatment remains unclear.

A key question, Gupta explained, is whether such consideration should be taxed in the year of sale or the year of receipt. “Since most of the time, this consideration is based on achievement of profitability or other financial or operating milestones in the future, the consideration truly accrues only when such milestones are achieved,” he said, arguing that taxation should apply when income actually accrues.

Overseas Mergers vs Domestic Reorganisation

While shareholders in domestic mergers or demergers enjoy full tax neutrality, the same benefit is not extended to shareholders in overseas mergers or demergers.

“This puts overseas reorganisations at a disadvantage to domestic reorganisations,” Gupta noted. While foreign shareholders are taxed only if the ‘substantial value’ test under Section 9 is met, resident shareholders are taxed regardless of value, creating asymmetry.

Extending tax neutrality to shareholders in overseas reorganisations, could improve India’s global competitiveness.

LLP Mergers and Conversions

Despite legal provisions allowing mergers between limited liability partnerships, the absence of tax neutrality has meant very few such transactions have taken place. Gupta suggested that mergers between LLPs should be granted tax-neutral status, similar to company mergers.

Additionally, while partnerships and LLPs are not taxed on conversion into companies (subject to conditions), partners receiving shares upon conversion do not enjoy similar neutrality. “To reduce ambiguity and litigation, it will be worthwhile to extend the tax neutrality to partners as well,” he said.

Income Tax Slabs, Relief Likely to Be Targeted, Not Sweeping

On the personal tax front, expectations are more restrained. According to Chauhan, large-scale slab restructuring may be unlikely, but selective adjustments are on the table.

Some key expectations include:

• Raising the 30% top slab threshold from around Rs 25 lakh to Rs 35 lakh to account for inflation.
• Increasing the standard deduction beyond current levels.
• Enhancing limits under Sections 80C and 80D in the old tax regime.
• Rationalising surcharge structures to reduce marginal tax spikes.

Simplification and Compliance Ease Under the New Tax Law

A major focus area is expected to be simplification. Chauhan pointed to the rationalisation of income tax return filing, particularly the possibility of a single, simplified ITR form for individuals under the new Income Tax Act expected to come into effect in April 2026.

“The focus seems to be on tax certainty, ease of compliance, and boosting consumption rather than drastic slab overhauls,” he said.

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