Taxes in the Budget

Of the Rs 36.52 lakh crore the Union government expects to receive in 2026-27 without borrowing, Rs 28.67 lakh crore — a little over three-quarters — is tax revenue left with the Centre after the states have taken their share. Taxes are the largest single subject in the Budget, and among the hardest to read, because the same tax appears in several documents under several different totals.

This guide explains how the Union Budget handles taxes: the difference between direct and indirect taxes, how the Finance Bill actually changes a rate, how much of the money the Centre keeps and how much goes to states, and how to read the Receipt Budget — the volume that carries the detailed tax numbers — without mistaking a gross figure for a net one. All figures are 2026-27 Budget Estimates unless stated otherwise.

Direct taxes: income tax and corporation tax

A direct tax is paid to the government by the person or company whose income is taxed; it is not passed on to anyone else in a bill. The Union government levies two of them at scale. Corporation tax falls on the profits of companies. Taxes on income — the head used in the Budget documents — covers everyone else: individuals, Hindu undivided families, partnership firms and associations of persons.

In 2026-27 corporation tax is budgeted at Rs 12.31 lakh crore and taxes on income at Rs 14.66 lakh crore. Together they are about 61 per cent of gross tax revenue of Rs 44.04 lakh crore. Income tax has raised more than corporation tax in every year since 2022-23, reversing the older pattern in which company profits were the larger source.

The Receipt Budget splits each head into its components, and the split matters for the rest of this guide. Corporation tax is Rs 10.94 lakh crore of basic collections plus Rs 90,000 crore of surcharge and Rs 47,000 crore of health and education cess. Taxes on income are Rs 12.60 lakh crore of collections, Rs 79,000 crore of surcharge, Rs 53,000 crore of cess and Rs 73,700 crore of securities transaction tax. The health and education cess has been charged at 4 per cent of income tax including surcharge since 2018-19.

Direct tax law itself changed on 1 April 2026. The Income-tax Act, 2025, which received the President's assent on 21 August 2025, replaced the Income-tax Act, 1961. It restates the law in simpler form rather than altering policy, and replaces the old pair of "previous year" and "assessment year" with a single tax year. Rates were not changed.

Indirect taxes: GST, customs and excise

An indirect tax is levied on a transaction and collected from the seller, who recovers it in the price. The Union's indirect taxes are budgeted at Rs 16.79 lakh crore in 2026-27, about 38 per cent of gross tax revenue.

Goods and services tax is the largest at Rs 10.19 lakh crore, and that number needs care. It is central GST — the Centre's own half — and nothing else. State GST never appears in the Union Budget, and the integrated GST line nets to nil because IGST is apportioned between the Centre and the states before the year closes. Since 22 September 2025, GST has had two main slabs, 5 and 18 per cent, alongside a nil rate and a 40 per cent rate on luxury and sin goods; the earlier 12 and 28 per cent slabs were withdrawn. The GST compensation cess, which raised Rs 88,000 crore in the 2025-26 revised estimates, is budgeted at nil for 2026-27 — the first year without it since GST began.

Customs duty on imports is budgeted at Rs 2.71 lakh crore. Basic customs duty accounts for Rs 2.18 lakh crore of that; the remainder is the social welfare surcharge (Rs 18,130 crore), the agriculture infrastructure and development cess (Rs 29,950 crore), the national calamity contingent duty and small export duties.

Union excise duties, at Rs 3.89 lakh crore, survive only on goods kept outside GST — petroleum products and tobacco, under entry 84 of the Union List. The head rises 15.6 per cent over 2025-26, mainly because basic excise duty roughly doubles to Rs 90,810 crore: from 1 February 2026 tobacco products moved off the GST compensation cess and onto an additional excise duty and a separate cess.

How the Finance Bill changes tax rates

Article 265 of the Constitution says no tax may be levied or collected except by authority of law. The Budget speech announces intentions; the Finance Bill — introduced in the Lok Sabha immediately after the speech and certified as a Money Bill under Article 110 — is what turns them into law.

This year's became the Finance Act, 2026 (Act No. 4 of 2026), which received the President's assent on 30 March 2026, with most of its sections taking effect on 1 April 2026. The division of labour is worth understanding: the permanent Acts define what is taxable, while the annual Finance Act fixes the rates. Chapter II of the 2026 Act does this in two parts, because 2026 is a transition year. Section 2 charges income tax for the assessment year beginning 1 April 2026 under the 1961 Act, at rates set out in Part I-A of the First Schedule; section 3 charges it for the tax year beginning 1 April 2026 under the 2025 Act, at rates in Part I-B.

Some rates sit elsewhere. Securities transaction tax is altered by amending section 98 of the Finance (No. 2) Act, 2004: in 2026 the rate on the sale of options rose from 0.1 to 0.15 per cent and on futures from 0.02 to 0.05 per cent. Personal slabs were left unchanged, and minimum alternate tax fell from 15 to 14 per cent.

Customs and excise changes often take effect on Budget night, before Parliament has voted. The Provisional Collection of Taxes Act, 2023, which replaced a 1931 Act, permits this: a declared provision holds for 75 days or until the Bill is enacted, whichever comes first, and duty collected under a provision later dropped or reduced must be refunded.

GST is the exception to all of this. Its rates are not set by the Finance Bill; they are notified on the recommendation of the GST Council, the Centre-states body created by Article 279A.

Tax devolution: what the Centre keeps and what states get

Article 270 requires the net proceeds of most Union taxes to be divided between the Centre and the states. Three categories are kept out: taxes under Articles 268, 269 and 269A, surcharges levied for Union purposes under Article 271, and any cess levied for a specific purpose. What remains is the divisible pool, given its present single-pool form by the Constitution (Eightieth Amendment) Act, 2000.

The states' share of that pool is fixed by the Finance Commission, appointed under Article 280 every five years. The Sixteenth Finance Commission submitted its report to the President on 17 November 2025 for the award period 2026-27 to 2030-31 and recommended keeping the share at 41 per cent; the government accepted this and announced it in the Budget speech on 1 February 2026. The division between states follows six criteria: per capita GSDP distance (42.5 per cent), population as of the 2011 Census (17.5 per cent), and 10 per cent each for demographic performance, area, forest, and — new in this award — contribution to GDP. The largest shares are Uttar Pradesh 17.619 per cent, Bihar 9.948 per cent and Madhya Pradesh 7.347 per cent.

Forty-one per cent of the pool is not 41 per cent of collections. Devolution in 2026-27 is Rs 15.26 lakh crore against gross tax revenue of Rs 44.04 lakh crore, or about 35 per cent, because cesses and surcharges stay wholly with the Centre — Rs 2.69 lakh crore of them on the two direct taxes alone. Union excise makes the point sharply: of Rs 3.89 lakh crore budgeted, only Rs 34,689 crore is shown as devolved, because the road and infrastructure cess, the agriculture cess and the special additional excise duty are all non-shareable. Devolution is not the whole transfer, however: with grants and loans, total transfers to states reach Rs 26.21 lakh crore, including Rs 1.4 lakh crore of Finance Commission grants.

Reading tax numbers in the Receipt Budget

The Receipt Budget, prepared by the Budget Division of the Department of Economic Affairs, is where the tax numbers appear in full. Part A carries receipts; Part B carries asset and liability statements.

Begin with the Abstract of Receipts, which sets out the arithmetic in a single column: gross tax revenue Rs 44,04,086 crore, less the states' share of Rs 15,26,255 crore, less Rs 10,910 crore of national calamity contingent duty transferred to the National Disaster Response Fund, giving the Centre's net tax revenue of Rs 28,66,922 crore. Add non-tax revenue of Rs 6,66,228 crore and non-debt capital receipts of Rs 1,18,397 crore, and you reach the Rs 36.52 lakh crore the Centre expects without borrowing. The commonest error in reading budget coverage is mixing gross with net, so always establish which one a figure is.

The detailed tables then break each head down to its accounting major head — 0020 corporation tax, 0021 taxes on income, 0005 central GST, 0037 customs, 0038 union excise — listing collections, surcharge and each cess on separate lines. That is where you can see what falls outside the divisible pool.

The annexes repay attention. Annex 1 gives ten years of receipts on one page. Annex 3 reconciles the Receipt Budget with the Annual Financial Statement, the Budget's constitutional name under Article 112. Annex 4 gives the state-wise devolution, and Annex 4C the net proceeds as certified by the Comptroller and Auditor General under Article 279. Annex 5, required by Rule 6 of the FRBM Rules, 2004, reports tax raised but not realised: Rs 38,39,729 crore at the end of 2024-25, of which Rs 17,88,848 crore is under dispute. Annex 7 estimates the revenue impact of tax incentives — accelerated depreciation cost Rs 29,899 crore in 2023-24, and the SEZ export deduction Rs 23,868 crore.