Budget 2026: Why Raising Income Tax Surcharge on the Super Rich Could Trigger Capital and Talent Flight

As preparations intensify for Budget 2026–27, taxation of high-income individuals has once again become a key topic of debate. Tax experts and economists are advising the government to avoid increasing the income tax surcharge on the super rich or reintroducing wealth tax, warning that such moves could push high earners to relocate to low-tax countries. According to experts, an aggressive tax approach may do more harm than good at a time when India needs to retain capital, talent, and entrepreneurship.

Current Surcharge Structure for High-Income Earners

At present, individuals earning more than ₹50 lakh annually are subject to an income tax surcharge. The surcharge increases progressively with income levels. Those earning between ₹50 lakh and ₹1 crore pay a 10 percent surcharge, while incomes between ₹1 crore and ₹2 crore attract a 15 percent surcharge. For individuals earning between ₹2 crore and ₹5 crore, the surcharge rises to 25 percent.

For taxpayers earning more than ₹5 crore, the surcharge depends on the tax regime chosen. Under the new income tax regime, the surcharge is capped at 25 percent. However, individuals who continue under the old tax regime face a significantly higher surcharge of 37 percent, making their effective tax rate one of the highest in the world.

Experts Caution Against Higher Tax Burden

Tax professionals believe that increasing the surcharge further or reintroducing wealth tax could lead to unintended consequences. According to independent economists, reduced GST rates and lower-than-expected income tax collections could result in a revenue shortfall of nearly ₹2 lakh crore in the current financial year 2025–26. While additional revenue sources in FY 2026–27 could help the government increase allocations for defence and other priority sectors, experts argue that targeting the super rich may not be the most effective solution.

A senior partner at a leading consulting firm explained that India follows the principle of “vertical equity” in taxation, which means individuals with higher income should pay more tax. However, there is a fine balance. If tax rates become excessively high, wealthy individuals may choose to move their residence and investments abroad. In today’s globalised world, such relocation is not only possible but increasingly common.

Risk of Migration to Low-Tax Jurisdictions

Several tax experts have highlighted the growing risk of high-net-worth individuals (HNIs) shifting to countries with more favourable tax regimes. According to them, higher surcharges, uncertainty in tax policies, or the return of wealth tax could influence decisions related to residency and capital allocation.

A tax partner at a global advisory firm noted that tax stability and predictability are just as important as tax rates. Frequent changes or sudden increases can create uncertainty, prompting wealthy individuals to move assets or even change their country of residence. When the objective is to retain capital and skilled professionals, maintaining consistency in tax policy becomes crucial.

India had abolished wealth tax in 2015 to reduce administrative complexity and compliance costs. Experts warn that bringing it back could revive old challenges, including valuation disputes, higher compliance burdens, and increased litigation, without guaranteeing proportionate revenue gains.

Impact on Entrepreneurship and Job Creation

Another major concern raised by experts is the potential impact on entrepreneurship and employment. High-income individuals often play a significant role in investment, business expansion, and job creation. Excessive taxation could discourage risk-taking and innovation, slowing down economic growth.

Legal and tax experts point out that higher tax rates may accelerate capital outflow, affecting domestic investments. This could have a ripple effect on startups, manufacturing, and other sectors that rely heavily on private capital.

Lessons from Budget 2023

Experts also refer to changes introduced in Budget 2023, when the government reduced the highest surcharge rate for individuals earning more than ₹5 crore from 37 percent to 25 percent under the new tax regime. This move lowered the maximum marginal tax rate from around 42.7 percent to approximately 39 percent and was implemented from April 1, 2023.

Tax professionals believe that since this reform is relatively recent, it is unlikely that the government would reverse the decision within a short span of three years. Such a reversal could send negative signals about policy stability to both domestic and international investors.

The Road Ahead for Budget 2026

As Budget 2026 approaches, the consensus among experts is clear: while higher earners should contribute more, taxation must remain balanced and predictable. A stable tax environment helps retain wealth, talent, and investment within the country, which ultimately supports economic growth and employment generation.

Rather than increasing surcharges or reviving wealth tax, experts suggest focusing on widening the tax base, improving compliance, and boosting economic activity. These measures, they argue, can strengthen government revenues without risking capital flight or discouraging high-value contributors to the economy.

The government’s challenge will be to strike the right balance between revenue needs and long-term economic competitiveness in Budget 2026.