(Corrects headline, lead to clarify yields fell as government's borrowing program came below estimates)

BENGALURU, Feb 1 (Reuters) - Indian shares surged on Wednesday after the government raised the minimum tax rebate limit and stepped up spending, while bond yields moved lower after gross borrowing for the next financial year was lower than expected in the Union budget.

The Nifty 50 index was up 1.5% at 17,922.50, while the S&P BSE Sensex gained 1.6% to 60,528 as of 12:32 p.m. IST.

Indian bond yields reversed course after the government announced gross borrowing at 15.43 trillion rupees for the next financial year and net borrowing at 11.80 trillion rupees.

The benchmark bond yield dropped much as 11 basis points from the day’s high levels, while the Indian rupee rose slightly against the dollar.

Finance Minister Nirmala Sitharaman said the government will spend 10 trillion rupees ($122.3 billion) on longer-term capital expenditure in 2023/24, extending a strategy adopted to revive growth in the aftermath of the COVID crisis.

She also raised the rebate limit for personal income tax to 700,000 rupees from 500,000 rupees, sending shares higher.

India's federal government cut down the fiscal deficit target to 5.9% of GDP in the next financial year, compared to 6.4% for the current fiscal year.

This is the last full-year budget before the national elections in 2024 and key state elections later this year.

Banks and financials were the top gainers among the 13 major sectors, rising 1.5% and 1.6%, respectively.

India has pegged its economic growth at 6-6.8% in the 2023/24 fiscal year, the slowest in three years, at its pre-budget economic survey released on Tuesday.

Shares of seafood company Avanti Feeds Ltd and Coastal Corporation rose 5.8% and 4.8% respectively after Sitharaman announced plans to raise spending on the fisheries sector.

Meanwhile, most Adani Group stocks dropped, extending their losses since short-seller Hindenburg Research's report and despite the group completing a $2.5 billion share sale a day earlier. (Reporting by Bharath Rajeswaran and Nallur Sethruaman in Bengaluru; editing by Eileen Soreng, Savio D'Souza and Janane Venkatraman)