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India Budget 2026 – Highlights

On February 1, 2026, the Finance Minister of India, Ms. Nirmala Sitharaman presented the budget for the year 2026-27 before the Parliament. As a process, the Finance Bill is required to be approved by both the houses of Parliament, and it stands enacted only after receiving the Presidential assent and publishing the same in the Official Gazette.

The tax proposals listed below are applicable for Tax Year 2026-27 unless specified otherwise.

The key proposals are as under:

  • Tax rates: The budget does not propose any significant change in the tax rates applicable to individuals or companies. Surcharge and cess rates also remain unchanged. 
  • Tax holiday for non-residents and foreign companies: it is proposed to provide tax holiday until 2047 for foreign companies providing cloud services using data centre infrastructure located in India. Sale of such services to Indian users shall be made through an Indian reseller entity and taxed appropriately. Thus, income of foreign company in India from procuring data centre services from specified data centre for period up to tax year ended March 31, 2047, will be exempt. Such foreign company should not own or operate any physical infrastructure or resources of such specified data centre. The company should be notified by the central government in this behalf.

For this purpose, key definitions are as under:

  1. “data centre” means a dedicated secure space within a building or centralised location where computing and networking equipment is concentrated for the purpose of collecting, storing, processing, distributing or allowing access to large amounts of data;
  2. “data centre services” means services provided by a data centre through the use of physical infrastructure including land, buildings, mechanical electrical power equipment’s, cooling system, security and information technology infrastructure including servers, computers, storage systems, operating systems, security solutions, network and associated software platforms, networking and other equipment, human resource in India;
  3. “specified data centre” means a data centre which–(i) is set up under an approved scheme and is notified in this behalf by the Central Government in the Ministry of Electronics and Information Technology; and (ii) is owned and operated by an Indian company.
  • Tax holiday for toll manufacturing income: Income of foreign company from providing capital goods, equipment, tooling to contract manufacturer which is Indian resident located in custom bonded area for use in electronic manufacturing in India on behalf of foreign company is exempt subject to certain conditions. This exemption is available up to tax year 2030-31.
  • Safe harbor rules: The Finance Minister announced significant proposals to amend the safe harbor rules.
  1. The Income-tax Act provides safe harbor margins for determination of arm’s length price for services such as software development services, contract R&D services, information technology enabled services, knowledge process outsourcing services, etc. provided to associated enterprises. If the profit margin declared by the taxpayer is within the safe harbor, the taxpayer is not required to go through rigorous transfer pricing audit and the risk of litigation is reduced substantially. The finance minister has declared that all the above-mentioned services will be clubbed together under one head as information technology services and would be subject to safe harbor profit margin rates of 15.5%. The current rate ranges from 17% to 24% depending upon the nature of services and value of transaction. Further transaction value limit for applicability of safe harbor will increase from INR 3 billion to INR 20 billion. Once applies, company can continue safe harbor for 5 years at a stretch at its choice.
  1. It is proposed to provide safe harbour of 15% on cost in case of resident entity providing data centre services to a related foreign company (who is providing cloud services to any part of the world outside India). Further safe harbour for non-residents for component warehousing in a bonded warehouse would be at profit margin of 2% of the invoice value.
  • Advance pricing agreements: It is proposed to fast-track unilateral APA process for IT services with an endeavour to conclude it within a period of 2 years. The period of 2 years can be extended by a further period of 6 months on taxpayer’s request.
  • Further, if the taxpayer enters into advance pricing agreement (APA) relating to its cross-border transactions with associated enterprises, the budget now allow the associated enterprise to modify it already filed return in line with such agreement within the period of 3 months from the end of the month in which the agreement is entered. Earlier only the taxpayer was allowed to do so.
  • Minimum Alternate Tax (MAT): Under minimum alternate tax regime, 15% tax is charged on book profits. Such tax is payable where MAT is higher than the tax payable on company’s total income other normal tax provisions. The excess of MAT over the tax on normal profits is carried forward as MAT credit and can be set off in future when company’s tax under normal provisions of income tax act is higher than MAT. It is proposed that when a company opts for old regime of taxation, MAT would be chargeable at 14% of book profit and it will be considered as final tax without MAT credit availability. Thus, MAT credit would be available only when company opts for new regime where deductions cannot be claimed. Such credit would be available up to 25% of tax liability. The credit of MAT accumulated up to March 31, 2026, shall be allowable up to fifteenth year from the year when the corresponding credit was first created.
  • Buy back of shares: In case of buy back of shares, the income is treated as dividends currently and taxed at rates applicable to the taxpayer. The budget proposes that such income will be treated as capital gains instead of dividends and thus can be subject to lower tax rates. However, in case of promoters, there would be additional levy whereby the effective tax rate will be 30% while in case of promoter companies it will be 22%.
  • Employee contribution to PF: The budget proposes that for availing deduction the employer is required to make payment of employees’ contribution to provident fund within the due date for filing tax return. Earlier the due date for such payment was the date provided under the PF law, rules, notification, scheme, etc.
  • Lower or nil deduction of tax at source certification: It is proposed to enable electronic application for obtaining certificates for lower or nil deduction of income tax to ease compliance for small taxpayers. The prescribed income-tax authority may issue or reject the certificate based on fulfilment of prescribed conditions. This amendment will be effective from April 01, 2026.
  • TDS on supply of manpower: The budget proposes to remove ambiguity regarding the applicable TDS rate on payments for supply of manpower as to whether it should be treated as contractual work or as professional/technical services. It is proposed to include supply of manpower within the definition of “work” under section 402(47), so that TDS provisions under section 393(1) applicable to contractual work shall apply, as relevant.
  • Revised and updated returns:

    ➤ It is proposed to extend the time limit for filing a revised return from nine months to twelve months from the end of the relevant tax year. Additionally, a fee under section 428(b) is proposed for revised returns filed after nine months from the end of the relevant tax year.

    ➤ Income-tax Act allows filing of updated return for payment of additional tax allowing longer period for filing of tax return.  It is proposed to amend section 263(6) to permit filing of an updated return where the taxpayer reduces the amount of loss compared to the loss claimed in the return furnished within the due date. Further, updated return may also be allowed in cases where proceedings of reassessment have been initiated and notice of reassessment has been issued. This amendment will be effective from March 1, 2026.
  • Securities transaction tax rates: STTT rate for sale of options will increase

    i) from 0.1% 0.5% on option premium;
    ii) from 0.125% to 1.15% of the intrinsic price where the option is exercised; and
    iii) in case of sale of futures from 0.02% to 0.05%.
  • Penalties and prosecution: The budget proposes to make many changes relating to penalties and prosecution. It also proposal to convert certain penalties for technical faults into mandatory fees such as penalty for failure to get accounts audited, failure to submit accountant’s report in respect of international transactions, failure to submit statement for financial transactions of reportable accounts, etc. 
  • The budget also proposes reduction in basic customs duty on various goods such as certain life- saving drugs, certain goods required for generation of nuclear power, renewable energy, certain goods required for manufacturing of aircrafts, etc.

Implications

Businesses should evaluate impact of changes in MAT credit rules, newly announced tax exemption and taxation of buy back of shares. Eligible businesses should evaluate reduced safe harbour margins and new safe harbour for data centre in their own facts.