In her ninth consecutive budget presentation, India’s Finance Minister on 1 February 2026 announced broad-based reforms across diverse sectors, laying out a progressive roadmap to Viksit Bharat 2047 (Developed India by 2047). The Union Budget 2026 signals a strong push towards growth and self-reliance, aligned with India’s ambition to become the world’s third largest economy.
The Economic Survey 2026, released a day earlier, presents an optimistic outlook for the Indian economy. The International Monetary Fund projects India’s GDP growth for 2026 at approximately 7.3%. The survey highlights manufacturing, infrastructure and digital transformation—particularly innovation in artificial intelligence (AI) and the expansion of small and medium-sized enterprises—as drivers of future growth.
A central theme of the budget is the focus on 10 priority areas aimed at enhancing India’s growth potential and global competitiveness. These include strengthening domestic manufacturing across strategic sectors, such as semiconductors, pharma and capital goods to reinforce supply chains and reduce external dependencies.
From a tax perspective, the budget seeks to provide greater clarity and predictability for foreign investors. Key measures include safe harbour margins for IT/ITES (information technology/IT-enabled services) and data centre structures, clearer tax treatment of electronics contract manufacturing and faster advance pricing agreement (APA) processes.
This article outlines the major tax and regulatory proposals affecting businesses. Notably, the budget does not propose any changes to the standard income tax rates. The budget is likely to receive presidential assent by end of March 2026 and most of the provisions would be effective from 1 April 2026.
The Finance Bill, 2026 (Finance Bill) introduces several favourable tax measures for foreign companies and individuals:
To continue promoting investment in IFSCs, the government proposes extending existing tax holiday periods:
The Finance Bill also proposes that loans or advances provided by treasury centres in IFSCs would not be treated as deemed dividends where the loans or advances are extended to a group entity located in a notified overseas jurisdiction, provided the parent entity’s share are listed on a notified overseas stock exchange. The definitions of certain terms, such as group entity and parent entity, are proposed to be aligned with IFSCA regulations.
The Finance Bill introduces several significant transfer pricing measures:
The Finance Bill proposes significant revisions to the MAT regime aimed at rationalising the regime, including a reduction in the MAT rate, changes to the use of MAT credits and a new exclusion from the MAT:
The Finance Bill proposes significant changes to the tax treatment of buyback provisions and the securities transaction tax.
The bill proposes that the buyback of shares/securities for all shareholders would be taxed as capital gains rather than as dividend income. Promoters would be subject to an additional income tax depending on the nature of the capital gains, as outlined below:
The bill also proposes increases to the securities transaction tax rates:
The Finance Minister announced a comprehensive review of the Foreign Exchange Management (Non-debt Instruments) Rules to create a more contemporary and user-friendly framework for foreign investment into India. In addition, a high-level committee on banking would be set up to undertake a comprehensive review of the Indian banking sector.
The Finance Bill includes a number of proposed administrative reforms:
The Union Budget 2026 aims to balance economic expansion with fiscal discipline. Policy measures and incentives for nuclear power, critical minerals and carbon capture and utilisation reflect a strong commitment to an energy-transition future. These initiatives, alongside the tax holiday until 2047 for foreign cloud services companies, and the allocation of approximately USD 4.36 billion in the India Semiconductor Mission 2.0, underscore the government’s focus on future-readiness and reduced import dependence.
The budget also identifies strategic and frontier sectors for scaled up manufacturing, including biopharma, chemicals, capital goods and textiles, reinforcing India’s ambition to become a more competitive and self-reliant manufacturing hub.
On the direct tax front, the proposals aim to enhance tax certainty, rationalise rates and reduce litigation through measures such as incentives for nonresidents and foreign companies, rationalisation of MAT and administrative reforms designed to improve voluntary compliance. Continued incentives for IFSCs highlight India’s aspiration to emerge as a global financial hub.
Overall, Budget 2026 reflects a clear policy intent to strengthen India’s manufacturing base, promote strategic and emerging sectors, ease compliance burdens and simplify the tax environment, positioning India as a more competitive and self-reliant investment destination in a shifting global landscape.
Niranjan Govindekar
Tushar Desai
BDO in India
The Economic Survey 2026, released a day earlier, presents an optimistic outlook for the Indian economy. The International Monetary Fund projects India’s GDP growth for 2026 at approximately 7.3%. The survey highlights manufacturing, infrastructure and digital transformation—particularly innovation in artificial intelligence (AI) and the expansion of small and medium-sized enterprises—as drivers of future growth.
A central theme of the budget is the focus on 10 priority areas aimed at enhancing India’s growth potential and global competitiveness. These include strengthening domestic manufacturing across strategic sectors, such as semiconductors, pharma and capital goods to reinforce supply chains and reduce external dependencies.
From a tax perspective, the budget seeks to provide greater clarity and predictability for foreign investors. Key measures include safe harbour margins for IT/ITES (information technology/IT-enabled services) and data centre structures, clearer tax treatment of electronics contract manufacturing and faster advance pricing agreement (APA) processes.
This article outlines the major tax and regulatory proposals affecting businesses. Notably, the budget does not propose any changes to the standard income tax rates. The budget is likely to receive presidential assent by end of March 2026 and most of the provisions would be effective from 1 April 2026.
Benefits for Eligible Foreign Companies
The Finance Bill, 2026 (Finance Bill) introduces several favourable tax measures for foreign companies and individuals:
- Tax holiday for data centre services: To attract investment in data centres and promote AI-driven data infrastructure in India, including global capability centres, the Finance Bill proposes a tax holiday for foreign companies on income earned from “data centre services” until fiscal year (FY) 2046-47, subject to specified conditions
- Tax holiday for capital goods suppliers: Eligible foreign companies supplying capital goods, equipment or tooling to a contract manufacturer in India receive a five-year tax holiday, available until FY 2030-31, subject to specified conditions.
- Tax exemption for visiting nonresident experts: To encourage foreign expertise, nonresident individuals would receive a five-year tax exemption on income earned outside India while visiting the country to render services under government-notified schemes. The incentive would apply as from 1 April 2026 provided the individual was nonresident (in India) for the preceding five years.
Incentives for International Financial Service Centres (IFSCs)
To continue promoting investment in IFSCs, the government proposes extending existing tax holiday periods:
- Offshore Banking Units (OBUs): From 10 FYs to 20 FYs; and
- Units in IFSCs: From 15 FYs to 20 consecutive FYs out of 25 FYs, subject to specified conditions.
The Finance Bill also proposes that loans or advances provided by treasury centres in IFSCs would not be treated as deemed dividends where the loans or advances are extended to a group entity located in a notified overseas jurisdiction, provided the parent entity’s share are listed on a notified overseas stock exchange. The definitions of certain terms, such as group entity and parent entity, are proposed to be aligned with IFSCA regulations.
Transfer Pricing Measures
The Finance Bill introduces several significant transfer pricing measures:
- Safe Harbour Rules: The turnover threshold for the safe harbour regime would be increased significantly from INR 3 billion to INR 20 billion for IT services. IT services would be consolidated to include software development, IT-enabled service providers, knowledge process outsourcing and contract R&D relating to software. A uniform safe harbour margin of 15.5% is proposed for the IT services category, a 15% margin on costs is proposed for data centre services provided to related parties and a 2% margin on invoice value is proposed for nonresident entities undertaking component warehousing in customs bonded warehouses serving manufacturing operations. Finally, the safe harbour regime would transition to a rule-based process.
- APAs: Unilateral APAs for IT services would be fast-tracked, with a targeted finalisation timeline of two years. Associated enterprises would be permitted to file modified tax returns to claim refunds of additional taxes paid or withheld. This would apply to APAs entered on or after 1 April 2026 for FYs beginning 1 April 2026 and thereafter.
- Assessment timelines for nonresidents and transfer pricing cases: The Finance Bill clarifies that the one-month deadline for issuing the final order and the nine-month period for dispute resolution panel directions would supersede general assessment timelines, reducing disputes over time-barred assessments.
- Computation of 60-day transfer pricing order: The limitation date would be explicitly included in computing the 60-day period for passing transfer pricing orders to align with legislative intent and eliminate interpretational disputes. The clarification would apply retroactively as from 1 June 2007.
Minimum Alternate Tax (MAT)
The Finance Bill proposes significant revisions to the MAT regime aimed at rationalising the regime, including a reduction in the MAT rate, changes to the use of MAT credits and a new exclusion from the MAT:
- The MAT rate would be reduced from 15% to 14% of book profits for companies not opting for the concessional regime (plus the applicable surcharge and cess).
- To encourage domestic companies to opt for the concessional corporate tax regime, the Finance Bill proposes to allow the carryforward and setoff of MAT credits in such regimes. Domestic companies moving into the concessional tax regime for FY 2026-27 and thereafter would be allowed to use the balance of MAT credits but only up to 25% of their tax liability for the year. The MAT credit can be carried forward until its credit balance is fully exhausted or for 15 years from the year the credit arose. For companies that do not opt for the concessional tax regime, the new lower MAT rate would apply (plus the applicable surcharge and cess). MAT paid would be treated as a final tax, i.e., once the company paid tax under the MAT provisions, no MAT credit would be allowed to be carried forward to subsequent FYs.
- In the case of foreign companies, the setoff of MAT credit would be allowed up to the difference between the tax on total income and the MAT.
- Nonresident taxpayers engaged in the operation of cruise ships and those providing services/technology in India for electronics manufacturing or production for a resident company and that elect presumptive taxation would not be subject to the MAT.
Share Buybacks and Securities Transaction Tax
The Finance Bill proposes significant changes to the tax treatment of buyback provisions and the securities transaction tax.The bill proposes that the buyback of shares/securities for all shareholders would be taxed as capital gains rather than as dividend income. Promoters would be subject to an additional income tax depending on the nature of the capital gains, as outlined below:
| Type of gain | Promoters | |
| Domestic company | Other than a domestic company | |
| Short-term capital gain | 2% | 10% |
| Long-term capital gain | 9.5% | 17.5% |
| Effective tax rate | 22% | 30% |
The bill also proposes increases to the securities transaction tax rates:
- On the sale of options in securities:
- From 0.1% to 0.15% of the option premium
- From 0.125% to 0.15% of the intrinsic value where the options are exercised.
- On the sale of futures in securities:
- From 0.02% to 0.05%.
Review of Exchange Control Regulations and Financial Sector Reforms
The Finance Minister announced a comprehensive review of the Foreign Exchange Management (Non-debt Instruments) Rules to create a more contemporary and user-friendly framework for foreign investment into India. In addition, a high-level committee on banking would be set up to undertake a comprehensive review of the Indian banking sector.
Administrative Reforms
The Finance Bill includes a number of proposed administrative reforms:
- The due date for filing income tax returns would be moved forward one month, from 31 July to 31 August for taxpayers with business or professional income whose accounts are not required to be audited, including a partner of a firm whose accounts are not audited.
- The time limit for filing a revised return would be extended from nine months to 12 months from the end of the relevant FY. A fee would apply for revised returns filed after nine months.
- Taxpayers would be permitted to file updated returns even where doing so results in a reduction of losses compared to the original return.
- Taxpayers would be permitted to file updated returns even when an assessment or re-assessment is pending. In such cases, the income tax payable would be increased by 10% of the aggregate of tax and interest arising from the amended return but no penalties would apply to that amount.
BDO Perspective
The Union Budget 2026 aims to balance economic expansion with fiscal discipline. Policy measures and incentives for nuclear power, critical minerals and carbon capture and utilisation reflect a strong commitment to an energy-transition future. These initiatives, alongside the tax holiday until 2047 for foreign cloud services companies, and the allocation of approximately USD 4.36 billion in the India Semiconductor Mission 2.0, underscore the government’s focus on future-readiness and reduced import dependence. The budget also identifies strategic and frontier sectors for scaled up manufacturing, including biopharma, chemicals, capital goods and textiles, reinforcing India’s ambition to become a more competitive and self-reliant manufacturing hub.
On the direct tax front, the proposals aim to enhance tax certainty, rationalise rates and reduce litigation through measures such as incentives for nonresidents and foreign companies, rationalisation of MAT and administrative reforms designed to improve voluntary compliance. Continued incentives for IFSCs highlight India’s aspiration to emerge as a global financial hub.
Overall, Budget 2026 reflects a clear policy intent to strengthen India’s manufacturing base, promote strategic and emerging sectors, ease compliance burdens and simplify the tax environment, positioning India as a more competitive and self-reliant investment destination in a shifting global landscape.
Niranjan Govindekar
Tushar Desai
BDO in India