The Union Budget of India for the financial year 2026-27
The Union Budget 2026, presented by the Honorable Finance Minister on 1st February 2026, is anchored around the vision of “Sabka Vikas” and the three Kartavyas – accelerating economic growth, ensuring inclusive development, and strengthening governance and trust. The Budget continues to focus on tax certainty, simplification and rationalisation. This article summarises the key direct and indirect tax amendments proposals announced in the Budget, highlighting changes relevant from a practical compliance and planning perspective. Key Focus Areas of the Union Budget 2026–27.
Incentives and Reliefs for Foreign Entities and Individuals
India has proposed significant tax exemptions to attract global investment and talent. These include a tax exemption until 31 March 2047 for foreign companies procuring data centre services from specified Indian data centres, and a tax exemption up to FY 2030-31 for foreign companies supplying capital goods, equipment, or tooling to Indian contract manufacturers operating in customs bonded areas.
Additionally, individuals who have been non-residents for five consecutive tax years prior to their first visit to India will be exempt from Indian tax on foreign-sourced income for five consecutive tax years when providing notified services. This measure offers greater tax certainty and supports the inflow of specialised global talent. This amendment is intended to provide tax certainty and attract globally specialised talent with effect from 1 April 2026.
Long-term enhancements to the International Financial Services Centre (IFSC) ecosystem, primarily aimed at reinforcing GIFT City as a top-tier global financial hub.
- Extended Tax Holiday: The 100% income tax deduction for units operating in the IFSC has been doubled from 10 consecutive years within a 15-year window to 20 consecutive years within a 25-year period.
- Post-Holiday Concessional Rate: After completion of the 20-year tax holiday, business income of IFSC units will be taxed at a concessional rate of 15%, reduced from the earlier effective rates of 30% (trusts) and 22% (companies).
- Offshore Banking Units (OBU): OBUs operating in the IFSC will also be eligible for the 20-year tax deduction, with the deadline for commencing operations extended to 31 March 2030, providing additional time for new entrants.
Amendment related to Corporates Rationalization of Due Date for Employee Contribution Deductions (Applicable from Tax Year 2026-27 onwards)
- Section 29 of the Income Tax Act, which deals with the employee contributions to the provident fund, superannuation fund, ESI, etc. is proposed to be amended to provide that such contributions shall be allowed as deduction if they are deposited/paid on or before the due date for filing the return of income under Section263(1).
- Reduced tax rates on unexplained cash, credits, investments or expenditures: Section 195 of the Income-tax Act, 2025 currently levies tax at the rate of 60% on income referred to in sections 102 to 106, which include unexplained credits, investments, assets, expenditures, and amounts borrowed or repaid through negotiable instruments or hundis. It is now proposed to reduce the tax rate on such income under section 195 from 60% to 30%.
- Amendment to Section 69 of the IT Act, 2025 (corresponding to Section 46A of IT Act, 1961) – Taxation on Buy-back of Shares: Consideration received on buy-back of shares will no longer be treated as dividend. Such consideration will now be taxed under the head “Capital Gains”.
- Amendment in Section 70 of the IT Act, 2025 (corresponding to section 47 of IT Act, 1961) (Transaction not regarded as transfer): It is proposed to amend the existing exemption available to individuals on the transfer of Sovereign Gold BondS (SGBs), such that the exemption shall be available only where the individual holds the SGB from its original issue date until its maturity.
- Amendment in Section 93 of the IT Act, 2025 (corresponding to section 57 of IT Act, 1961) (Deductions): It is proposed to amend section 93(2) to provide that no deduction shall be allowed in respect of any interest, commission, or remuneration incurred for earning dividend income or income from units of mutual funds.
Transfer Pricing
For IT/ITES companies, the Safe Harbour margin has been lowered to 15.5%, providing clarity on acceptable pricing. The period for which these Safe Harbour rules apply has also been extended from 2 years to 5 years, offering longer-term certainty for taxpayers.
Taxation for IT services, including software development, IT-enabled services, Knowledge process outsourcing (KPO), and contract R&D will be simplified under a single category called “Information Technology Services,” with a standard Safe Harbour framework to provide certainty on transfer pricing.
Customs
- Customs Integrated System (CIS): It is proposed that the CIS will be rolled out over the next two years. CIS is intended to serve as a single, integrated and scalable platform for all the customs processes.
- Extension of Advance Ruling validity: The validity period of an advance ruling under Section 28J (2) of the Customs Act, 1962, is proposed to be extended from the current three years to five years.
Biopharmaceuticals at the Core of India’s Manufacturing Strategy in Union Budget 2026-27
Biopharma SHAKTI (Strategy for Healthcare Advancement through Knowledge, Technology, and Innovation) Biopharma SHAKTI is a new proposed government initiative to strengthen domestic capabilities in biological medicines and research.
The primary objective of the scheme is to:
- Position India as a global hub for biopharmaceutical manufacturing.
- Provide a financial outlay of ₹10,000 crore over five years to support research, innovation, and infrastructure development.
- Establish a nationwide network of 1,000 accredited clinical drug trial sites to enhance clinical research capacity across the country.
India Semiconductor Mission (ISM) 2.0
The Union Budget 26-27 showed India’s strong focus on technology with the launch of India Semiconductor Mission (ISM) 2.0. This new phase aims to strengthen semiconductor manufacturing in India for both domestic use and global supply chains.
The mission plans to support the production of semiconductor equipment and material in India, promote the, design of complete Indian technologies( IP), and strengthen supply chains. It will also focus on industry-led research and training centres to develop advanced technology and create a skilled workforce.
The following measures have been announced in the Budget:
- The outlay for the Electronics Components Manufacturing Scheme has been increased to ₹40,000 crore to expand India’s semiconductor capabilities across equipment, materials, design, and supply-chain resilience.
- An allocation of ₹1,000 crore has been made for 2026–27 to strengthen research, training, and domestic chip manufacturing capabilities.
Rare Earth Corridors
India is taking decisive steps toward self-reliance in critical materials by establishing a domestic ecosystem for Rare Earth Permanent Magnets (REPMs) – high-performance magnets essential for electric vehicles, wind turbines, electronics, aerospace, and defence.
To support this goal, the government approved a ₹7,280 crore scheme to develop 6,000 Metric Tonnes Per Annum (MTPA) of integrated REPM manufacturing capacity in November 2025, covering the full value chain from rare-earth oxides to finished magnets.
Complementing this, the Union Budget 2026–27 has announced the creation of Dedicated Rare Earth Corridors in Odisha, Kerala, Andhra Pradesh, and Tamil Nadu to promote mining, processing, research, and manufacturing. These initiatives align with the national priorities of Atmanirbhar Bharat, Net Zero 2070, and Viksit Bharat @2047, while positioning India as a key player in global advanced-materials value chains.
Chemical Manufacturing Infrastructure
- Support for States to establish three dedicated Chemical Parks on a cluster-based, plug-and-play model to strengthen domestic chemical production.
Construction and Infrastructure Equipment (CIE)
The Construction and Infrastructure Equipment (CIE) Scheme introduced in India’s Union Budget 2026-27 is a government initiative aimed at boosting domestic manufacturing of construction and infrastructure machinery to support India’s growing infrastructure needs.
The scheme targets a broad range of equipment used across sectors, such as:
- Tunnel boring machines (TBMs)
- Metro and urban construction machinery
- Fire-fighting and safety equipment
- Lifts and vertical mobility systems
- Heavy machinery used in roads and high-altitude infrastructure projects
In Union Budget 2026–27, an allocation (around ₹200 crore for 2026-27) was announced to kickstart initiatives under this scheme, though larger incentive frameworks worth several thousand crores are also being discussed to further scale up the sector.
Container Manufacturing Scheme
A dedicated Container Manufacturing Scheme will be Launched with a budgetary allocation of ₹10,000 crore over five years to develop globally competitive production capacity. The scheme aims to support companies in expanding existing factories and establishing new facilities for manufacturing freight containers, the steel boxes used for transporting goods in global trade.
Infrastructure
Key infrastructure-related initiatives include:
- Public capital expenditure : ₹12.2 lakh crore in FY27 to sustain momentum in infrastructure creation.
- High-Speed Rail corridors: Development of seven corridors to strengthen inter-city connectivity and support economic agglomeration across major growth regions.
- Inland water transport expansion: Operationalisation of 20 new National Waterways to improve logistics efficiency and connectivity between industrial clusters, mineral-rich regions, and ports.
- Tier II and Tier III city development: Continued focus on infrastructure development in cities with populations exceeding 5 lakhs, which have emerged as new growth centers.
City Economic Regions (CERs): Development of CER with an allocation of ₹5,000 crore per region over five years, to unlock agglomeration-led growth and strengthen urban economic clusters.
Champion SMEs and Micro Enterprises
- Introduced a dedicated ₹10,000 crore SME Growth Fund to create future Champions, incentivising enterprises based on select criteria.
- A ₹2,000 crore top-up for the Self-Reliant India Fund, set up in 2021, to support micro enterprises and maintain their access to risk capital.
Health, Agriculture & Rural Development
- Health Sector: – Customs duty exemptions on key cancer and rare disease medicines to improve accessibility and reduce costs.
- Agriculture technology and advisory tools: Continued support with AI-driven platforms and initiative to enhance fisheries growth.
- Medical tourism hubs and AYUSH expansion: Development of regional hubs and institutes to strengthen healthcare services and promote medical tourism.
Budget Initiatives on Ease of Doing Business
Trade and Investment Facilitation
- Single and interconnected digital window for cargo clearance approvals, for goods not having any compliance requirement, clearance will be done by Customs immediately after online registration is completedby the importer, subject to the payment of duty.
- Customs Integrated System (CIS) will be rolled out in 2 years as a single, integrated and scalable platform for all the customs processes.
- Individual Persons Resident Outside India (PROIs) will be permitted to invest in equity instruments of listed Indian companies through the Portfolio Investment Scheme (PIS). It is also proposed to increase the investment limit for an individual PROI under this scheme from 5% to 10%, with an overall investment individual PROIs to 24%, from the current 10%.
Attracting Global Business and Investment
- Exemption from Minimum Alternate Tax (MAT) to all non-residents who pay tax on presumptive basis. MAT was introduced to bring into the tax net “zero tax companies” which in spite of having earned substantial book profits and having paid handsome dividends, do not pay any tax due to various tax concessions and incentives provided under the Income-tax Law.
- MAT is proposed to be made final tax, with reduction in rate of final tax to 14% from 15%.
- Buyback of shares ordinarily means repurchasing of shares by the company that issued them. The company pays the shareholders the market value of the shares and reclaims the ownership that was previously distributed. It has been proposed to tax buyback of shares as Capital Gains.
Additional Sector Initiatives
- The Ministry of Defence has been allocated ₹7.85 lakh crore for FY 2026–27, the highest allocation among all ministries. The allocation would be towards capital expenditure, acquisition, operational, pensions and Welfare programmes.
In the Union Budget 2026–27, the government announced a comprehensive Integrated Programme for the Textile Sector.
- National fibre Scheme covering natural fibres (like silk, wool, jute), man-made fibres, and new-age fibres to support upstream raw material security and production.
- Textile Expansion and Employment Scheme, providing capital support for machinery, technology upgradation, and common testing & certification centres to boost productivity and employment.
- National Handloom and Handicraft Programme, Integrates and strengthens existing schemes to deliver targeted support for weavers and artisans, improve market linkages, and enhance product competitiveness.
- Tex-Eco Initiative, promotes sustainable and globally competitive textiles & apparel, supporting environmentally responsible production and quality improvement aligned with international standards.
- Upgraded skilling and workforce development programme, aimed at modernising the textile skilling ecosystem.
Allen D’souza
Manager | Business Development
- +91 8600481900
- adsouza@juristax.com