The Union Budget 2026 marks a more deliberate and intent-driven phase in India’s direct tax policy. Instead of headline rate changes, the emphasis is firmly on clarity, simplicity and certainty—along with closer alignment between tax outcomes and economic growth.
A key thrust is the resolution of interpretational issues that have historically triggered litigation on procedural aspects, several of which are currently pending before the Supreme Court. With the New Income-tax Act, 2025 scheduled to come into force from FY27, the proposals signal a transition towards a more predictable, rules-based tax regime.
At the same time, the Budget reflects a broader policy intent to attract foreign direct investment into new-age sectors such as technology, digital infrastructure and data-driven businesses.
The proposals span taxation of emerging economic sectors, share buy-backs, targeted incentives for GIFT City, rationalisation of the Minimum Alternate Tax (MAT) framework, and a suite of measures aimed at simplifying compliance and reducing procedural litigation.
Backing the new-age economy
The Budget adopts a forward-looking approach towards the new-age economy, with targeted measures for sectors such as IT, IT-enabled services and data centres.
In a significant move, income earned by a foreign company from providing data centre services to Indian customers is proposed to be exempt from tax until March 2047, subject to specified conditions.
Support has also been extended to electronic manufacturing. Income earned by foreign companies from supplying capital goods to Indian contract manufacturers—where electronics manufacturing is undertaken on behalf of the foreign company under a bonded warehouse arrangement—is proposed to be exempt from tax. This measure reduces the need for heavy capital investment by Indian contract manufacturers, lowering overall production costs.
For globally integrated sectors such as IT and technology services, the expansion of safe harbour margins and renewed emphasis on time-bound Advance Pricing Agreements are expected to enhance certainty and reduce transfer pricing disputes.
GIFT City matures
In contrast to the tightening of exit-oriented provisions, Budget 2026 adopts a facilitative stance where the objective is long-term capital formation.
Currently, GIFT City units enjoy a 100% income tax exemption for any 10 consecutive years out of a block of 15 years. Budget 2026 proposes to extend this to a 20-year tax holiday within a 25-year block. Further, income earned after the expiry of the tax holiday period is proposed to be taxed at a concessional rate of 15%.
This materially alters the economics of operating from GIFT City, shifting the focus from front-loaded tax planning to long-term operational continuity. For global banks, fund managers and fintech players, certainty across the full business lifecycle often matters more than absolute exemptions. The proposals reinforce GIFT City’s positioning as a permanent onshore international financial centre, rather than a transient, tax-driven location.
Buy-backs, redefined
One of the most significant changes relates to the taxation of share buy-backs—once again. Over time, buy-backs have moved across multiple tax regimes: from capital gains taxation, to a company-level buy-back tax, to alignment with dividend taxation, and now back to capital gains. This evolution reflects a sustained attempt to neutralize arbitrage.
Under the current regime, buy-back income is taxed as dividends, with the cost base treated as a capital loss. Budget 2026 proposes to tax buy-back consideration as capital gains. However, it also imposes an additional tax burden on promoters, resulting in a headline tax rate of 30% for non-corporate promoters and 22% for corporate promoters.
The policy intent is clear. Buy-backs may remain legitimate capital management tools, but they are no longer intended to function as tax-efficient exit routes for promoters. By imposing a higher explicit tax cost on promoter-led buy-backs, the Budget removes the long-standing asymmetry between dividends, buy-backs and secondary market exits. Promoters and minority shareholders are placed on a more even tax footing, signalling that exit monetization—regardless of structure—will not be lightly taxed.
MAT reset
Another important reform lies in the rationalization of the MAT framework, which applies to companies under the old corporate tax regime. When the lower, simplified corporate tax regime was introduced in 2019, MAT no longer applied to companies opting for the new regime.
However, companies with accumulated MAT credits often chose to remain under the old regime to avoid losing these credits, leading to further accumulation over time.
Budget 2026 seeks to break this cycle by narrowing the relevance of the old regime. It proposes treating MAT liability as final, while permitting utilization of accumulated MAT credit to the extent of 25% of tax payable under the new regime.
By addressing the open-ended build-up of MAT credits and rationalising their use, the Budget nudges corporates towards a cleaner transition to the new corporate tax framework.
Procedure over paperwork
Beyond structural reforms, the Budget places sustained emphasis on simplifying tax administration and reducing procedural disputes.
The government has taken a firm view on challenges based purely on procedural defects, introducing targeted retrospective clarifications to overturn judicial precedents where assessment orders were set aside on technical grounds alone. While retrospective amendments must be used sparingly, their limited application here reflects an intent to refocus disputes on substantive tax issues rather than procedural lapses.
Easing taxpayer stress
Alongside policy recalibration, Budget 2026 also addresses genuine taxpayer hardship. A series of targeted measures aims to reduce compliance burdens, ease cash-flow pressures, and provide pathways to resolve legacy non-compliances.
- Reduction in TCS rates to 2% for overseas tour packages and remittances for education and medical purposes;
- A one-time, six-month window for small taxpayers to voluntarily disclose and resolve legacy foreign asset or income non-compliances;
- Decriminalisation of offences relating to non-payment of TDS involving amounts below ₹10 lakh;
- Introduction of a rule-based automated process for issuing lower or nil withholding tax certificates for small taxpayers.
Overall, the direct tax proposals in Union Budget 2026 reflect a calibrated shift towards clarity, simplification and predictable tax outcomes. The emphasis on structural reform suggests a move to a more stable and administrable tax framework.
The real dividend of this Budget may lie less in immediate tax relief and more in the credibility, predictability and institutional clarity it brings to India’s direct tax system.
Dinesh Kanabar, chairman & CEO, Dhruva Advisors, and Abhishek Mundada, partner, Dhruva Advisors
