Executive summary

The Finance Minister of India presented the Union Budget for 2026 on 1 February 2026. Key highlights of India's tax proposals include:

• Reduction in Minimum Alternate Tax (MAT) rates from 15% to 14% with elimination of MAT credit for domestic companies not opting for a concessional tax regime
• Taxation of buyback of shares, now proposed to be taxed as capital gains instead of dividend income
• Enhanced scope for safe harbor provisions under Indian Transfer Pricing Regulations
• Fast track for unilateral Advance Pricing Agreements
• Additional tax holiday period proposed for Offshore Banking Units (OBUs) and Units operating in International Financial Service Center (IFSC)
• Exemptions proposed for foreign company income from (1) providing capital goods, equipment, etc. to an Indian contract manufacturer producing electronic goods and (2) procuring data center services from an Indian resident subject to conditions

This Alert summarizes the key budget proposals.

Key direct tax proposals

New Income-tax Act applicable from tax year 2026-27 onwards

The new Income-tax Act 2025 (new IT Act) which was approved by the Indian Government late last year will be applicable from tax year 2026-27. The purpose of the new IT Act is to make the law simple and minimize controversies. There is no change in the basic principles of taxation.

Corporate tax rates

No changes would be made to the corporate tax rates.

The MAT rate would be reduced from existing 15% to 14% for both domestic and foreign companies, but there would be no change in the MAT rate for IFSC units, which are taxed at 9%. The MAT rate is proposed to be the final rate for domestic companies not opting for a concessional tax regime; no MAT credit would be allowed.

Under the proposal, domestic companies availing a concessional tax regime from tax year 2026-27 and onward will be entitled to MAT credit of 25% of normal tax liability. MAT credit will be the credit accumulated up to 31 March 2026. Carryforward of this MAT credit would be available for 15 succeeding tax years from the year in which credit first became allowable.

Foreign companies opting for presumptive tax regime would be uniformly exempted from MAT.

Rationalization of buyback tax regime

The existing regime of taxing consideration received on buyback as dividend income in the hands of shareholders proposed would be abolished.

Consideration received on the buyback would now be taxable as "capital gains" with applicable beneficial tax rates. However, an additional tax is proposed to be levied for "promoter" shareholders as follows:

Deduction against dividend income abolished

Interest expenditure deduction on earning of dividend income or income from units of a mutual fund presently permitted up to 20% of gross income is now proposed to be withdrawn.

Transfer pricing safe harbor rules amendments

The proposal includes a unified category of Information Technology services combining (1) software development services, (2) IT-enabled services, (3) knowledge process outsourcing and (4) contract research and development (R&D) services relating to software development with a common safe harbor margin of 15.5% applicable.

The eligibility threshold for making an application under the safe harbor would be significantly enhanced from 300 million Indian rupees (INR3000m) to INR 20b.

A safe harbor of 15% on cost is proposed for Indian captive data center service providers.

A safe harbor margin of 2% of invoice value is proposed for nonresidents engaged in component warehousing inside bonded warehouses.

Transfer pricing Advance Pricing Agreement (APA) related amendments

Unilateral APAs relating to IT services are proposed to be fast tracked with a clear target timeline of two years for conclusion (six-month extension to be granted upon a taxpayer's request).

The present anomaly in tax return filing provisions would be corrected by introducing provisions permitting nonresident associated enterprise to file a modified tax return to reflect the APA outcome.

Additional tax incentives for units in IFSC

The current tax holiday period available to OBUs and IFSC Units is proposed to be extended from 10 consecutive years to 20 consecutive years for OBUs and from 10 consecutive years out of 15 years to 20 consecutive years out of 25 years for IFSC Units.

Following the tax-holiday period, a concessional tax rate of 15% is now proposed on specified income earned by OBUs and IFSC Units.

Exemption for foreign companies on supply of capital goods, equipment, etc.

Income arising in the hands of a foreign company from providing capital goods, equipment or tooling to an Indian contract manufacturer is proposed to be tax exempt up to the tax year 2030-31. This exemption applies when the contract manufacturer is an Indian-resident company producing electronic goods for the foreign company located in a custom bonded area.

Exemption for foreign companies on income from procuring data center services

Income arising in the hands of a foreign company from procuring data center services from a specified data center owned and operated by an Indian company and set up under an approved scheme is proposed to be tax exempt up to 31 March 2047. This exemption applies when all sales the foreign company makes to users located in India are through a reseller Indian company.

Unified framework for assessment and penalty proceedings

Assessment and penalty proceedings would now be integrated through a common order to reduce multiplicity and improve ease of doing business.

No interest would apply on the penalty amount during the appeal period before the first appellate authority, regardless of the outcome of the appeal.

Key indirect tax proposals

The place-of-supply provisions under the Integrated Goods and Services Tax (GST) Act for intermediary services currently based on the location of the supplier are proposed to be omitted. Post omission, the place of supply for such services will be determined based on the general rule of location of recipient of the service.

In case of post-sale discount, the condition requiring linking the discount with the agreement and the original invoice is proposed to be omitted. Such discount would be deductible from sale value, subject to a credit note being issued and the corresponding input tax credit being reversed by the recipient.

A provisional GST refund would be available equivalent to 90% of the claimed amount for inverted tax refunds filed (i.e. the rate of tax on inputs is higher than the rate of tax on the output).

Upon formation of the announced National Appellate Authority for Advance Rulings (NAAR), the Government will be empowered to notify any existing authority (including a Tribunal) to hear appeals arising from conflicting advance rulings given by the Appellate Authorities of two or more States or Union Territories.

The validity of an advance ruling obtained under Customs law would be extended from three years to five years, unless there is a change in law or facts.

A Customs Integrated System is proposed to be rolled out in two years as a single, integrated and scalable platform for all the customs processes.

New Baggage Rules under Customs are being introduced to (1) enhance duty-free allowance and (2) remove monetary caps on jewelry allowance, for specified passengers.

Implications

The Union Budget 2026 seeks to accelerate and sustain economic growth, by enhancing competitiveness and building resilience to the global uncertainty.

A focused push to scale up manufacturing in key sectors can strengthen India's domestic supply chains and deepen its integration with global value chains. Overall, the Budget paves the way for India to remain deeply integrated with global markets, become competitive and attract stable long-term investment.