India's Union Budget for the fiscal year 2026-27 has been unveiled as a forward-looking blueprint that aims to accelerate the nation's journey toward becoming a developed economy, or Viksit Bharat. With a strong emphasis on enhancing productivity and competitiveness, the budget outlines three key responsibilities: fostering economic growth, fulfilling the aspirations of the people, and aligning with the vision of Sabka Sath Sabka Vikas.
Key Direct Tax Proposals in Budget 2026-27
Contrary to expectations of a stable transition with minimal changes, the Finance Bill 2027 introduces significant amendments to both the old and new Income Tax Law. These proposals are designed to streamline taxation, promote investment, and reduce compliance burdens.
Buyback Taxation Revised
Effective from April 1, 2026, the taxation of buyback proceeds will undergo a major shift. Previously treated as dividends in the hands of shareholders, these proceeds will now be taxed as capital gains. For retail investors, the classification of gains as long-term or short-term will depend on the holding period, providing clarity and potentially altering investment strategies.
Differentiated Tax Rates for Promoters
The budget proposes a differentiated tax rate structure for promoters. Domestic companies acting as promoters will face an effective tax liability of 22%, while all other promoters will be subject to a 30% rate. This move aims to incentivize domestic investment and corporate governance.
Tax Amendments to Boost Digital Agenda
To strengthen India's position in the global digital infrastructure map, the budget includes provisions for a tax holiday. Foreign companies procuring data centre services from specified Indian data centres will benefit, provided that services to Indian users are routed through an Indian reseller entity. This is expected to attract global investments in data centre infrastructure.
Additionally, Indian entities providing IT services such as data-centre services, software development, contract R&D, IT-enabled services, and knowledge process outsourcing to related foreign companies will enjoy safe harbour margins. This measure is likely to reduce transfer-pricing disputes and enhance compliance certainty.
Minimum Alternate Taxation (MAT) Adjustments
For Indian corporate taxpayers under the old regime, existing MAT credits up to March 31, 2026, can now be set off only in the new tax regime, limited to 25% of the tax liability. Furthermore, the MAT rate has been reduced from 15% to 14%, excluding surcharge and cess. This reduction may encourage companies to reconsider their tax regimes and optimize deductions.
Compliance and Procedural Relaxations
The budget introduces several easing measures for TDS and TCS compliance, aimed at simplifying processes for taxpayers and businesses.
- From October 1, 2026, resident buyers (Individuals and HUFs) purchasing immovable property from non-residents will no longer need a TAN for TDS compliance; a PAN will suffice.
- TCS rates have been adjusted: increased from 1% to 2% for alcoholic liquor, scrap, and minerals like coal, lignite, or iron ore, while decreased from 5% to 2% for tendu leaves.
- For the Liberalised Remittance Scheme (LRS), TCS on medical treatment is reduced from 5%/20% to 2%/20%, and on overseas tour programs, it is revised to 2% from 5%/20%.
Rationalization of Penalty and Prosecution
To foster a more taxpayer-friendly environment, the budget expands immunity provisions and decriminalizes certain tax offences.
- Taxpayers can obtain immunity by paying an additional tax of 100% in misreporting cases and 120% for unexplained income.
- A unified assessment-cum-penalty order mechanism is introduced to avoid repetitive proceedings, with penalty-related interest suspended during appeals.
- Minor and technical defaults, such as failure to get accounts audited or furnish statements, will now attract fee-based penalties instead of criminal liability, provided the TDS amount does not exceed ₹10 lakh in specific cases like lottery payments.
Key Indirect Tax Proposals
Budget 2026-27 places a strong emphasis on Customs reforms and the implementation of GST 2.0, with a focus on rate calibration across critical sectors.
The core themes under Customs include adjustments for life sciences, critical minerals, electronics, electric vehicles (EVs), and battery energy storage. Procedural benefits are also introduced to enhance ease of doing business.
- Deferred duty payment for Authorized Economic Operators (AEOs) in Tier-2 and Tier-3 is extended to monthly from 15 days, with similar benefits for manufacturer importers until March 2028.
- Warehoused goods can now be moved between warehouses without prior officer permission, subject to conditions.
- A one-time facilitative measure allows eligible SEZ manufacturing units to sell goods in the Domestic Tariff Area (DTA) under specified conditions.
- The place of supply for intermediary services is defined as the recipient's location, granting export status to these services.
- Conditions for deducting post-sales discounts from taxable value are relaxed, with requirements for linkage to agreements and specific invoices removed, subject to credit note issuance and input tax credit reversal.
Overall, the Union Budget 2026-27, with its enhanced capital outlay and next-generation manufacturing missions, sets a robust foundation for a resilient and innovation-driven economy. While some critics, like West Bengal Chief Minister Mamata Banerjee, have labeled it a 'Humpty Dumpty' budget with little for the common man, the government's focus on simplified taxation and digital infrastructure aims to propel India toward sustained growth and global competitiveness.
