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February 03, 2026
The Union Budget 2026-27 is more of a systems document than a political one. The government has made it a point to not have any “headline tax cuts” or “aggressive giveaways.” The focus is on building credibility, predictability, and capital formation. With a total expenditure of 53.5 lakh crore Rs. and capital spending of 12.2 lakh crore Rs. , the budget again reiterates that the focus will be on growth through infrastructure, logistics, and manufacturing, and not on fiscal expansion. The fiscal deficit target of 4.3 percent of GDP again reinforces that stability is non-negotiable. This is a budget that wants the markets to trust its vision and not get emotional about it.
Corporate tax simplification and MAT rationalization
On the corporate side, the reduction in Minimum Alternate Tax from 15 percent to 14 percent and making it a final tax liability in most cases will simplify compliance and minimize disputes.
The exemption of non-residents from MAT is a major positive signal for ease of doing business and minimizing litigation.
These measures show that there is a move away from complex credit mechanisms to cleaner and more predictable tax structures, which are much more valuable to global investors than the rate itself.
Changes in Deductions and Business-Related Provisions
Regarding the deductions, the Budget offers both relief and simplification. The date for depositing contributions of employees to provident funds and ESI has been extended to the date of filing the income tax return.
On the other hand, the interest expenditure incurred for earning income in the form of dividend or units has been disallowed as a deduction. This is to avoid abuse.
Cooperative societies will also continue to receive tax support in terms of enhanced deductions and expanded activities that are eligible for tax deductions.
Tax Incentives for Global Businesses and IFSC Units
The units operating in the IFSCs are eligible for a 100% tax deduction for 20 years out of a total of 25 years, which provides more flexibility in tax planning.
In addition, the income generated after the end of the tax holiday period will be liable to tax at a concessional rate of 15%, which provides certainty after the tax holiday.
The Budget also provides certainty in the treatment of income from fund management, leasing, treasury business, and certain cross-border financial services.
Buyback of Shares: From Dividend Taxation to Capital Gains Taxation
Prior to the Budget, buybacks were liable to dividend taxation in the hands of the shareholders. However, from 1 April 2026 onwards, the buyback consideration will be liable to capital gains taxation.
Non-promoter shareholders will be liable to tax at the applicable capital gains tax rates. In contrast, promoter shareholders will be subject to an additional tax on capital gains, resulting in an effective tax rate of 22% for domestic corporate promoters and 30% for other promoter shareholders.
TDS and TCS
The TDS on manpower services is now rationalized at 1% or 2%, with an automated system that allows small taxpayers to get a lower or nil deduction, thus removing the problem of over-withholding.
Investors can now file Form 15G/15H for multiple holdings through depositories, thus simplifying the process.
Filing timelines designed to reduce friction
Although the deadline for filing ITR-1 and ITR-2 remains the same at 31st July. The Budget has extended relief to non-audit business cases and trusts, allowing them to file returns up to 31st August. A major taxpayer-friendly reform is the extension of the deadline for filing belated and revised returns up to 31st March of the assessment year, instead of the earlier December cut-off. This provides genuine taxpayers with additional time to correct errors or incorporate late-received information.
Most notably, the scope of updated returns has been expanded. Taxpayers are now permitted to file an updated return even in cases where loss is reduced or where a reassessment notice has been issued, which was earlier not allowed.
However, where an updated return is filed pursuant to a reassessment notice, an additional tax of 10% over and above the applicable tax and interest will be payable. This marks a significant shift towards encouraging voluntary compliance, even at a later stage, by allowing corrections post-reassessment at a defined cost.
Tax on unexplained income
The Budget has also rationalized the harsh taxation regime on unexplained cash credits, investments, assets, expenditure and negotiable instruments etc. Such income, which was earlier taxed at 60% plus a 10% penalty, will now be taxed at a reduced rate of 30%, with the specific 10% penalty being removed.
However, misreporting of such income will continue to attract a penalty of 200%, unless the taxpayer opts for immunity by paying 120% of the tax payable on such income. This change balances deterrence with an opportunity for clean disclosure and settlement.
Personal Income tax policy as a confidence lever
In the sphere of personal income taxation, the government has consciously chosen continuity over radical change, using stability as a tool to reinforce taxpayer confidence. A significant relief measure is the effective exemption of income up to 12 lakh Rs. under the new tax regime through an enhanced tax rebate. For salaried taxpayers, this benefit extends further to 12.75 lakh Rs. after accounting for the standard deduction.
The forthcoming Income Tax Act, 2025, scheduled to take effect from 1 April 2026, signals a structural reset of India’s direct tax framework. With simplified tax provisions and return forms expected to be notified well in advance, taxpayers will have sufficient lead time to understand and transition into the new regime. This reform has the potential to mark a paradigm shift from complex, litigation-driven drafting to a system anchored in clarity, certainty, and trust-based compliance. The overarching objective is to make tax laws more readable, predictable, and less adversarial, particularly for individuals and small businesses.
From a global mobility and compliance standpoint, the reduction of TCS to 2% on overseas tours and payments for foreign education or medical treatment offers immediate cash-flow relief to residents. Complementing this, a special six-month window for disclosure of foreign assets has been introduced to encourage voluntary compliance. This window covers two categories of taxpayers:
· Category A: Undisclosed income or assets up to ?1 crore; and
· Category B: Taxpayers who had disclosed foreign income and paid taxes but failed to report foreign assets up to ?5 crore.
In cross-border real estate transactions, compliance has been further streamlined by linking TDS on property purchases from non-residents to the buyer’s PAN, resolving a long-standing procedural bottleneck.
Meanwhile, changes in the capital markets reflect a calibrated policy stance. The increase in Securities Transaction Tax (STT) with rates on futures raised from 0.02% to 0.05% and on options (premium and exercise) increased to 0.15%, underscores the government’s intent to discourage excessive short-term speculation. The clear message is that Indian capital markets are envisioned as platforms for long-term capital allocation rather than arenas for high-frequency trading dominance.
Framework for Advance Ruling: Defined Timelines and Extended Validity Period
The Union Budget 2026 further enhances the advance ruling system by providing defined timelines for the disposal of applications, thereby overcoming the limitations of the advance ruling system due to delays.
In addition, the Validity of advance ruling to be extended from three years to five years, unless there is a change in law or facts. enabling taxpayers to benefit from advance rulings for a longer period of time without having to make repeated applications.
The above measures further improve the advance ruling system as a means of providing taxpayers with advance tax certainty, especially in situations involving international transactions, classification of indirect taxes, and complex factual scenarios.
Transfer Pricing: Rationalization of Safe Harbour and Resolution Timelines
The Union Budget 2026 introduces targeted structural refinements to the transfer pricing framework with a clear focus on certainty and ease of compliance. The Safe Harbour Regime has been rationalized and expanded for select industries through higher transaction value thresholds and harmonized margins, reducing the need for extensive benchmarking and documentation in low-risk cases.
Further, emphasis has been placed on speedy dispute resolution, particularly through the time-bound completion of unilateral Advance Pricing Agreements (APAs) for certain service sectors. In a taxpayer-friendly move, non-resident taxpayers are now permitted to file revised returns pursuant to APA outcomes, enabling corresponding adjustments and refunds of taxes already deducted or paid.
Overall, these measures reflect a calibrated shift from a broad-brush compliance model to a risk-based transfer pricing approach, easing the burden on routine transactions while preserving safeguards against base erosion in higher-risk cases.
Indirect Taxation
GST and Custom Duties
Under GST, key amendments have been proposed to simplify valuation and align the framework with commercial realities. The place of supply for intermediary services is proposed to be shifted to the location of the service recipient, addressing long-standing interpretational disputes and reducing litigation.
Further, the requirement that discounts must be pre-agreed and linked to a specific invoice is proposed to be removed. Going forward, discounts will be allowed as a deduction from taxable value provided a GST credit note is issued and the recipient reverses the corresponding input tax credit, thereby offering greater flexibility in commercial pricing arrangements.
On the customs front, duties have been selectively reduced or restructured to correct inverted duty structures, particularly across manufacturing, energy, electronics, and logistics sectors. These changes are calibrated to support domestic value addition while ensuring that export competitiveness is not adversely impacted.
Infrastructure as the backbone of growth execution
Spending on infrastructure remains the transmission channel through which growth is expected to emerge. High-speed rail routes, new freight routes, inland waterway projects, and large urban development budgets are not standalone announcements. They are all part of a larger strategy to compress logistics costs, enhance reliability, and unlock productivity. The emphasis on economic clusters in cities other than the top ones indicates a deliberate strategy to spread growth evenly. This is where public capex is expected to crowd in private investment, especially in manufacturing, construction, logistics, and urban sectors.
Manufacturing policy moves from scale to substance
The story of manufacturing in Budget 2026-27 is a clear move towards resilience and depth. The extension of incentives in semiconductor mission 2.0, biopharma support, and container manufacturing support are all designed to enhance the ecosystem rather than just increase assembly capacity.
The idea is to decrease dependence on strategic imports and enhance the overall position in the global value chain. This is a high gestation period play with high execution risk, but also high reward if executed. Markets will eventually assess this based on timelines, quality delivery, and ecosystem development.
Rationalization of Penalties and Prosecution Provisions
The Union Budget introduces a rational and proportionate approach to penalties and prosecution by decriminalizing minor and technical tax defaults and replacing prosecution with monetary fines. Penalties have largely been converted into fixed fees, small foreign assets have been insulated from harsh consequences, and the tax rate on unexplained income has been moderated. Taken together, these measures signal a clear shift from a fear-based enforcement model to one that priorities correction, certainty, and voluntary compliance, while preserving strict deterrence against willful non-compliance.
The real takeaway from Budget 2026
The Union Budget 2026-27 can be considered as a control and commit budget. It commits resources to infrastructure and manufacturing, commits stability to taxpayers, and commits the system to more controlled and technology-based compliance. At the same time, it controls speculative activity, compliance leakage, and fiscal slippage. For the long-term investor, the clean filter, and the business that is aligned with the domestic growth themes, the environment becomes more predictable and favorable. For those who are dependent on churn, opacity, and regulatory arbitrage, the cost of doing business in the formal economy is clearly going up. This budget is not intended to thrill the markets overnight. It is intended to hold together in the next decade, and that is exactly where its strength lies.
FAQs | Indian Union Budget 2026–27
