UNION BUDGET 2026-2027

HIGHLIGHTS OF THE FINANCE BILL, 2026

The Finance Minister Smt. Nirmala Sitharaman, delivered her ninth consecutive Union Budget on 1st February, 2026; continuing efforts of Government to make India Atmanirbhar and Viksit Bharat in the face of global uncertainties/ disruptions by focussing on continuous, adaptive, and forward-looking structural reforms, revival of domestic consumption without compromising fiscal prudence, employment creation, innovation, MSME’s, ease of doing business, make in India and make for world, trusting taxpayers and simplifying regulation, to name a few.

The Budget has targeted efforts to boost strategic manufacturing and further develop technology sectors including AI, infrastructure development, bring stability and long term reforms, skilling and job creation, education, ease of doing business etc.

The taxation proposals are aimed at ensuring tax certainty, simplification, reducing litigation, decriminalization of offences, use of technology and AI for better governance, widening tax base and enhancing revenues to fund the development and welfare schemes of the Government.

The approach of the Government in being sensitive and responsive to concerns of various stakeholders can be seen from the Budget proposals and it appears that principle of ‘trust first and scrutinize later’ is being followed; which would go a long way in reforming the taxation framework and improve ease of doing business in India.

As in the earlier years, we have made humble attempt to lucidly present in the following paragraphs; our analysis of some of the salient tax proposals, to enable you to grasp them easily.

As of date, these are proposals only, and if adopted by the Parliament and passed as Finance Act; will come into force for and from Tax Year* 2026-2027, unless specifically provided otherwise.

* The Income Tax Act, 2025 has done away with the concept of Assessment Year, which was used in Income Tax Act, 1961 and introduced definition of Tax Year, which corresponds to the relevant Financial Year.

I. DIRECT TAXES

Amendments proposed under the Income-tax Act, 2025 (hereafter referred to as “the Act”) and the Income Tax Act, 1961 (‘the old Act’).

1. Rates of Tax-No change:

The Finance Minister has not proposed any change in the tax rates basis the last year; except reduction in rate of Minimum Alternate Tax from 15% to 14% (excluding Surcharge and Cess) for companies opting to continue under the Old Regime.

2. Overhaul of Minimum Alternate Tax (MAT)-Nudging taxpayers to move to New Regime:

With the objective of encouraging corporate taxpayers to shift to the New Regime of taxation, the following changes are proposed in MAT provisions:

• Tax paid under MAT (under Old Regime) to be treated as final tax and no new MAT Credit available for set-off in future for domestic and foreign companies.
• Rate of Tax under MAT to be reduced to 14% as against existing 15% (excluding Surcharge and Cess).
• Existing MAT Credit to be allowed for set-off only if domestic company opts for New Regime, else the same would lapse.
• MAT Credit utilization by domestic company opting into New Regime allowed to the extent of 1/4th of the tax liability of the concerned tax year, and balance to be carried forward and available for set-off upto 15 years from first available date.
• MAT Credit utilization by foreign company to be allowed as done hitherto i.e. to the extent of the difference between the Normal tax and MAT for the relevant tax year.
• Exemption from MAT provisions extended Two additional businesses of non-residents being operation of cruise ships and providing services or technology for setting up or supporting electronics manufacturing facilities in India for resident companies.

The amendment shall take effect from 1st April, 2026 and shall apply in relation to the Tax Year 2026-27 and subsequent tax years.

3. Extension of Tax Holiday and reduction of tax rate for subsequent period for units located in International Financial Services Centre (IFSC):

To enhance competitiveness, further promote and incentivize operations from units set-up in IFSC, the following further incentives are proposed:

 Extension of Tax Holiday period, as set-out in table below:

Particulars Existing Proposed
Unit of IFSC 10 out of 15 consecutive years 20 out of 25 consecutive years
Offshore Banking Unit 10 consecutive years 20 consecutive years

 The units setup on or after 1st April, 2026 should not be by splitting up, reconstruction, reorganization, or transfer of an existing business in India.
 Post Tax Holiday period, income to be taxed @ concessional tax rate of 15% instead of present 22% or 25% or 30% (excluding Surcharge and Cess), as applicable.
 Further, it is proposed to rationalize certain terms with respect to Treasury centers in IFSC.
4. Employee’s contribution to a Fund, to be allowed as deduction in hands of employer if paid upto due date of Income tax Return-welcome:

With the objective of aligning the deduction timeline in respect of employees contribution with that applicable to employer contributions to any Fund, it is proposed that deduction for employee’s contribution towards PF, ESI, etc. shall be allowed to the employer if paid upto the due date of filing return of income of the relevant tax year.

5. Changes proposed in respect to TDS/TCS provisions and related compliances:

The Finance Minister has proposed following amendments with respect to TDS/TCS compliances:

 Supply of manpower to get covered in definition of ‘work’ and hence TDS applicable thereon would be 1% in respect of Individual/HUF suppliers and or 2% for other payees.
 TDS not applicable on Interest on compensation awarded by Motor Accidents Claims Tribunal to an individual.
 No TDS to be done from Interest income paid to co-operative society engaged in the business of banking.
 Requirement of obtaining TAN by a resident Individual/ HUF done away with in case of purchase of immovable property from non-resident.
 Guidelines issued for removal of difficulties in the TDS/TCS implementation to be binding on Income-tax authorities as well as persons responsible for deducting or collecting tax.
 To ease compliance burden for small taxpayers, a facility would be provided to the payee to file the application for issuance of lower / Nil deduction certificate electronically before the prescribed tax authority, subject to prescribed conditions.

 To reduce burden on investors and simplify the procedure to submit separate declarations to each payer for no TDS on income like Dividends, Interest on securities etc.; investors holding listed units or securities with depository may now file the declaration directly with the depository, which in turn shall share the declaration with the relevant payers (effective from 1st April, 2027)

 Rationalization of TCS rates:

TCS rates on certain transactions are proposed to be modified as under (effective from 1st April, 2026):

Sr. No Nature of receipt Current Rate Proposed Rate
1. Sale of alcoholic liquor for human consumption 1%. 2%.
2. Sale of tendu leaves 5%. 2%.
3. Sale of scrap 1%. 2%.
4. Sale of minerals, being coal or lignite or iron ore 1%. 2%.
5. Remittance under the Liberalised Remittance Scheme (‘LRS’) exceeding Rs.10 Lakh
(a) for education or medical treatment;
(b) for other purposes.

5%

20%

2%

20%
6. Sale of Overseas Tour Package which includes expenses for travel/ hotel stay/ boarding or lodging/ any such similar expenditure.
(a) Up to Rs.10 Lakh;
(b) Above Rs.10 Lakh

5%
20%

2%
2%

6. Changes in Transfer Pricing, Safe Harbour and Advance Pricing Agreement related provisions:

 Rationalization of Safe Harbour Rules for IT Sector

In order to support the IT sector as India’s growth engine and to provide tax certainty, the Finance Minister has proposed changes in Safe Harbour Regime (as per the Budget Speech, detailed Rules are awaited) which are summarized below:

• Existing categories of transactions such as software development services, IT enabled services, knowledge process outsourcing services and contract R&D services for software development to be clubbed into a single category called ‘IT services’ with a uniform margin of 15.5% reduced from earlier range of 17% to 24%.
• Threshold for availing Safe Harbor for IT services to be enhanced substantially from Rs.300 Crores to Rs.2,000 Crores, which would cover a larger set of taxpayers within the framework.
• Approval of Safe Harbour for IT services will now be processed through an automated rule-based mechanism, eliminating tax officer involvement.
• Safe Harbour can be opted for a period of 5 years.

 To attract investments in Data Centre and promote Artificial Intelligence Data Centre framework in India, the benefit of Safe Harbour is proposed to be extended to data Centre service providers with a margin of 15% on cost.

 Safe Harbor will also be available to non-residents performing Electronic component warehousing at a profit margin of 2% of the invoice value.

 Advance Pricing Agreements (APA):

• In the Budget Speech, the Finance Minister mentioned about fast tracking of Unilateral APA process for IT service companies, with a target timeline of Two years for conclusion, which is extendable by additional six months at the Taxpayer’s request.

• The facility of filing modified returns which is currently available only to the entity entering into APA is now being extended to Associated Entities whose income and tax liability is correspondingly modified.

 Time limit for passage of TP orders:

To resolve the ambiguity regarding time limit for passage of TP orders-whether to include ‘date of limitation’ in computation of period 60 days or not, due to different interpretation by Courts; it has now been retrospectively clarified that ‘date of limitation’ has to be included in the computation of sixty days. Also, the concept of days has substituted by month for computing date of limitation. Accordingly, the due dates for passing TP assessment order would be as under:

Period of Limitation expiring on Due Date for passing TP Order under the old Act (based on days) Due Date for passing TP Order under the Act (based on month)
31st March (non-leap year) 30th January 31st January
31st March (leap year) 31st January
31st December 1st November 31st October

(This clarification would come into force with retrospective effect from 1st June, 2007 and same is proposed both under the Act as well as old Act).

 Clarification of time limits for passage of Final Assessment Order in DRP cases:

In order to put to rest the ongoing litigation due to divergent views of Courts, it is clarified that the general time-barring period of limitation applies only to issuance of the Draft Assessment Order, and not for passing final assessment order post DRP proceedings. Once the matter proceeds to the DRP, for finalization of assessments, the specific timelines prescribed for DRP cases will be applicable for passage of Final Assessment Order.

The above amendments will take effect retrospectively from 1st April, 2009 and for search cases from 1st October, 2009. This clarity is proposed in the Act as well as old Act.

7. Return filing provisions rationalized:

With the objective of further facilitating the taxpayers and reduce grievances, the following changes are proposed with respect to filing of return of income:

 Extending the Time limit for filing of return of income for certain taxpayers:

Presently, the due date for filing return of income in case of non-audit, non-corporate business income cases (including partners of firms) as well as trusts is 31st July. This is proposed to be extended to 31st August.

 Extension of time limit for filing Revised Return:

Effective from 1st March, 2026 the time limit for filing revised returns is proposed to be extended from present 9 months to 12 months, from the end of the relevant Tax Year.

Further, it is proposed to levy additional Fee of Rs.1,000/- for filing revised return of income beyond 9 months in cases where Total Income is upto Rs.5 Lakhs; and Fee of Rs.5,000/- in other cases.

 Expanding scope for filing Updated Return:

It is proposed to expand the scope for filing an Updated return, by allowing filing of the Updated return in the following cases which was hitherto not allowed:
• Where the loss claimed in original return of income is reduced in the Updated return; and
• Where re-assessment notice is issued, subject to the same being filed within the time specified in the reassessment notice and on payment of an enhanced additional tax (an incremental 10% over and above additional tax payable in case of updated returns). Further, it is provided that no penalty for under reporting/misreporting shall be levied on the additional income disclosed through an Updated return.

8. Rationalization of taxation on Share Buyback:

• The Finance Minister has now proposed to treat the proceeds on buyback of shares as Capital Gains, which are currently taxed as Dividend income.
• The below table summarizes effective rate of Capital Gains in the hands of various categories of shareholders:
Category Gains Promoter Non-Promoter
Domestic Company Other than Domestic Company
Listed shares STCG 20% + 2%* = 22% 20% + 10%* = 30% 20%
Other securities STCG Applicable rates
Listed/Unlisted securities LTCG 12.50% + 9.5%* = 22% 12.50% + 17.50%* = 30% 12.50%

*Additional Tax (For domestic companies it is presumed that New Regime is opted)

• Definition of term ‘Promoter’ has been introduced in the Act.
These amendments shall take effect from 1st April, 2026 and shall apply in relation to the Tax Year 2026-27 and subsequent Tax Years.

9. Changes related to Black Money Act:

 Foreign Assets of Small Taxpayers – Disclosure Scheme 2026 (FAST-DS 2026):

With the objective of facilitating voluntary disclosure and compliance by small taxpayers with respect to undisclosed foreign assets/income, The Finance Minister has proposed to introduce FAST-DS-2026 (effective date to be notified by Government) which provides a one-time opportunity to eligible taxpayers to regularize legacy lapses; on payment of specified amount (see table below) and obtain immunity from penalty and prosecution under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (hereinafter referred to as ‘BMA’).

Condition Amount payable
Undisclosed foreign
assets or foreign income Aggregate of undisclosed income and asset value up to Rs.1 Crore Aggregate of Tax @30% on (undisclosed foreign income and FMV as on 31st March 2026 of undisclosed foreign asset) + Penalty being 100% of tax as above
Disclosed foreign income but failure to report foreign assets Aggregate undisclosed asset up to Rs.5 Crores Fee of Rs.1 Lakh

The benefit of FAST-DS-2026 would not be available in cases where proceedings are pending under PMLA or concluded proceedings under BMA.

10. Changes related to Assessment/Re-assessment proceedings:
 Penalty for under-reporting/ misreporting of income to be levied along with Assessment Order-Merging of Assessment and Penalty order:

In order to reduce multiplicity of proceedings and uncertainty arising from prolonged appellate processes, it is proposed to have a common order covering both assessment and penalty, if applicable, which presently are Two separate proceedings; wherein applicability of Penalty, if any, depends on outcome of quantum appeal which is based on Assessment Order.

Further, it is also proposed that no interest shall be levied on the penalty amount for the period of appeal before the first appellate authority, regardless of the appeal outcome.

 Reduction of Pre-Deposit for obtaining Stay of Demand:

In the Budget Speech it was mentioned that henceforth stay of Demand would be granted on payment of 10% of the quantum Demand (i.e. other than penalty demand) which hitherto is 20%.

 Clarification on validity of assessments despite technical defects in DIN:

Considering divergent rulings of various High Courts, and with the object of reducing overall litigation and to bring certainty; it is clarified retrospectively that an assessment shall not be rendered invalid solely on account of any mistake, defect, or omission in quoting the DIN, where the assessment order is otherwise referenced by a computer-generated DIN.

(This amendment will take effect retrospectively from 1st October, 2019.)

 Modification in time limit for completion of Block Assessments:

It is proposed that Block assessment is to be completed within 18 months from the end of quarter in which search is initiated / requisition is made as against the current timeline of 12 months from the end of the quarter in which the last authorizations for search was executed.

 Rationalizing the period of block assessment in case of other person:

In the case of non-searched persons, the Block period is proposed to be restricted to the search period and the immediately preceding year, where the undisclosed income is restricted to such period and to a single tax year where the undisclosed income pertains to a single tax year.

 Clarification on JAO v. FAO controversy with respect to initiation of reassessment proceedings:

In view of differing judgments of Courts on the issue as to who is Assessing Officer for the purpose of re-assessment i.e. Jurisdictional Assessing Officer (‘JAO’) or Faceless Assessing Officer (‘FAO’) and to remove doubts, it is retrospectively clarified that reassessment proceedings shall be initiated by a non-faceless AO i.e. JAO, thereby overriding various judicial precedents which have held otherwise.

(This amendment will take effect retrospectively from 1st April, 2021)

11. Changes related to Penalties:

 Conversion of specified compliance penalties into a Fee and rationalization of other penalties:

Nature of Penalty Existing Penalty Proposed Fee/Penalty
Failure to get accounts audited Lower of 0.5% of total sales/turnover/gross receipts in business or profession for such tax year, or Rs,150,000/-. Rs.75,000/- for a delay up to 1 month and Rs.150,000/- thereafter
Failure to furnish Transfer Pricing audit report Rs.1,00,000. Rs.50,000/- for a delay up to 1 month and Rs.1,00,000/- thereafter.
Failure to furnish Statement of Financial Transaction Rs.500/- per day Rs.200/- per day, max. up to Rs.1,00,000/-
Failure to furnish SFT (after issuance of notice) Rs.1,000/- per day Penalty Rs.1,000/- per day, subject to a max. upto Rs.1,00,000
Failure to furnish information required by tax authorities (in case of a survey) Rs.1,000/- Penalty Rs.25,000/-

 New Penalty introduced for non-furnishing of statement/ or furnishing inaccurate information on transaction of crypto asset:

The Penalty of Rs.200/- per day for non-furnishing of statement on transaction of crypto asset and Penalty of Rs.50,000/- for furnishing inaccurate particulars is proposed.

12. Change in Taxation/ Penalty on Unexplained Credit, Unexplained Investment, Unexplained Asset, Unexplained Expenditure and amount borrowed or repaid through negotiable instrument, hundi, etc.:

The Finance Minister has proposed following changes with respect to taxation of Unexplained Credits/Investments/Money/Expenses and Penalty thereon:

• Rate of Basic Tax reduced to 30% as against existing 60%.
• The penalty applicable on aforesaid income would be for misreporting i.e. at the rate of 200% of the tax payable on such income; as against the existing 10% penalty.
• Due to above changes, there would be higher cash outflow despite the reduction in the base tax rate.

13. Expanding the scope of Immunity from penalty or prosecution:
It is proposed to extend the benefit of Immunity from Penalty, Prosecution provided the Tax and Interest as per the Assessment order is paid within 30 days and no appeal is filed against such Order to following cases, which are presently not covered:

• Cases of Misreporting of income, if additional Income-tax of 100% of the amount of tax payable on misreported income has been paid within the period specified in the notice of demand. (Applicable from 1/3/2026 Assessment year 2026-27 or any earlier Assessment Years.)

• Cases of Misreporting of income involving unexplained credits, investments, assets, expenditure and hundi etc. if additional Income-tax of 120% of the amount of tax payable on misreported income has been paid within the period specified in the notice of demand.

No waiver or immunity shall be granted if any proceeding has been initiated under Chapter XXII for prosecution proceedings.

14. Rationalization of prosecution proceedings:

With the object of decriminalization of certain compliances under the Act as well as the old Act, the Finance Minister has relaxed the provisions by introducing simplified prosecution regime, reducing criminal exposure for lower-value, procedural defaults, making prosecution regime proportionate to offence committed, while retaining deterrence for serious offences. The following are major principles followed:
a) Nature of punishment is changed from rigorous imprisonment to simple imprisonment.
b) Capping of maximum imprisonment at 2 years (and 3 years for repeat offences).
c) Punishment for offences is linked to amount involved(graded):
1. Above 50 Lakhs – imprisonment up to 2 years, or fine, or both;
2. Rs.10 Lakhs to Rs.50 Lakhs – Imprisonment up to 6 months, or fine, or both;
3. Below Rs.10 Lakhs – Only fine (no imprisonment).
d) Permit levy of fines in lieu of or in addition to imprisonment.
e) Certain offences are fully decriminalized
f) Applicable from 1/3/2026 Assessment year 2026-27

15. No expenses deductible against Dividend and income from Mutual Funds:

The Finance Minister has proposed that no deduction of any expenditure incurred will be allowed with respect to Dividend and income from units of Mutual Funds, which deduction is currently capped to 20% of such income.

16. Clarifications with respect to Income from House Property:

The cap of Interest deduction Rs.2 Lakhs per tax year for self-occupied house property acquired through borrowed funds to include pre-construction period interest as well.

17. Changes related to registered Non-Profit Organisations (NPO’s):

The following welcome changes are proposed with respect to NPO’s:

• Permitting to file Belated Return of Income;
• Commercial activities undertaken by registered NPO’s engaged in the advancement of any other object of general public utility will not be treated as a specified violation leading to cancellation
of registration and will instead be aligned with the framework under section the old Act.
• Clarity provided for a tax-neutral framework for merger of registered NPOs having the same or similar objects, subject to fulfillment of prescribed conditions.

18. Others:

 Exemption from Capital Gains on redemption of Sovereign Gold Bonds (‘SGB’) to be granted only to original individual subscribers if the SGB are subscribed and held continuously till redemption. Also, it is clarified that the aforesaid exemption would apply to all series of SGB schemes.

 The prosecution provisions u/s.49 and 50 would not apply in respect of foreign assets (other than immovable property), where the aggregate value of such asset or assets do not exceed Rs.20 Lakhs. (This would be applicable from 1st October, 2024)

 No taxation on income received by individual/HUF on account of compulsory acquisition of land under Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013.

 Exemption provided on Interest on compensation awarded by Motor Accident Claims Tribunal to an individual or his/her legal heir under the Motor Vehicles Act, 1988.

 Foreign income of Individual (being non-resident for past 5 years) to be exempt from tax for a period of five consecutive years from the first tax year during which he visits India for rendering services in connection with Government notified scheme.

 Exemption granted to income of a notified foreign company (up to tax year ending on March 31, 2047), from procuring data centre services from a specified data centre (set up under an approved scheme and notified by MEITY and owned and operated by an Indian company), subject to fulfillment of certain conditions.

 Exemption granted to Income of foreign companies (up to tax year 2030-2031) from providing capital goods, equipment or tooling to Indian contract manufacturers engaged in electronic goods manufacturing in India, subject to certain conditions.

II. INDIRECT TAXES

Key amendments proposed in respect to Goods and Service Tax are stated hereunder (to be effective from date to be notified unless otherwise specified):
 Removing link with pre-exiting agreement and invoice, for adjustment of post-sale discounts from the supply value. Such adjustment is subject to ITC reversal by the recipient.
 Benefit of provisional refunds to exporters has been extended for refund arising due to Inverted Duty Structure.
 Requirement of minimum refund of Rs.1,000/- removed for export refunds with GST payment.
 Existing authorities (incl. tribunals) empowered to hear appeals pending constitution of National Appellate Authority for Advance Rulings.
 Place of supply for Intermediary services to be based on location of recipient as against currently based on location of supplier.

Posted on: February 6th, 2026