India’s Union Budget 2026–27 delivers major tax and transfer pricing reforms for the IT sector, including simplified service classifications, expanded safe harbour thresholds, and faster dispute resolution, aimed at boosting certainty and competitiveness for global technology businesses operating in India.
India’s Minister of Finance, Nirmala Sitharaman, delivered the Union Budget for 2026-27 on 1 February 2026. The proposals aim to relax tax rules for multinational companies, which are expected to bring greater certainty to cross-border transactions. The budget also includes reforms to the safe harbour regime, under which Indian tax authorities accept the arm’s-length pricing of specified transfer pricing transactions declared by taxpayers in designated sectors.
The proposals focus on simplifying taxation through the New Income Tax Act 2025, which is set to take effect on 1 April 2026.
These include boosting strategic industries with major investments in biopharma and semiconductors; expanding infrastructure through new high-speed rail corridors and higher public spending; and supporting domestic manufacturing through targeted customs duty exemptions.
Corporate tax and transfer pricing changes
Minimum alternate tax (MAT)
- Minimum alternate tax: The Minimum alternate tax (MAT) rate is being reduced from 15% to 14%. More importantly, it is now being treated as a “final tax,” meaning no further credit can be claimed after 1 April 2026. To encourage the transition to the new tax regime, companies can set off existing MAT credits up to one-fourth (25%) of their tax liability.
- Buyback tax: Income from share buybacks now taxed as capital gains for shareholders; additional buyback tax ensures effective tax rates of 22% for promoters and 30% for others.
IT sector safe harbour
The Union Budget 2026–27 proposes simplifying IT service classifications by consolidating software development, IT-enabled services (ITES), knowledge process outsourcing (KPO), and contract R&D into a single “Information Technology Services” category.
This unified category will apply a uniform 15.5% safe-harbour margin, with the eligibility threshold significantly increased from INR 300 crore to INR 2,000 crore, extending the benefit to a wider range of tech businesses.
Other incentives:
- Long-term tax holiday: Foreign cloud service providers using Indian data centres will enjoy a 20-year tax holiday, or until 2047. Additionally, non-residents providing equipment to “toll manufacturers” in bonded zones are exempt from income tax for five years.
- Data centre incentives: A 15% cost safe harbour is proposed for resident entities that provide data centre services to related foreign companies.
- Logistics for electronics: To support the “just-in-time” needs of electronics manufacturing, non-residents will have a safe harbour for component warehousing in bonded zones with a profit margin of 2%, resulting in an effective tax of approximately 0.7%.
- Fast-tracking agreements: For companies that prefer Advance Pricing Agreements (APAs), the government aims to conclude unilateral APAs within two years. Additionally, the ability to file modified returns under these agreements has been extended to include associated entities.
Securities and investments
In the securities and investment space, the Securities Transaction Tax (STT) on futures has been increased from 0.02% to 0.05%, while options premium and exercise rates have been raised to 0.15%. The tax rate on unexplained credits, investments, and expenditures has been reduced from 60% to 30%.
Customs, excise, and indirect tax changes
- Personal imports: The tariff rate on dutiable goods imported for personal use is being halved from 20% to 10%.
- Healthcare relief: Customs duties are being waived on 17 essential drugs and medicines, and exemptions are being granted for treatments for seven rare diseases.
- Green energy & technology: To support the battery industry, the budget extends customs duty exemptions for capital goods used to manufacture lithium-ion cells. Duties are also being waived on sodium antimonate used in solar glass production.
Excise & GST (VAT)
On the excise front, the value of biogas will now be excluded when calculating the duty for biogas-blended CNG. Regarding GST, the government is simplifying post-sale discounts by removing the rigid requirement to link them to specific prior agreements.
Foreign asset disclosure scheme
For disclosure of foreign assets, the new FAST-DS 2026 scheme allows taxpayers to declare undisclosed foreign assets up to INR 10 million by paying 30% tax and 30% penalty, with immunity from prosecution. A separate flat penalty of INR 100,000 applies for proper disclosure of assets up to INR 50 million if tax on the income was already paid.
Personal tax reforms
The government is making a concerted effort to simplify the tax experience for everyday citizens. Under the new Act, tax forms are being redesigned to be more user-friendly.
Key changes include:
- Reduced TCS rates: The tax collected at source (TCS) for overseas tour packages is dropping significantly, from the current tiered rates of 5% and 20% down to a flat 2%.
- Education and medical remittances: For those sending money abroad for studies or healthcare under the Liberalised Remittance Scheme (LRS), the TCS rate is also being cut from 5% to 2%.
- Filing deadlines: To reduce the last-minute rush, the government is staggering tax return deadlines. While individuals (ITR 1 and 2) still have until 31 July, non-audit businesses and trusts will now have until 31 August. Furthermore, the window to revise a return has been extended from 31 December to 31 March.
- Property transactions: For residents buying property from non-residents, the process is being simplified by allowing permanent account number (PAN)-based challans for TDS (tax deducted at source) instead of requiring a TAN (tax deduction and collection account number).
