Union Budget 2026–27: A forward-looking blueprint for productivity, competitiveness and Viksit Bharat

By Samir Kanabar, Tax Partner, EY India

India’s Union Budget 2026-27 presents a forward-looking blueprint (i.e., three kartavyas) focused on economic growth by enhancing productivity and competitiveness, fulfills aspirations of people and aligns the vision of Sabka Sath Sabka Vikas. With enhanced capital outlay, next-gen manufacturing missions, and simplified taxation, the Budget accelerates India’s path toward a resilient, innovation-driven Viksit Bharat.

Contrary to expectation of a stable transition to new Income Tax Law with minimal changes, the Finance Bill 2027 proceeds with significant changes to the old as well as new Income Tax Law.




Key Direct Tax proposals:

• Buy Back taxation: Effective 01 April 2026, the buyback proceeds will now be taxed as capital gains, which was earlier treated as dividend in the hands of shareholders. For retail investors, the gains would be long-term/short-term based on the period of holding.

The Budget also proposes a differentiated tax rate for ‘promoters’ i.e., effective tax liability for promoters being domestic companies will be 22%, whereas rate would be 30% for all others.

• Tax amendments to promote the digital agenda: It is proposed that a tax holiday shall be granted to any foreign company procuring data centres services from specified data centres located in India, subject to the condition that any service provided to Indian users must be routed through an Indian reseller entity. This will go a long way to build global data centre infrastructure and put India on the global digital infrastructure map.

Additionally, it is proposed to provide for the benefit of safe harbour margin to the Indian entities providing ‘IT services’ such as data-centre services, software development services, contract R&D relating to software development, IT enabled services, knowledge process outsourcing services, etc., to any related foreign companies. This may help in reducing transfer-pricing disputes and improving compliance certainty.

• Minimum Alternate Taxation (MAT): For Indian corporate taxpayers under the old regime, it is proposed that any existing MAT credit up to 31 March 2026 may be set off only in the new tax regime, to the extent of 25% of the tax liability. Further the rate of MAT has been reduced from 15% to 14% (excluding surcharge and cess). This will entail domestic companies claiming tax deduction to go back to the drawing board and take the decision to switch to a new tax regime.

• Compliance & Procedural Relaxation:

TDS/ TCS compliance eased, including:

• Effective 1 October 2026, the resident buyers (Individuals and HUF), purchasing immovable property from non-residents, will not be required to obtain TAN for deducting and depositing the TDS with the Indian government (PAN would be sufficient to fulfil the TDS compliance).
• TCS rate in respect of alcoholic liquor, scrap, minerals being coal or lignite or iron ore has been increased from 1% to 2%. TCS on sale of tendu leaves has been decreased from 5% to 2%. Further in respect of LRS, for medical treatment TCS has been reduced from 5%/ 20% to 2%/20%. TCS on overseas tour program is now revised to 2% as against 5%/20%.

Rationalization of Penalty and Prosecution:

• Certain relaxation as under:

• Immunity provisions expanded - Taxpayers may obtain immunity by paying additional tax of 100% in misreporting cases and 120% where income is unexplained.
• A unified assessment-cum-penalty order mechanism introduced to avoid repetitive proceedings, with penalty-related interest kept in abeyance during appeals.
• Decriminalisation of tax offences, shifting minor and technical defaults from criminal liability to fee-based penalties, including failures such as not getting accounts audited or not furnishing statements, or where the TDS amount under consideration in certain cases such as payment of lottery/ cross word puzzles etc, does not exceed ₹10 lakh etc.

Key Indirect Tax Proposals:

In Budget 2026, the government placed emphasis on Customs reforms and at the same time GST2.0 reforms saw effect in this Budget. The core theme under Customs being rate calibration covering sectors, such as, life science, critical minerals, electronics, EVs and battery energy storage. Further, from an overall indirect tax perspective procedural benefits provided for ease of doing business.

The key changes from an indirect tax standpoint are as below:

• Deferred duty payment for AEOs (Tier-2 and Tier-3) importers extended to monthly from existing 15 days. Similar benefit provided to ‘manufacturer importer’ till March 2028.
• Owner of any warehoused goods will be allowed to remove such goods from one warehouse to another without requiring the permission from the proper officer subject to conditions
• One-time facilitative measure for eligible manufacturing units in SEZs to sell goods in DTA, subject to conditions
• The place of supply of intermediary services to be the location of recipient of service, thereby providing export status to intermediary services
• Conditions relaxed for deduction of post sales discount from taxable value (date to be notified)
  • Requirement of establishing linkage between discount and terms of agreement along with specific invoice will be deleted
  • Post sales discount value deductible subject to issuance of credit note and corresponding input tax credit reversal required by the recipient