Union Budget 2026 | Key Takeaways

Union Budget 2026 | Key Takeaways

Union Budget 2026 marks a watershed moment in India’s direct tax policy framework and undertakes a structural recalibration of the income‑tax regime, with the objectives of simplicity, certainty, and voluntary compliance. In a global move to encourage the partnership between tax payors and tax authorities, voluntary compliance is a step in the right direction. The operationalisation of the Income-tax Act, 2025 which replaces the six‑decade‑old Income-tax Act, 1961 from 1 April 2026 is a welcome step. As always, the fine print of the tax proposals of budget have sparked many discussions and debates.

To start with, buybacks are proposed to be taxed as capital gains, as against the current regime where they are taxed as dividends. Further, promoters will be required to pay a higher rate of tax in case of buybacks – ie for promoters, the capital gains tax rate for buyback will be 22% (in case the promoter is a domestic company), and 30% (for other promoters) which are domestic companies and 30% for promoters. In the case of listed companies, ‘promoter’ shall have the same meaning as assigned to it in regulation 2(k) of the SEBI (Buy-Back of Securities) Regulations, 2018; for other cases, ‘promoter’ would mean (i) a ‘promoter’ as defined in section 2(69) of the Companies Act, 2013¹ or (ii) a person who holds, directly or indirectly, more than 10% of the shareholding in the company. This proposal to change the manner of taxing buybacks to a capital gains regime (with no set-off mechanism provided for upstreaming the same to ultimate shareholders) can lead to tax inefficient upstreaming in a hold co structure, as compared to the current dividend taxation structure, especially for promoters. Notably, in case of dividend income generally, it is also proposed that no deduction shall be allowed – unlike the current law wherein interest expense is allowed (subject to a 20% limit).

Secondly, it is proposed to provide a tax holiday up to 2047 to any foreign company who provides services to any part of the world outside India by procuring data centre services in India. Notably, it is also provided that (i) the data centre should be owned & operated by an Indian company and notified by the MeitY², (ii) all sales by such foreign company to users located in India are made through a reseller entity being an Indian company, (iii) such foreign company does not own or operate any of the physical infrastructure or any resources of the specified data centre.

Interestingly, the budget has also announced³ an amnesty scheme window for non-disclosure of foreign assets / foreign income upto specified thresholds. As part of this proposal, taxpayers with aggregate undisclosed foreign asset / undisclosed foreign income upto INR 1 crore can avail this scheme by paying 60% (as against 120% under the normal regime) of the value of undisclosed foreign asset / undisclosed foreign income (as the case may be). In cases where taxpayers had offered the foreign income for tax in India but missed disclosing the concerned foreign asset or in cases where a taxpayer had acquired foreign assets when it was a non-resident but missed disclosing the same upon becoming a resident, the benefit of the scheme can be taken by paying a fee of INR 1 lakh, if the value of foreign asset does not exceed INR 5 crores. Declarants under this scheme would be granted immunity from penalty and prosecution under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.

In addition, the Union Budget 2026 has proposed a retrospective amendment addressing the long-standing JAO–FAO⁴ controversy, namely whether reopening notices and allied proceedings can be validly initiated by the jurisdictional Assessing Officer. The proposal seeks to put the matter to rest by expressly validating notices issued by the jurisdictional AO. Further, in relation to the controversy commonly referred to as the Shelf Drilling or Roca issue concerning the interplay of statutory assessment timelines in cases involving Dispute Resolution Panel (DRP) proceedings, the Budget proposes that the passing of a draft assessment order within the prescribed timeline shall be deemed sufficient compliance with limitation requirements. Notably, both these issues have been among the most litigated aspects of Indian income-tax jurisprudence in recent years, and the proposed amendments appear aimed at curbing protracted disputes and providing legislative finality.

Other than these, other key amendments proposed by Budget 2026 include: (i) reduction in the TCS rate with respect to sale of overseas tour programme package from the currently applicable 5% / 20% (depending on amount) to 2% (irrespective of amount), (ii) reduction in the TCS rate with respect to LRS⁵ remittances for educational purposes / medical treatment from the currently applicable 5% to 2%, (iii) providing that resident individual / HUF are not required to obtain TAN to deduct tax at source in respect of any consideration on transfer of any immovable property, (iv) allowing immunity from penalty in cases of misreporting of income also, (v) increasing the exemption period to IFSC units to 20 consecutive years out of 25 years, as against the current regime of 10 consecutive years out of 15 years.

All in all, budget 2026 has proposed some significant proposals – be it on the tax front or non-tax macroeconomic policy level reforms. Government has walked a tight rope with one objective to maintain the required fiscal discipline and other objective to give the requisite fillip to youth, emerging sectors like AI, content creators, tourism economy etc. The announcement about a comprehensive review of the Foreign Exchange Management (Non-debt Instruments) Rules to create a more contemporary, user-friendly framework for foreign investments is also welcome. Specially in the context of tax reforms like buyback, taxpayers and organisations should reassess their ongoing restructuring proposals in light of the amendments proposed and keep a close eye on what the final version of the law will have in store for everyone.