Budget 2026–27: Cautiously optimistic

The Union Budget 2026–27 can be described as a strategic, reform-oriented roadmap centred on the "3 Kartavya" framework to accelerate economic growth, fulfill citizen aspirations and ensure inclusive development toward Viksit Bharat 2047.

The Economic Survey preceding the Union Budget 2026–27 presents a nuanced assessment of India’s macroeconomic position. It correctly notes that the year 2025 began with one set of expectations and ended with another for the global economy. However, India’s economy had been continuously expanding posing the country’s strong post-Covid macroeconomic performance.

At the same time, the survey flags emerging vulnerabilities. Despite strong fundamentals, the Indian rupee weakened in 2025. India continues to run a trade deficit in goods; the dependence on foreign capital inflows to maintain balance-of-payments stability was, to an extent, exposed and is reflecting upon the depreciation of rupee. In a world marked by uncertainty and mobile capital, investor confidence becomes critical.

It is against this macroeconomic diagnosis that the Union Budget 2026–27 must be evaluated.

In her 85-minute budget speech, the Finance Minister, through select policy announcements, reflected the response to the Economic Survey’s diagnosis, seeking to balance fiscal consolidation with growth, protect the tax base and simultaneously advance structural tax reform and ease of compliance. This approach signals continuity rather than disruption.

The absence of direct personal income tax cuts is notable but unsurprising. The government had already raised exemption limits in the previous year and GST cuts in this fiscal year, making income up to ₹12 lakh tax-free for many individuals. With limited fiscal room and a focus on controlling the fiscal deficit, further relief was unlikely.

Instead, the Budget focuses on improving compliance, reducing disputes and creating a more predictable tax environment, an approach that aligns with the Survey’s emphasis on investor confidence and stability. This restraint is consistent with the Survey’s cautionary note on investor sentiment and capital flows: in an environment where macro stability is strong but confidence is fragile, policy predictability takes precedence over populist measures.

One of the most visible Budget measures was the increase in Securities Transaction Tax (STT) on derivatives trading. STT on futures contracts has been raised from 0.02% to 0.05%, while STT on options premium has increased from 0.10% to 0.15%.

This move clearly aims to reduce excessive speculation in derivatives markets and bring tax collections in line with the sharp rise in trading volumes seen in recent years. Options trading in particular has grown rapidly, raising concerns about market volatility and retail investor risk. Markets reacted quickly, with a sharp sell-off in derivatives-heavy stocks during special Budget-day trading. Many traders had expected relief in capital gains taxes, which made the STT hike more disappointing.

Over time, the higher STT is likely to hit high-frequency and intraday traders the hardest, as transaction costs form a large part of their profits. While this may reduce excessive trading and encourage longer-term investing, it could also reduce liquidity in derivatives markets.

In a significant investment-friendly move, the Budget announces a tax exemption extending until 31 March 2047 for foreign companies procuring global cloud and data centre services from specified data centres located in India. This measure reinforces the government’s strategic focus on positioning India as a key player in data and artificial intelligence hub.

Further, to strengthen India’s transfer pricing regime and improve certainty for multinational enterprises, the Budget reduces the processing timeline for Advance Pricing Agreements (APAs) to two years.

Union Budget 2026–27 introduces long-awaited tax certainty for the sector. The Budget proposes to consolidate software development services, IT-enabled services, knowledge process outsourcing and contract R&D related to software development under a single category of Information Technology Services, with a uniform safe harbour transfer pricing margin of 15.5 %.

This is expected to significantly reduce transfer pricing disputes, particularly for GCCs operating on cost-plus models, which have increasingly faced scrutiny over margins. Together, these measures signal a decisive move towards greater tax predictability, lower compliance friction and improved ease of doing business for India’s fast-growing technology and GCC ecosystem.

A significant focus of Budget 2026 is on reducing everyday tax compliance burdens and easing the enforcement framework. The underlying objective is to make compliance simpler, less time-consuming and less adversarial for taxpayers, particularly individuals and small businesses.

More time to file returns has been provided by staggering filing deadlines. Individuals filing ITR-1 and ITR-2 will continue to have a 31 July deadline, while non-audit business and professional taxpayers will now have time until 31 August. Further, revised returns may be filed until 31 March, instead of the earlier 31 December deadline, subject to a nominal fee. This change is expected to reduce congestion and allow taxpayers more time to correct genuine errors.

Relief on overseas remittances has been provided by reducing the Tax Collection at Source (TCS) rate on foreign remittances for education and medical expenses from 5% to 2%. TCS on overseas tour packages has also been reduced to 2%. These changes ease cash-flow pressure and reduce the need for taxpayers to claim refunds.

To address the long-standing issue of excess TDS, eligible taxpayers can now apply electronically for lower or nil TDS certificates through a rule-based system.

The Budget also introduces several measures aimed at simplifying TDS procedures and dispute resolution. Depositories will be allowed to centrally collect and transmit Form 15G and Form 15H declarations, eliminating repetitive submissions.

In property transactions involving non-resident sellers, resident buyers can now deposit TDS using PAN, without the need to obtain a TAN.

However, one significant change has been introduced in the fine prints. Now, the assessment and penalty proceedings will be combined into a single order. This implies that if the taxpayer loses the appeal at any stage, they would be required to pay interest on penalty levied except for the time period upto first appellate stage. This will make the tax litigation more costlier in the hands of the taxpayers.

Penalties for technical or procedural defaults are proposed to be converted into fees, and several minor offences have been decriminalised. For small defaults, imprisonment has been capped at two years or replaced entirely with monetary penalties. Non-disclosure of small foreign assets will not attract prosecution, and in certain cases, taxpayers may settle disputes by paying additional tax without exposure to penalty or prosecution.

Budget 2026 introduces important changes to the taxation of investment-related income, aimed at reducing arbitrage opportunities and protecting the tax base.

One significant change relates to the taxation of share buy-backs. Buy-back proceeds will no longer be treated as deemed dividends but will instead be taxed as capital gains in the hands of shareholders. At the same time, an additional levy has been introduced for promoters to prevent the misuse of buy-backs as a tax-efficient substitute for dividends. As a result, corporate promoters will face an effective tax rate of 22 per cent, while non-corporate promoters will be taxed at 30 per cent. A positive aspect of this reform is that shareholders will now be allowed to set off capital losses where the buy-back consideration is lower than the cost of acquisition. However, for small (individual) promoter, this may prove to be costlier as they will no longer to avail the slab benefit, for taxation of buy back as dividend.

The Budget also takes a stricter approach towards interest deductions on investment income. The ability to deduct interest expenditure incurred in relation to dividend income and income from mutual fund units has been withdrawn. Previously, such deductions were permitted up to 20 per cent of the gross income. This change particularly affects leveraged investment strategies, where investments are financed through borrowings or margin funding. Tax will now apply on the gross investment income, without any reduction for interest costs.

These changes may also give rise to interpretational challenges and disputes, especially in cases where businesses operate through mixed pools of funds. Establishing whether investments were made using borrowed funds or own funds could become contentious, potentially increasing litigation in this area.

At a time when several economies traditionally viewed as champions of free trade are increasingly resorting to protectionist measures, India’s policy direction under Budget 2026 signals a conscious effort to hold its ground as an open and rules-based market. Through measures aimed at easing tax compliance, reducing procedural friction, and proposing a review of the FEMA Non-Debt Instrument (NDI) Rules, increasing the threshold of investments to 10% for Person Resident Outside India. the government appears to be reinforcing its commitment to facilitating cross-border investment rather than restricting it. This approach underscores a broader policy message: even amid global uncertainty and inward-looking trade policies elsewhere, India intends to position itself as a predictable, facilitative and investor-friendly jurisdiction.

Union Budget 2026–27 reflects a clear preference for restraint over spectacle. Read alongside the Economic Survey, it prioritises macroeconomic stability, fiscal consolidation and systemic reform over headline tax cuts or short-term stimulus, at a time of global uncertainty and volatile capital flows.

Reforms relating to capital markets, investment income, transfer pricing and support for MSMEs further underline a disciplined approach to revenue protection while maintaining openness to investment.

Despite these measures, several pressing economic challenges remain largely unaddressed. Concerns around unemployment, particularly among the youth, continue to persist, alongside signs of stress in manufacturing and declining household savings. The continued depreciation of the rupee, capital outflows by foreign investors, and pressure on farm incomes also find limited acknowledgement in the Budget narrative.

However, the Budgetary proposals offers a steady policy direction rather than dramatic course correction. Whether this careful balancing act translates into sustained confidence and inclusive growth will depend on effective implementation and timely follow-up reforms.

Amit Singhania is the Managing Partner of Areete Law Offices.

Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.

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