India 2026–27 Union Budget Impact Study for Foreign Entities

Executive Overview

India's Union Budget 2026–27, presented on 1 February 2026, places strong emphasis on investment promotion, ease of doing business, global integration, and long-term competitiveness, with strategic reforms aimed at positioning India as a compelling destination for foreign capital, global digital services, manufacturing linkages, financial services, and equity market participation.

Implementation of the New Income Tax Act, 2025 (Effective 1 April 2026)

The Income-tax Act, 2025 is a comprehensive overhaul of India's direct tax framework, replacing the Income-tax Act, 1961. It aims to simplify and modernise tax rules, procedures, and compliance.

Key Features

• Introduction of a unified Tax Year concept replacing the "assessment year / previous year" system, thereby streamlining income taxation
• Reduction in the number of sections with clearer language to minimise ambiguity and litigation
• Strong emphasis on digital filing and faceless assessments to reduce human interface and disputes
• Faster processing of refunds and greater clarity on deductions such as standard deduction, house property interest, and pre-construction interest

Impact: Easier compliance for taxpayers, fewer disputes, and faster processing of assessments and refunds.

Rationalisation of Tax & Investment Incentives

20-Year Tax Holiday for IFSC & Data-Driven Services

• Businesses establishing operations in GIFT City are eligible for a 20-year tax holiday (earlier 10 years), followed by a 15% flat corporate tax rate
• Foreign cloud and global digital service providers using India-based data centres are granted income tax exemption until 2047 on income derived from such services
• A safe harbour margin of 15% on cost applies where the resident data centre provider is a related entity

Tax-free Toll Manufacturing for Electronics

• Foreign companies supplying capital goods, equipment, or tooling to Indian contract manufacturers through customs-bonded warehouses are eligible for income tax exemption until 31 March 2031, subject to prescribed conditions

Impact: Enhanced tax certainty and major cost savings for international finance, technology, and digital services firms planning India-centric operations.

FDI & Capital Market Reforms

Insurance Sector: FDI Limit Raised to 100%

• Foreign Direct Investment in the insurance sector has been raised from 74% to 100%, subject to the condition that the insurer invests an amount equivalent to its entire premium income in India
• Composite insurance licences now permit a single entity to offer life, general, and health insurance products under one entity

SWAMIH 2 Fund

• A ₹15,000 crore fund aimed at completing an additional 1 lakh stalled housing units, supporting real estate recovery and construction-linked sectors

Equity Market Access for Non-Residents

• Non-resident Indians (NRIs) and Overseas Citizens of India (OCIs) will soon be allowed to participate directly in Indian equity markets using the Unified Pension Scheme (UPS), removing a long-standing structural barrier to retail-level portfolio investment

Transfer Pricing & International Tax Compliance

Block Transfer Pricing Assessments

• The budget introduces a block period assessment mechanism for transfer pricing, allowing a single consolidated review of related-party transactions over a defined period, reducing repetitive scrutiny and compliance costs

Safe Harbour for Global Digital Services

• A safe harbour margin of 15% on cost is prescribed for resident data centre operators that are related to the foreign entity
• This provides a clear margin benchmark and minimises transfer pricing disputes

Customs & Tariff Rationalisation

• Tariff lines reduced from over 12,000 to approximately 10,000
• Critical minerals such as cobalt, lithium, and rare earths receive nil or concessional duty treatment
• Customs duty exemptions for flat panel display components used in domestic manufacturing of televisions and monitors
• Extension of concessional duties for EV battery components until March 2026

Green Energy & Sustainability Incentives

• Extension of excise duty exemptions for blended compressed natural gas (CNG)
• Continued concessional treatment for EV components and critical minerals central to the clean energy supply chain
• Nuclear energy development plan: 100 GW target by 2047, with private sector participation to be enabled through a new regulatory framework

Strategic Outlook for Foreign Entities

The Union Budget 2026–27 positions India as a high-growth, reform-oriented jurisdiction. Foreign entities should focus on:

• Evaluating GIFT City and IFSC opportunities for financial services and digital operations
• Leveraging toll manufacturing exemptions for electronics supply chain restructuring
• Reassessing insurance sector entry given the 100% FDI allowance
• Reviewing transfer pricing structures in light of safe harbour provisions
• Exploring equity market access reforms for NRI/OCI investors