Presenting the Union Budget 2026 in the Lok Sabha, Nirmala Sitharaman, Union Minister for Finance unveiled a wide-ranging set of fiscal, tax, and technology-focused measures, positioning the Budget as a “Yuva Shakti–driven” and “Kartavya-led” roadmap for India’s next phase of economic growth. A key highlight for the technology ecosystem was a long-term tax holiday for cloud services and a comprehensive overhaul of the income tax framework aimed at simplifying compliance and improving ease of doing business.
Also read: Union Budget 2026 Announced: Important Highlights for Industry
Tax Holiday for Cloud Services Till 2047
In a major move to attract global technology investment, the Finance Minister announced a tax holiday till 2047 for foreign companies providing cloud services to customers using data centre services from India, subject to the condition that these services are also offered to Indian customers. To further strengthen India’s data centre ecosystem, the government will provide a safe harbour margin of 15% on cost where data centre services are provided from India by a related entity, said the minister as part of the Union Budget 2026 announcements. The announcement is aimed at positioning India as a preferred global hub for cloud infrastructure and digital services.
“Recognising the need to enable critical infrastructure and boost investment in data centres, I propose to provide a tax holiday till 2047 to any foreign company that provides cloud services to customers using data centre services from India, subject to the condition that it also provides services to Indian customers. I also propose to provide a safe harbour of 15% on cost in cases where data centre services from India are provided by a related entity,” she said, making the announcement.
Additionally, to support just-in-time logistics for electronic manufacturing, a safe harbour profit margin of 2% of invoice value has been proposed for non-residents warehousing components in bonded warehouses. The resulting tax incidence, estimated at around 0.7%, is significantly lower than in competing jurisdictions.
Boost for IT Services
Reaffirming IT as a core growth engine of the Indian economy, the Finance Minister announced: “India is a global leader in software development services, IT enabled services, knowledge process outsourcing services and contract R&D services relating to software development These business segments are quite inter-connected with each other. All these services are proposed to be clubbed under a single category Information Technology Services with a common safe harbour margin of 15.5 percent applicable to all.”
Key measures include:
- A common safe harbour margin of 15.5% for all IT services
- Safe harbour threshold raised sharply from Rs 300 crore to Rs 2,000 crore
- Automated, rule-based approval of safe harbour applications without tax officer intervention
- Option to continue the same safe harbour for five consecutive years
- Fast-tracking of unilateral Advance Pricing Agreements (APAs) for IT services, targeted to be concluded within two years, extendable by six months
- Extension of modified return facility under APA to associated entities as well
New Income Tax Act 2025 from April 2026
The Finance Minister confirmed that the Income Tax Act, 2025, following a comprehensive review of the Income Tax Act, 1961, will come into force from 1 April 2026. Simplified rules and redesigned tax forms will be notified shortly to allow taxpayers adequate time to adjust.
Key personal and procedural tax announcements include:
- Tax exemption on interest awarded by Motor Accident Claims Tribunals to natural persons
- Reduction in TCS on overseas tour packages from 5%/20% to 2% without any threshold
- Reduction in TCS under LRS for education and medical purposes from 5% to 2%
- Manpower supply services brought under contractor payments for TDS purposes, attracting TDS at 1% or 2%
- Automated, rule-based system for small taxpayers to obtain lower or nil TDS certificates
- Depositories enabled to collect Form 15G/15H and share directly with relevant companies
- Extended timeline for revising income tax returns till 31 March, with a nominal fee
- Revised ITR filing deadlines:
- ITR-1 and ITR-2: 31 July
- Non-audit business cases and trusts: 31 August
Foreign Assets, NRIs, and Litigation Reduction
Addressing compliance challenges faced by young professionals, tech employees, and relocated NRIs, the Budget proposes a one-time six-month foreign asset disclosure scheme:
- Category A: Undisclosed foreign income/assets up to Rs 1 crore – tax at 30% plus additional 30% in lieu of penalty, with immunity from prosecution
- Category B: Assets up to Rs 5 crore – immunity from penalty and prosecution on payment of a Rs 1 lakh fee
To reduce litigation and compliance burden:
- Assessment and penalty proceedings to be integrated into a single order
- No interest on penalty amounts during appeal period
- Pre-deposit for appeals reduced from 20% to 10%, applicable only on core tax demand
- Taxpayers allowed to update returns even after reassessment proceedings, with an additional 10% tax
Decriminalisation and Rationalisation of Tax Prosecution
Several technical and minor tax defaults will be decriminalised or converted into fees, including:
- Non-production of books of accounts
- TDS payment where consideration is in kind
Remaining prosecutions will be graded based on severity, with maximum imprisonment capped at two years, and courts empowered to convert imprisonment into fines. Immunity from prosecution has also been extended retrospectively for non-disclosure of foreign assets below Rs 20 lakh.
Fiscal Consolidation and Finance Commission Grants
The Finance Minister confirmed the government’s acceptance of the 16th Finance Commission’s recommendation to retain the vertical devolution share at 41%, with Rs 1.4 lakh crore provided to states in FY27 as Finance Commission grants. The fiscal deficit for FY26 is estimated at 4.4% of GDP, declining further to 4.3% in FY27, while the debt-to-GDP ratio is projected to fall to 55.6%, reinforcing the government’s fiscal consolidation roadmap.
