In current unpredictable market conditions, India’s recent budget promotes stability and growth, write Shruti Lohia and Anushka Agarwal of BMR Legal
Finance Minister Nirmala Sitharaman’s 9th consecutive budget sends a clear message about India’s long-term growth priorities. It emphasises public capital expenditure, manufacturing competitiveness, infrastructure development, and the deepening of the financial sector.
It advances reforms to improve the ease of doing business, streamline tax administration and provide targeted support to MSMEs (micro, small and medium enterprises), the services sector and emerging technologies. The budget proposals signal a shift from enforcement-heavy to trust-based tax governance.
The economic survey estimates GDP growth at 7.4% for fiscal year 2026, driven by strong domestic consumption, investment and reforms despite tariff and geopolitical headwinds. Fiscal consolidation is largely on track, with the fiscal deficit targeted at 4.3% in fiscal year 2027, reinforcing macroeconomic stability while supporting growth. Budget proposals identify the services sector as a core driver of Viksit Bharat (Developed India by 2047) and fulfil aspirations of a youthful India. A high-powered “Education to Employment and Enterprise” standing committee is proposed to be set up to recommend measures for India to emerge as a global leader in services, with a 10% global share by 2047.
A boost to infrastructure and service sectors is evident with the highest allocation to capex of INR12.2 trillion (USD133.4 billion) for roads, railways, ports and cities. The push for “Made in India” is evident in sectors such as semiconductors, electronics, biopharma and the development of three rare-earth corridors.
On the regulatory front, a comprehensive review of the Foreign Exchange Management Act (Non-debt Instruments) Rules, 2019, has been proposed to modernise provisions and accommodate new instruments for foreign direct investment. Currently, the portfolio investment in listed Indian companies is permitted only for non-resident Indians and overseas citizens of India, subject to a 5% cap per investor and an aggregate cap of 10%. It is proposed to extend the limit to 10% per investor, retaining the overall limit at 24%, giving a boost to capital market inflow.
A high-level committee on banking is also proposed to be set up for a comprehensive review of the financial sector. To incentivise the debt market, the budget proposes to introduce total return swaps on corporate bonds. An incentive of INR1 billion for a single bond issuance of more than INR10 billion has been proposed to encourage the issuance of municipal bonds by large cities.
AI data centres
The bill has introduced tax carve-outs for foreign companies procuring data centre services from an Indian notified data centre, for a period up to 31 March 2047. Data centre means an entity owned and operated as an Indian incorporated company and set up under a scheme notified by the Ministry of Electronics and Information Technology. Such a carve-out is subject to conditions, including that the foreign company does not own or operate physical infrastructure, and the mandatory routing of services through an Indian reseller where the services are provided to Indian users. The bill also proposes a safe-harbour rate of 15% for Indian data centres in a related party situation.
It is unclear if enabling and supporting data centre businesses in the generation of renewable power to fuel growth and infrastructure, such as deep-sea cables, will be covered under the carve-out.
Tax certainty for IT
With a view to enhancing India’s attractiveness as a destination for global capability centres, the budget proposals recognise the need for close integration of software development, IT-enabled services, knowledge process outsourcing, and contract R&D. All have been clubbed under IT services (ITeS), and a common safe-harbour margin of 15.5% is proposed, replacing the earlier segmented approach. This move largely aligns the safe-harbour margins with industry benchmarks and advance pricing agreement (APA) outcomes.
The threshold for availing safe harbour for ITeS is proposed to be enhanced from INR3 billion to INR20 billion. Approvals under safe-harbour regulations are proposed to be fully automated and rule-driven, eliminating the need for discretionary review by the revenue authorities.
The budget speech also carries an intent to fast-track the unilateral APA process for ITeS and endeavour to conclude it within a period of two years, further extendable by six months. A facility to file modified returns will also be made available for associated enterprises (which hitherto were allowed only for APA applicants) for years covered under an APA.
Restraints on capital markets
The Finance Bill proposes to increase the securities transaction tax rates on derivatives:
From 0.1% to 0.15% of the option premium on sale;
From 0.125% to 0.15% of the intrinsic value on sale; and
From 0.02% to 0.05% of the traded price on sale.
This hike significantly increases transaction costs for traders. It was clarified that the reason for this move is the volume of futures and options trading (in the Indian stock market) not being in tandem with the size of GDP, hinting at its speculative intent.
The amendment to remove the 20% cap on interest for earning dividends effectively treats dividends as a passive return and will impact the structuring of leveraged investment structures, which benefitted from the partial offset of interest costs against dividend income.
Taxation of buybacks witnessed multiple changes in policy due to its characterisation between dividends and capital gains. Similarly, the taxation burden shifted from shareholders to corporates. The proposed regime is a step towards stability and also a rationalisation measure. Under the new regime, non-promoter shareholders will be treated as normal investors and pay capital gains tax on the buyback income. However, the promoters will be required to pay an additional tax on the buyback income such that the overall tax is between 22% and 30% for corporate and individual shareholders, respectively.
For non-resident promoter shareholders, the amendment could act as a disincentive to tender their shares in a buyback offer. Under the new regime, a buyback undertaken by a foreign company that derives substantial value from Indian assets will be subject to indirect transfer taxation, thus significantly expanding the tax net for offshore structures.
Incentivising GIFT City. With a focus to increase India’s competitiveness in offering an International Financial Services Centre (IFSC) established in GIFT City, Gujarat, the bill proposes to extend the 100% income tax holiday for units in the IFSC from 10 consecutive years to 20 consecutive years out of a total of 25 years, followed by a concessional rate of 15% (earlier, the tax rate ranged between 25% and 38%).
Tax process and penalty. With an intent to reduce multiple proceedings for tax audit and penalty levy, it is now proposed to integrate penalty proceedings with audit proceedings. Earlier, it was possible for the taxpayer to request that penalty proceedings be kept in abeyance during a quantum appeal, and thus the demand for a penalty would arise only if the taxpayer eventually lost the appeal on its merits.
However, with this amendment, the demand arising out of a tax audit will comprise both tax on merits and penalty levy. Given that the penalty amount can range from 100% to 300% of tax, the initial demand could be substantial. This substantial demand can also see an adjustment against outstanding past refunds, delaying refund receipt and creating liquidity challenges.
Measures for penalty rationalisation, streamlining compliances and clarifications on disputed administrative issues have also been introduced, reflecting the government’s intent to reduce litigation and foster tax certainty. A six-month amnesty window scheme allowing residents to regularise undisclosed foreign income and assets is intended for small taxpayers.
Such a disclosure window offers immunity from prosecution and penalties for smaller, often inadvertent non-disclosures (such as employee stock option plans, foreign bank accounts or inherited property) by paying 30% to 60% tax or a flat fee, depending on the category of non-compliance.
Overall, the budget proposals signal a decisive push towards long-term certainty, systemic design and investment alignment.
Shruti Lohia (Pictured) is a partner and Anushka Agarwal is an associate at BMR Legal