Budget Day Analysis (Publish Same Day)

India's Union Budget 2026-27: What Foreign Companies Need to Know

Finance Minister Nirmala Sitharaman presented the Union Budget for financial year 2026-27 in Parliament on February 1, 2026, with a clear focus on infrastructure investment, manufacturing incentives, and tax simplification. For foreign companies with Indian operations — whether through a wholly owned subsidiary, branch office, or liaison office — this budget introduces several targeted provisions that will affect investment planning, compliance costs, and repatriation strategies.

This analysis covers every Budget 2026 proposal relevant to foreign investors and multinational companies, organized by impact area with specific action items. All proposals take effect from April 1, 2026, unless otherwise noted, and are subject to enactment through the Finance Bill in Parliament.

Corporate Tax: Foreign Company Rate Remains at 35%

The headline corporate tax rate for foreign companies — those incorporated outside India but earning income in India — remains unchanged at 35% plus applicable surcharge and 4% health and education cess. The effective tax rates for foreign companies for Assessment Year 2027-28 are:

For domestic subsidiaries of foreign companies (i.e., companies incorporated in India), the concessional rate of 22% under section 200 read with section 205(1) of the Income-tax Act, 2025 (section 115BAA of the Income-tax Act, 1961) continues (effective rate approximately 25.17%), or 15% under section 201 (Table, Sl. No. 1) read with section 205(2) of the Income-tax Act, 2025 (section 115BAB of the Income-tax Act, 1961) for new manufacturing companies — a window that had closed to companies commencing production after 31 March 2024, and is now extended (see below).

Action item: Foreign companies operating through a branch or project office should evaluate whether restructuring into a domestic subsidiary would yield tax savings, particularly given the 12-13 percentage point differential between foreign and domestic company rates. Read our branch office vs subsidiary comparison for a full analysis.

New Manufacturing Incentive: 15% Tax Rate Extended

Budget 2026 extends the concessional 15% corporate tax rate under section 201 (Table, Sl. No. 1) of the Income-tax Act, 2025 to foreign companies establishing new manufacturing operations in India between April 1, 2026, and March 31, 2029. This is a significant expansion — previously, this rate was available only to domestic companies incorporated before March 31, 2024.

Key conditions:

• The entity must be set up and registered on or after April 1, 2026
• Manufacturing must commence before March 31, 2029
• The entity must not be formed by splitting up or reconstruction of an existing business
• Prescribed investment and employment criteria must be met (details awaited in the Finance Bill rules)

Effective tax rate: Approximately 17.16% (15% + 10% surcharge + 4% cess)

This makes India's manufacturing tax rate competitive with Vietnam (20%), Thailand (20%), and significantly lower than China (25% standard). For foreign companies evaluating FDI into Indian manufacturing, this is a landmark concession. Our FDI advisory team can help assess eligibility.

Transfer Pricing: Structural Reset of Safe Harbour Rules

Budget 2026 signalled a structural reset of India's transfer pricing safe harbour framework, and that reset has since been notified: rules 86 to 93 of the Income-tax Rules, 2026 replaced rules 10TA to 10TG of the Income-tax Rules, 1962 and came into force on 1 April 2026, so the first year they govern is tax year 2026-27. The rule-making power is section 167 of the Income-tax Act, 2025 (section 92CB of the Income-tax Act, 1961). The key changes:

Consolidated Safe Harbour at 15.5%

Software development services, IT-enabled services, knowledge process outsourcing and contract R&D relating to software development are now one eligible transaction — the provision of information technology services — carrying a single margin: operating profit to operating expense of not less than 15.5%, under rule 89(2) of the Income-tax Rules, 2026.

For FY 2025-26 and earlier tax years, Rule 10TD of the Income-tax Rules, 1962 (as amended by Notification 21/2025) set separate margins for those categories: 17% for software development and ITeS where transaction value did not exceed INR 100 crore and 18% above that up to INR 300 crore; 24%, 21% or 18% for KPO depending on the ratio of employee cost to operating expense; and 24% for contract R&D. Those margins and that employee-cost ladder do not carry into tax year 2026-27, which lowers the benchmark for most captive service centres and global capability centres (GCCs) operating in India.

Enhanced Threshold

The 15.5% row applies where aggregate operating revenue from the eligible transaction for the tax year does not exceed INR 2,000 crore (approximately USD 240 million) — replacing the INR 100 crore and INR 300 crore transaction value ceilings that applied under Rule 10TD, and bringing far more multinational operations within the safe harbour umbrella.

Two Multi-Year Periods, Not One

The rate table itself applies for a block period of three tax years commencing from tax year 2026-27, rolling forward for later blocks unless CBDT modifies it (rule 89(4)). Separately, an option exercised for information technology services remains in force for five consecutive tax years, with the INR 2,000 crore threshold tested only for the first of those years (rule 91(1) and (2)); withdrawal is barred after six months from the end of the first tax year (rule 91(10)). The option is exercised in Form No. 49 — the 2026 Rules' replacement for Form 3CEFA — filed with the Director General of Income-tax (Systems) for information technology services (rule 91(3)), and with the Assessing Officer year by year under rule 90 for every other eligible transaction.

New Data Centre Safe Harbour

The provision of data centre services is a new eligible transaction with no equivalent in the 1962 Rules, at an operating profit to operating expense margin of not less than 15% (rule 89(2), Sl. No. 9) — reflecting India's push to become a global data centre hub.

Faster Advance Pricing Agreements

Unilateral Advance Pricing Agreements (APAs) for IT services are targeted for conclusion within two years, extendable by six months at the taxpayer's request. This is a marked improvement from the current average processing time of 3-5 years.

Action item: If your Indian subsidiary operates as a captive service centre, GCC, or IT-enabled services provider, model the impact of the 15.5% safe harbour against your current transfer pricing policy. The lower margin will increase Indian taxable income but may simplify compliance significantly.

Capital Gains Tax Changes

Budget 2026 introduces two important changes to the capital gains tax framework affecting foreign investors:

Reduced Holding Period for Unlisted Securities

The holding period for long-term capital gains treatment on unlisted securities has been reduced from 24 months to 18 months. This means gains on shares in unlisted Indian companies (including private limited companies) held for 18 months or more will now qualify for the preferential 12.5% long-term capital gains rate, rather than the short-term rate of 25-43% (depending on the investor's tax status).

Preferential Rate for Qualified Foreign Investments

A new preferential 12.5% long-term capital gains rate is available for "qualified foreign investments" retained beyond 36 months — subject to conditions that will be specified in the Finance Bill rules. This appears targeted at encouraging longer-duration FDI commitments.

Action item: Review your investment holding timeline. If you are planning an exit from an Indian private company, the reduced 18-month holding period may affect your exit timing strategy. Read our guide to exit routes for foreign investors for context.

Data Centre and Cloud Services Tax Holiday

In a first-of-its-kind provision, Budget 2026 proposes a tax holiday until FY 2046-47 (nearly 21 years) for foreign companies that provide cloud services to global customers using data centre infrastructure in India. Separately, rule 89(2) of the Income-tax Rules, 2026 gives the provision of data centre services its own transfer pricing safe harbour row, at an operating profit to operating expense margin of not less than 15%, from tax year 2026-27.

This is designed to attract hyperscale cloud providers (AWS, Azure, GCP) and enterprise cloud companies to establish Indian data centre operations. The conditions for eligibility will be prescribed in the Finance Bill rules.

Customs Duty Rationalization

Budget 2026 continues the government's customs duty rationalization programme with changes affecting multiple sectors relevant to foreign manufacturers:

• Critical minerals: Nil Basic Customs Duty (BCD) on critical minerals, moved permanently into the Customs Tariff from temporary exemption notifications
• Lithium-ion batteries: BCD exemption on capital goods for production extended to battery energy storage systems
• Nuclear power: BCD exemption on imports for nuclear power projects extended until 2035, expanded to all nuclear plants regardless of capacity
• Electronics: BCD exemption on specified parts for microwave oven manufacturing
• Defence and aviation: Duty exemption on components for civilian training aircraft and parts for MRO operations
• SEZ units: One-time measure allowing eligible manufacturing SEZ units to sell goods in the domestic tariff area at concessional duty rates

Action item: If your Indian subsidiary imports capital goods or raw materials, review the updated customs tariff schedule for potential duty savings. The critical minerals and battery manufacturing exemptions are particularly significant for the EV and renewable energy sectors.

IFSC Tax Benefits Extended

The tax holiday for units in the International Financial Services Centre (IFSC) at GIFT City, Gujarat, and for Offshore Banking Units has been extended from 10 to 20 years. Post-holiday, IFSC units are taxed at 15%. Additionally, MAT exemption is provided to all non-residents paying tax on a presumptive basis.

This strengthens India's holding company route proposition for companies using IFSC structures for their India investments, particularly in fund management, treasury operations, and financial services.

Capital Goods and Component Warehousing

Budget 2026 also trailed a measure for non-residents engaged in component warehousing in bonded warehouses, aimed at foreign OEMs and Tier 1 suppliers maintaining component inventory in India for just-in-time manufacturing supply chains. It is not part of the transfer pricing safe harbour framework: the rule 89(2) table of the Income-tax Rules, 2026 runs to nine eligible international transactions and component warehousing is not among them. The terms of any such measure, including any minimum margin, should be confirmed against the provision as finally enacted before it is relied on.

Insurance Sector: FDI Limit Raised to 100%

Building on the 2025-26 budget announcement, the government has confirmed that the FDI limit in the insurance sector is raised from 74% to 100%, subject to the condition that the entire premium income is invested in India. This opens the door for full foreign ownership of Indian insurance companies — a landmark liberalization for global insurers that have been operating in India through joint ventures with 49% (pre-2020) and 74% (post-2021) caps.

For foreign insurance companies currently holding 74% stakes, the path to full ownership is now clear, subject to meeting the premium reinvestment condition and obtaining IRDAI approval. This is expected to trigger consolidation in the Indian insurance market as foreign partners buy out domestic joint venture partners. Our FDI advisory team can assist with the regulatory filings required for increasing foreign shareholding.

Withholding Tax and TDS Changes

While the budget does not alter the fundamental withholding tax framework for foreign companies, several procedural improvements affect cross-border payments:

• TDS rate simplification: The number of distinct TDS rates has been further reduced, continuing the rationalization programme started in Budget 2025. This reduces compliance complexity for Indian subsidiaries making payments to foreign parent companies
• Lower TDS threshold for professionals: The TDS threshold for payments to professional consultants has been raised, reducing the number of low-value transactions subject to withholding
• Faster refund processing: The CBDT has committed to processing TDS refund claims within 60 days — a significant improvement for foreign companies that over-withhold and need to claim refunds through Forms 145 and 146 (Forms 145 and 146 (formerly Forms 15CA and 15CB) under the 1961 Act) compliance

What Foreign Companies Should Do Now

The Budget 2026 proposals are subject to parliamentary enactment through the Finance Bill, typically completed by March 31. Between now and April 1, 2026, foreign companies should take the following steps:

1. Model the transfer pricing impact: If your Indian entity operates as a captive centre or GCC, calculate the tax impact of shifting from your current transfer pricing policy to the 15.5% safe harbour. In many cases, the compliance savings will outweigh any increase in Indian taxable income
2. Evaluate manufacturing incentives: If you are considering manufacturing investment in India, the 15% concessional tax rate window (April 2026 to March 2029) creates urgency. Begin entity setup planning now to be operational within the window
3. Review exit timelines: The reduced 18-month holding period for LTCG on unlisted shares changes exit timing calculations. If you are approaching the 18-month mark on an Indian investment, reassess whether to hold or sell
4. Check customs tariff changes: If your Indian operations import capital goods or raw materials, review the updated customs tariff schedule for duty reductions that could reduce your cost base
5. Brief your board: Ensure your global tax team and board are briefed on the Budget 2026 changes before the April 1 effective date. The manufacturing incentive in particular may affect capital allocation decisions across your Asia portfolio

Semiconductor and Electronics Manufacturing Push

Budget 2026 reinforces the government's semiconductor ambitions with a presumptive tax regime for non-residents providing services or technology to Indian companies setting up electronic manufacturing facilities. Under this regime, only 25% of gross receipts is deemed as income chargeable to tax — bringing the effective tax rate to less than 10%. This is designed to attract foreign semiconductor equipment manufacturers, EDA tool providers, and process technology licensors to support India's fab construction programme under the India Semiconductor Mission.

For foreign companies in the semiconductor supply chain, this creates a compelling proposition: provide technology and services to Indian fabs at an effective tax rate below 10%, compared to the standard 35-38% foreign company rate. The presumptive regime eliminates the need for detailed transfer pricing documentation on these transactions, further reducing compliance costs.

Key Takeaways for Foreign Companies

• Manufacturing is the big winner: The 15% tax rate extension to foreign companies, customs duty rationalization on critical inputs, and SEZ liberalization collectively make India significantly more attractive for manufacturing FDI in 2026
• Transfer pricing compliance gets simpler: From tax year 2026-27, the consolidated 15.5% safe harbour in rule 89(2) of the Income-tax Rules, 2026, at a much higher ceiling of INR 2,000 crore of aggregate operating revenue, will simplify compliance for the majority of captive centres and GCCs. Model the impact on your Indian subsidiary immediately
• Exit flexibility improves: The reduced 18-month holding period for long-term capital gains on unlisted securities and the preferential 12.5% rate for long-duration investments both improve exit economics for foreign investors. Read our DTAA guide for treaty-specific optimization
• Data centre investment has a 21-year window: The unprecedented tax holiday for cloud services is a clear signal — foreign companies planning data centre investments in India should act before the eligibility window and conditions are finalized
• Core rates are unchanged: The 35% foreign company rate and the 22%/25.17% domestic subsidiary rate remain as before. For most foreign companies, operating through an Indian subsidiary (not a branch) remains the tax-efficient structure. See our India entry strategy service for structuring guidance