Union Budget 2026-27: 10 Key Takeaways for Foreign Companies

Why This Budget Matters for Foreign Companies

Finance Minister Nirmala Sitharaman's Union Budget 2026-27 is not an incremental update. It introduces the new Income Tax Act, 2025 (replacing the 60-year-old 1961 Act effective April 1, 2026), arrives alongside the Income-tax Rules, 2026, which rebuild the transfer pricing safe harbours (rules 86 to 93) and add data centre services as a new category, with a further safe harbour proposed for electronics warehousing, doubles NRI equity investment limits, and extends the IFSC tax holiday from 10 to 20 years. For foreign companies with Indian operations or planning India entry, this budget fundamentally alters the cost-benefit analysis.

Here are the 10 changes that matter most, each with specific numbers, effective dates, and practical implications for your India strategy.

1. Data Centre Tax Holiday Until 2047

Foreign companies providing cloud services to global customers through Indian data centres will receive a complete income tax exemption until 2047. This is the single largest tax incentive ever offered to foreign technology companies in India.

How It Works

• Eligibility: Foreign companies that provide cloud services globally by using data centre services from India
• Duration: Tax holiday from the year of commencement until March 31, 2047
• Related Party Safe Harbour: The Income-tax Rules, 2026 add the provision of data centre services as a new transfer pricing safe harbour category — rule 89(2), Sl. No. 9 — at an operating profit margin of not less than 15% of operating expense, applicable from tax year 2026-27. Where the Indian data centre entity is a related party of the foreign cloud company, declaring that 15% margin means the transfer price is accepted by the income-tax authorities without adjustment.
• Indian Customer Requirement: Foreign cloud companies must serve Indian customers through a separate Indian reseller entity

Practical Impact

For a foreign cloud company spending USD 50 million annually on Indian data centre operations through a related entity, the effective tax on the Indian operations would be approximately 0.7% of total costs (15% deemed profit x ~35% corporate tax rate on the deemed profit, factored by cess). Compare this to the standard corporate tax rate of 25.17% for domestic companies or 35%+ for foreign companies operating through branch offices.

This positions India as a direct competitor to Singapore and Hong Kong for cloud infrastructure hosting, with lower operational costs and a massive domestic market as a bonus.

2. Transfer Pricing Safe Harbour Overhaul for IT Services

The Income-tax Rules, 2026 — notified on 20 March 2026 and in force from 1 April 2026 — restructure the safe harbour framework for IT and IT-enabled services companies, replacing rules 10TA to 10TG of the 1962 Rules with rules 86 to 93 and making India more predictable for transfer pricing compliance.

Key Changes

What This Means

For tax year 2026-27 onwards, rule 89(2) of the Income-tax Rules, 2026 sets a single safe harbour margin of 15.5% of operating expense for the provision of information technology services — software development, ITeS, KPO and software-related contract R&D together — where aggregate operating revenue from the transaction does not exceed INR 2,000 crore (approximately USD 240 million). Foreign companies with Indian IT subsidiaries inside that ceiling can opt in and have the declared price accepted, removing transfer pricing disputes for the vast majority of foreign-owned Indian IT service providers. The removal of separate categories for software development, KPO, and ITeS simplifies compliance significantly. The safe harbour is claimed under section 167 of the Income-tax Act, 2025 (section 92CB of the Income-tax Act, 1961); the option runs for five consecutive tax years, the INR 2,000 crore threshold is tested only for the first of them (rule 91(1) and (2)), and withdrawal is barred more than six months after the end of that first year. The rate table itself is fixed for a block of three tax years beginning with tax year 2026-27 (rule 89(4)).

If your Indian subsidiary provides IT services to the parent company, this is a material cost reduction. A company with INR 500 crore in costs would declare INR 77.5 crore as profit under safe harbour, paying approximately INR 19.5 crore in tax—versus potentially higher margins demanded by transfer pricing officers under the old regime.

3. Five-Year Tax Exemption for Foreign Expert Talent

To attract global talent for India's semiconductor, AI, and advanced manufacturing ambitions, the Budget exempts foreign experts' global income from Indian taxation for up to five years.

How It Works

• Eligibility: Non-residents who were non-resident for the previous five years and who provide services under a notified Government scheme
• Exemption Scope: Income accruing or arising outside India (salary, consulting fees, bonuses, equity income from foreign sources) is fully exempt from Indian tax for five continuous years from the year of arrival
• Indian Income: Salary for services rendered in India remains taxable in India
• Effective Date: Assessment Year 2027-28 (income earned from April 1, 2026)

Practical Impact

Foreign companies deploying senior technical talent to India—chip designers, AI researchers, manufacturing engineers—can offer India assignments without the tax penalty that previously deterred senior staff. A semiconductor engineer earning USD 300,000 globally who relocates to India would previously have faced Indian tax on their worldwide income once they became resident (after 182 days). Under the new rule, only the India-sourced salary portion is taxable, making India postings significantly more attractive financially.

4. Electronics Manufacturing: Bonded Warehouse Safe Harbour

The Budget introduces a safe harbour for non-resident companies warehousing electronic components in bonded warehouses in India, targeting the electronics supply chain.

Key Details

• Safe Harbour Margin: 2% of invoice value — a Budget 2026-27 proposal for a deemed-profit safe harbour on component warehousing. It is not one of the nine transfer pricing safe harbour categories notified in rule 89(2) of the Income-tax Rules, 2026, so check the notified scheme before relying on it
• Effective Tax Rate: Approximately 0.7% of invoice value (2% profit margin x 35% foreign company tax rate)
• Scope: Component warehousing in bonded zones for just-in-time delivery to Indian manufacturers

Why It Matters

India's electronics manufacturing sector requires just-in-time component delivery. Previously, foreign component suppliers avoided establishing any presence in India due to permanent establishment (PE) risk—a warehouse could trigger full corporate tax liability on attributable profits. The 2% safe harbour eliminates this risk, making it economically viable for companies like semiconductor suppliers and electronic component distributors to maintain Indian inventory without triggering disproportionate tax obligations.

This complements the PLI (Production Linked Incentive) schemes for electronics manufacturing and positions India as an alternative to China and Vietnam for supply chain diversification. See our analysis of China Plus One manufacturing strategies in India.

5. Five-Year Tax Holiday for Capital Goods Suppliers

Non-resident companies supplying capital goods, equipment, and tooling to toll manufacturers in bonded zones for electronics manufacturing receive a complete five-year income tax exemption.

Conditions

• The supplier must be a non-resident
• The recipient must be a toll manufacturer operating in a bonded zone
• The goods must be capital goods, equipment, or tooling (not raw materials or components)
• The manufacturing must be of electronic goods

Strategic Implication

This incentive targets the upstream electronics value chain—machinery manufacturers, tooling companies, and equipment suppliers. A German precision machinery company supplying SMT (Surface Mount Technology) equipment to a bonded zone manufacturer in India pays zero Indian income tax on the supply for five years. Combined with India's expanding PLI ecosystem, this makes India-directed capital goods supply significantly more profitable than comparable operations in other Asian markets.

6. PROI Equity Investment Limits Raised

These caps went up in the same Budget cycle, but not through the Budget itself. Schedule III of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 was substituted by notification S.O. 3030(E) dated 12 June 2026, and the revised limits are reproduced in Annex 3 of the RBI's Master Direction on Foreign Investment in India, updated to 15 June 2026.

Changes

What This Enables

NRIs and other PROIs can now take significantly larger positions in listed Indian companies. An NRI investor can hold just under 10% of a listed company's equity through the Portfolio Investment Scheme—up from 5%—without triggering FDI regulations. The test is strict: at 10% or more the holding stops being portfolio investment and the whole stake is reclassified as FDI. The combined cap increase to 24% means more foreign portfolio capital can flow into individual Indian companies before hitting the regulatory ceiling, and because 24% is now a flat ceiling, the special resolution that used to lift it no longer applies.

This is particularly significant for NRI entrepreneurs who want to maintain meaningful stakes in Indian listed companies they may have founded or invested in early. For a comprehensive look at NRI investment regulations, see our guide on FEMA investment rules for NRIs.

7. New Income Tax Act, 2025: Effective April 1, 2026

The Budget implements the Income Tax Act, 2025, replacing the Income Tax Act, 1961 that governed Indian taxation for six decades. While the substance of most provisions remains unchanged, the structural reorganization has practical implications for foreign companies.

What Changes

• Section Numbering: All section numbers change. TDS on payments to non-residents is now section 393(2) of the Income-tax Act, 2025 (Table, Sl. No. 17; section 195 of the Income-tax Act, 1961), deducted at the rates in force. Both numbers remain live law — the 1961 Act continues to govern tax years beginning before 1 April 2026 — so contracts and compliance systems should carry the new reference alongside the old.
• Simplified Language: The new Act uses clearer language and eliminates many Explanations and Provisos that made the old Act difficult to interpret.
• Table-Based Provisions: Complex provisions (like TDS rates, depreciation schedules) are presented in tables rather than nested paragraphs, improving readability.
• Digital-First Framework: The new Act assumes electronic filing, digital signatures, and online communication as defaults rather than alternatives.

Action Required

Foreign companies must update all India-facing legal documentation—intercompany agreements, service contracts, withholding tax clauses—to reference the new Act's section numbers. Tax compliance software and processes need reconfiguration before April 1, 2026. Work with your tax advisory team to complete this transition.

8. IFSC/GIFT City Tax Holiday Extended to 20 Years

Units operating in the International Financial Services Centre (IFSC) at GIFT City, Gujarat now receive a tax holiday of 20 years (up from 10 years), with income taxed at 15% after the holiday period ends.

Impact for Foreign Companies

GIFT City is India's designated international financial hub, offering zero-tax operations for fund management, aircraft leasing, marine insurance, and global treasury operations. The extension to 20 years makes GIFT City commitments more attractive for long-term infrastructure like fund administration offices, global treasury centres, and reinsurance operations.

Foreign companies using GIFT City as a gateway to Indian markets—or as a cost-efficient base for Asia-Pacific operations—now have two decades of tax-free income before the concessional 15% rate kicks in. Combined with regulatory relaxations (IFSC operates under a separate regulatory framework from mainland India), this makes GIFT City one of the most tax-efficient financial hubs in Asia.

9. Corporate Tax Rates: Status Quo with Structural Clarity

The Budget maintains the existing corporate tax rate structure without changes, but the new Income Tax Act provides clearer articulation of rates and surcharges.

Current Rates for Foreign Companies (AY 2026-27)

For comparison, domestic companies under the concessional regime (section 200 read with section 205(1) of the Income-tax Act, 2025; section 115BAA of the Income-tax Act, 1961) pay an effective rate of approximately 25.17%. This differential—approximately 13 percentage points—continues to incentivize foreign companies to operate through Indian subsidiaries (wholly-owned subsidiaries) rather than branch offices, since subsidiary profits are taxed at the lower domestic rate. For a detailed comparison, see our analysis of branch office vs subsidiary.

MAT (Minimum Alternate Tax)

MAT continues at 15% for companies whose tax liability under normal provisions is less than 15% of book profits. Foreign companies and companies in IFSC are exempt from MAT in specified circumstances.

10. TDS Rationalization and Compliance Simplification

The Budget rationalizes TDS provisions affecting cross-border payments, with several changes relevant to foreign companies.

Key TDS Changes

• Manpower Supply Reclassified: Supply of manpower services is now explicitly classified as "work" under section 393(1) of the Income-tax Act, 2025 (Table, Sl. No. 6; section 194C of the Income-tax Act, 1961) for TDS purposes, with TDS at 1% (individuals/HUF) or 2% (others). This resolves years of litigation over whether manpower supply was "work" (1-2%) or "technical services" (10%).
• Royalty and FTS to Non-Residents: The TDS rate on royalty and fees for technical services payable to non-resident companies remains at 20% (plus surcharge and cess) under domestic law. However, DTAA rates continue to apply where beneficial—most Indian DTAAs provide rates of 10-15% for royalties and FTS.
• Higher TDS for Non-Filers: The provisions for higher TDS on payments to non-filers have been streamlined under the new Act. Foreign companies that have not filed Indian tax returns may face higher withholding rates.

These changes affect every foreign company making or receiving cross-border payments with India. Review your Forms 145 and 146 (formerly Forms 15CA and 15CB) processes and withholding tax calculations to ensure compliance under the new Act.

What Should Foreign Companies Do Now?

The Budget 2026-27 changes require action across multiple business functions. Here is a prioritized action plan:

Immediate (Before April 1, 2026)

1. Update Legal References: All intercompany agreements, service contracts, and withholding clauses referencing the Income Tax Act, 1961 must be updated to reference the new Act. Flag every contract with Indian counterparties for review.
2. Reconfigure Tax Compliance Systems: TDS calculation modules, advance tax schedules, and return filing systems must be updated for new section numbers and any procedural changes.
3. Evaluate Safe Harbour Opt-In: If your Indian IT subsidiary qualifies for the 15.5% safe harbour in rule 89(2) of the Income-tax Rules, 2026 (aggregate operating revenue from the transaction up to INR 2,000 crore), model the cost savings versus your current transfer pricing approach, remembering that the option in Form No. 49 locks in five consecutive tax years from tax year 2026-27. In most cases, the safe harbour will be beneficial.

Short-Term (Q2-Q3 2026)

1. Assess Data Centre Opportunity: If your company provides cloud services, evaluate the economics of establishing or expanding Indian data centre operations under the new tax holiday regime.
2. Review GIFT City Strategy: For financial services companies, the 20-year tax holiday makes GIFT City worth re-evaluating for treasury, fund management, or insurance operations.
3. Talent Deployment Planning: Identify senior technical staff who could benefit from the five-year global income exemption for deployment to Indian operations under notified government schemes.

Medium-Term (FY 2026-27)

1. Supply Chain Restructuring: Evaluate the bonded warehouse safe harbour for electronic component logistics. If you supply components to Indian manufacturers, establishing a bonded warehouse presence at 0.7% effective tax is highly competitive.
2. Investment Structure Review: With PROI limits doubled, review your Indian portfolio investment structure. NRI executives and investors should assess whether the higher limits enable more efficient India exposure.

Key Takeaways

• Data centres and cloud services receive the most aggressive incentive: a tax holiday until 2047, and data centre services are now a notified safe harbour category at an operating margin of not less than 15% of operating expense (rule 89(2), Sl. No. 9, Income-tax Rules, 2026). Foreign cloud providers should seriously evaluate Indian data centre expansion.
• IT services transfer pricing becomes dramatically simpler: from tax year 2026-27, rule 89(2) of the Income-tax Rules, 2026 sets one safe harbour margin of 15.5% of operating expense where aggregate operating revenue from the transaction stays within INR 2,000 crore. The 17-18% software and ITeS margins and the KPO employee-cost ladder are law only for FY 2025-26 and earlier tax years (Rule 10TD of the Income-tax Rules, 1962, as amended by Notification 21/2025).
• The new Income Tax Act, 2025 takes effect April 1, 2026. While substance is largely unchanged, section numbers and procedural frameworks are different—requiring updates to all legal documentation and compliance systems.
• Electronics manufacturing supply chain gets a dual incentive: a proposed 2% deemed-profit safe harbour for component warehousing (a Budget 2026-27 proposal, not one of the categories notified in rule 89(2) of the Income-tax Rules, 2026) and a five-year tax holiday for capital goods suppliers to bonded zones.
• NRI/PROI investment limits raised by S.O. 3030(E), 12 June 2026: Individual cap to less than 10%, combined cap to a flat 24% of listed company equity. This enables larger portfolio positions without triggering FDI regulations.