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), creates entirely new safe harbour categories for data centres and 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: If the Indian data centre entity is a related party of the foreign cloud company, a safe harbour margin of 15% on cost is provided. This means the Indian entity's profit is deemed to be 15% of its operating costs, and tax is payable only on this deemed profit.
• 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 Budget restructures the safe harbour framework for IT and IT-enabled services companies, making India more predictable for transfer pricing compliance.

Key Changes

What This Means

Foreign companies with Indian IT subsidiaries doing up to INR 2,000 crore (approximately USD 240 million) in annual turnover can now opt for the safe harbour at a flat 15.5% markup. This eliminates transfer pricing audits and 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.

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
• 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 Doubled

The Budget doubles the equity investment limit for individual Persons Resident Outside India (PROIs) under the Portfolio Investment Scheme.

Changes

What This Enables

NRIs and other PROIs can now take significantly larger positions in listed Indian companies. An NRI investor can hold up to 10% of a listed company's equity through the Portfolio Investment Scheme—up from 5%—without triggering FDI regulations. The combined cap increase to 24% means more foreign portfolio capital can flow into individual Indian companies before hitting the regulatory ceiling.

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. Section 195 (TDS on payments to non-residents) becomes a new section number. Section 195 references in contracts and compliance systems need updating.
• 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 115BAB) 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 194C for TDS purposes, with TDS at 1% (individuals/HUF) or 2% (others). This resolves years of litigation over whether manpower supply was "work" (194C at 1-2%) or "technical services" (194J at 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 Form 15CA/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 new 15.5% safe harbour (turnover up to INR 2,000 crore), model the cost savings versus your current transfer pricing approach. 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 with a 15% safe harbour for related-party operations. Foreign cloud providers should seriously evaluate Indian data centre expansion.
• IT services transfer pricing becomes dramatically simpler with a unified 15.5% safe harbour margin for companies up to INR 2,000 crore turnover. This affects the majority of foreign-owned Indian IT service providers.
• 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: 2% safe harbour for component warehousing and a five-year tax holiday for capital goods suppliers to bonded zones.
• NRI/PROI investment limits doubled: Individual cap to 10%, combined cap to 24% of listed company equity. This enables larger portfolio positions without triggering FDI regulations.