Key Points
The Union Budget 2026-27 aims to position India for long-term growth while navigating global uncertainty and domestic structural transitions.
India will continue with a high public capital expenditure path, with capital outlay raised to ₹12.2 lakh crore for 2026-27, as part of a long-term infrastructure and growth strategy.
A series of safe harbour, tax holiday, and exemption measures are proposed to position India as a hub for IT services, data centres, and global business functions, attracting investments.
Finance Minister Nirmala Sitharaman, on 1 February 2026, announced the Union Budget 2026-27, which aims to position India for long-term growth while navigating global uncertainty and domestic structural transitions.
The Budget is presented against what the FM describes as a period of “heightened uncertainty and disruption” in the global environment, marked by trade fragmentation, supply chain disruptions, and rapid technological change. The government’s stated response is to combine fiscal prudence with a strong thrust on public investment and structural reform. This is framed as a continuation of a 10-year trajectory of “stability, fiscal discipline, sustained growth and moderate inflation.”
The Budget is structured around three “kartavyas” or duties: First, to accelerate and sustain economic growth by enhancing productivity, competitiveness, and resilience to global volatility; Second, to fulfil aspirations and build the capacity of people, especially youth, to participate in India’s growth; Third, to ensure that every family, community, region, and sector has access to resources and opportunities for meaningful participation.
This framework links macroeconomic policy with sectoral interventions. Growth is tied to manufacturing scale-up, infrastructure, and financial reforms. Aspirations are addressed through health, education, skilling, and services. Inclusion is operationalised through targeted schemes for farmers, disabled people, vulnerable populations, and a special focus on the North-East and “Purvodaya” States – Bihar, Jharkhand, West Bengal, Odisha, and Andhra Pradesh.
For 2026-27, total expenditure is pegged at ₹53.5 lakh crore, while non-debt receipts are estimated at ₹36.5 lakh crore. The fiscal deficit target is set at 4.3% of GDP, lower than the 4.4% estimated for the current year, indicating continued consolidation. The government signals a transition from a fiscal deficit-focused anchor to a debt-to-GDP framework, with the debt ratio at 55.6% in Budget Estimates for 2026-27. This shift is presented as a way to balance discipline with flexibility in a volatile global context.
The scale of borrowing is influenced by rising debt repayments from past years, but the policy emphasis remains on using public capex as a growth multiplier. The Budget repeatedly links infrastructure spending with productivity gains, private investment crowding-in, and long-term competitiveness rather than short-term demand stimulus.
Under the first kartavya, the Budget proposes interventions in six areas, beginning with scaling up manufacturing in seven strategic and frontier sectors. A flagship initiative is Biopharma SHAKTI, with an outlay of ₹10,000 crore over five years to develop India as a global hub for biologics and biosimilars. This includes three new National Institutes of Pharmaceutical Education and Research (NIPERs), upgrading seven existing ones, over 1,000 accredited clinical trial sites, and strengthening drug regulation capacity. The rationale given is the shift in disease burden toward non-communicable diseases and the need for affordable biologic medicines.
The India Semiconductor Mission 2.0 expands beyond fabrication to equipment, materials, full-stack design, and supply chain resilience. The Electronics Components Manufacturing Scheme outlay is proposed to be raised to ₹40,000 crore from the earlier ₹22,919 crore, reflecting high investment commitments. Rare earth corridors are to be established in Odisha, Kerala, Andhra Pradesh, and Tamil Nadu to support mining, processing, and manufacturing of rare earth permanent magnets. These moves are framed as reducing critical import dependence and securing supply chains.
Additional proposals include three chemical parks on a cluster-based model, hi-tech tool rooms for high-precision components, a scheme for construction and infrastructure equipment, and a ₹10,000 crore container manufacturing scheme. The latter responds to global container shortages and aims to build a domestic ecosystem in a sector dominated by a few global suppliers.
The labour-intensive textile sector is addressed through an integrated programme with five sub-schemes, including a National Fibre Scheme, Textile Expansion and Employment Scheme, a National Handloom and Handicraft Programme, Tex-Eco for sustainable textiles, and Samarth 2.0 for skilling. Mega Textile Parks and a Mahatma Gandhi Gram Swaraj initiative for khadi and village industries are also proposed. The emphasis is on modernisation, technology upgradation, and global market linkage.
A dedicated initiative for sports goods manufacturing is proposed, linking material science, equipment design, and research. Parallelly, a scheme to revive 200 legacy industrial clusters aims to improve cost competitiveness through infrastructure and technology upgrades. These measures target both sunrise and traditional sectors, combining export potential with employment generation.
MSMEs are described as a “vital engine of growth,” with a three-pronged strategy. Equity support includes a ₹10,000 crore SME Growth Fund and a ₹2,000 crore top-up to the Self-Reliant India Fund. Liquidity support focuses on expanding the Trade Receivables Discounting System (TReDS), linking it with GeM, providing credit guarantees, and enabling securitisation of receivables. Professional support involves creating a cadre of “Corporate Mitras” to help MSMEs with compliance.
The design here is to reduce the structural disadvantages MSMEs face in finance and compliance, enabling them to scale and integrate into formal supply chains. This is positioned as critical for employment and export growth.
Public capital expenditure is proposed at ₹12.2 lakh crore in 2026-27, up from ₹11.2 lakh crore in 2025-26. An Infrastructure Risk Guarantee Fund is proposed to de-risk private participation during construction phases. Dedicated Freight Corridors, 20 new National Waterways, ship repair ecosystems, and coastal cargo promotion aim to shift freight to more sustainable modes. Seven high-speed rail corridors are proposed as “growth connectors.”
City Economic Regions (CERs) are introduced as a planning and financing framework for Tier-II, Tier-III cities and temple towns, with ₹5,000 crore per CER over five years. The objective is to leverage agglomeration economies, improve urban infrastructure, and link cities to industrial and logistics corridors.
A High-Level Committee on Banking for Viksit Bharat is proposed to align the sector with long-term growth while ensuring stability and inclusion. Public sector NBFCs such as PFC and REC are to be restructured for scale and efficiency. A review of FEMA non-debt instrument rules aims to create a more user-friendly framework for foreign investment. Corporate bond market reforms include market-making frameworks and total return swaps, while municipal bonds are incentivised through a ₹100 crore incentive for large issuances.
Persons Resident Outside India are allowed higher investment limits in listed equity under the portfolio investment scheme, signalling a push to attract stable capital inflows. These measures together seek to deepen financial markets and diversify funding sources.
Under the second kartavya, the Budget emphasises the services sector as a future growth driver. A High-Powered “Education to Employment and Enterprise” Committee will recommend measures to expand services’ global share. Health proposals include expanding allied health professionals, training 1.5 lakh caregivers, and establishing five regional medical hubs to promote medical value tourism. Three new All India Institutes of Ayurveda and upgrades in AYUSH infrastructure are proposed.
In education, five university townships near industrial corridors, girls’ hostels in every district, and major astronomy infrastructure projects are proposed. Tourism initiatives include a National Institute of Hospitality, training 10,000 guides, a National Destination Digital Knowledge Grid, eco-trails, and development of 15 archaeological sites as experiential destinations. Sports policy is scaled up through a Khelo India Mission.
The third kartavya focuses on inclusion. Fisheries, animal husbandry, high-value agriculture, and entrepreneurship are emphasised for farmer incomes. Divyangjan, or Persons with Disabilities (PwDs), are to be supported with assistive devices and livelihood opportunities. Mental health and trauma care infrastructure is strengthened, including a new NIMHANS-2 and upgrades in existing institutes. Special focus on the Northeast and Purvodaya States is intended to address regional imbalances.
A central feature of the Budget is the operationalisation of the New Income Tax Act, 2026, from 1 April 2026. The accompanying Income Tax Rules and forms are to be redesigned for ease of compliance, especially for individual taxpayers. This is presented as a structural reform to reduce complexity and improve voluntary compliance.
Several procedural simplifications are proposed. A rule-based automated system will enable small taxpayers to obtain lower or nil TDS deduction certificates, replacing manual applications. Form 15G and 15H declarations for TDS on dividends and interest can be filed through a single window with depositories. The time for revising returns is proposed to be extended from December 31 to March 31 with a nominal fee, and filing timelines are to be staggered by taxpayer category. For property transactions involving NRIs, TAN requirements for resident buyers are to be replaced by PAN-based challans.
Specific reliefs are aimed at individuals. Interest awarded by the Motor Accident Claims Tribunal to a natural person is proposed to be exempt from income tax, and TDS on such payments will be removed. Tax Collected at Source (TCS) rates are proposed to be reduced to 2% for overseas tour packages and for Liberalised Remittance Scheme (LRS) remittances for education and medical purposes, down from higher existing rates. Simplified TDS provisions for manpower supply are intended to benefit labour-intensive sectors.
A one-time six-month foreign asset disclosure scheme is proposed for small taxpayers to declare overseas income or assets. Additionally, non-disclosure of non-immovable foreign assets with an aggregate value below ₹20 lakh is proposed to be granted immunity from prosecution retrospectively from 1 October 2024. These measures combine compliance incentives with calibrated enforcement.
The Budget proposes integrating assessment and penalty proceedings through common orders. Taxpayers will be allowed to update returns even after reassessment has begun, by paying an additional 10% tax over the applicable rate, to reduce litigation. Penalties for misreporting income may be granted immunity upon payment of additional tax.
The prosecution framework is to be rationalised, and certain defaults are proposed to be decriminalised, including non-production of books of account and non-deduction of TDS where payment is made in kind. These changes indicate a shift toward civil consequences and tax recovery rather than criminal prosecution in procedural matters.
Deductions available to primary cooperative societies engaged in supplying agricultural produce are proposed to be extended to those supplying cattle feed and cotton seed. Inter-cooperative society dividend income is proposed to be deductible under the new regime to the extent distributed to members. A three-year exemption is proposed for dividend income received by a notified national cooperative federation on investments made up to 31 January 2026, when further distributed to member cooperatives. These provisions aim to strengthen cooperative value chains.
A tax holiday till 2047 is proposed for foreign companies providing global cloud services using data centres located in India. A safe harbour margin of 15% on cost is proposed where the data centre service provider is a related entity. Non-residents providing component warehousing in bonded warehouses are proposed to have a safe harbour profit margin of 2% of invoice value, leading to a low effective tax burden.
Non-residents providing capital goods or tooling to toll manufacturers in bonded zones are proposed to receive a five-year income tax exemption. Non-resident experts under notified schemes are proposed to be exempt on non-India-sourced income for five years. Minimum Alternate Tax is proposed to be exempt for non-residents taxed on a presumptive basis. These measures position India as a hub for global supply chain functions and digital infrastructure.
Software development, IT-enabled services, KPO services, and contract R&D in software are proposed to be clubbed under a single “Information Technology Services” category with a common safe harbour margin of 15.5%. The threshold for availing safe harbour is proposed to be raised from ₹300 crore to ₹2,000 crore. Approvals are to be automated and valid for five years at a stretch.
Unilateral Advanced Pricing Agreements (APAs) for IT services are to be fast-tracked with a target timeline of two years, extendable by six months. The facility of modified returns for entities entering APAs is proposed to be extended to associated entities. These measures seek to reduce transfer pricing disputes and provide certainty to the IT sector.
MAT is proposed to be made a final tax from 1 April 2026, with no further credit accumulation. The MAT rate is proposed to be reduced from 15% to 14%. Set-off of brought-forward MAT credit will be allowed only under the new regime, limited to one-fourth of tax liability in a year. Brought-forward credits up to 31 March 2026 will continue to be usable.
Buybacks are proposed to be taxed as capital gains for all shareholders. Promoters will face additional buyback tax, leading to effective rates of 22% for corporate promoters and 30% for non-corporate promoters. STT on futures is proposed to rise to 0.05% from 0.02%, and on options to 0.15%. These changes affect capital market taxation and corporate distributions.
Customs processes are to shift toward trust-based systems, with extended duty deferral for AEOs, longer validity of advance rulings, and automated clearance for trusted importers. A single digital window for cargo clearance across agencies is to be operationalised, with Customs Integrated System rollout over two years. Non-intrusive scanning with AI-based risk assessment is to be expanded with a goal of scanning every container at major ports. These reforms aim to reduce transaction costs and improve logistics efficiency.
Customs proposals focus on tariff simplification, export competitiveness, and energy transition. Duty-free input limits for seafood processing are to be raised from 1% to 3% of FOB value. Duty-free input schemes are extended to leather and synthetic footwear exports. Basic customs duty exemptions are proposed for capital goods for lithium-ion cell manufacturing, sodium antimonate for solar glass, goods for nuclear power projects till 2035, and capital goods for processing critical minerals.
In civil and defence aviation, customs duty exemptions are proposed for components and raw materials for aircraft manufacturing and MRO. The value of biogas is to be excluded when calculating excise duty on biogas-blended CNG. A one-time measure is proposed to allow SEZ units to sell into the domestic tariff area at concessional duty. Tariff rates on personal imports are proposed to be reduced from 20% to 10%, and basic customs duty is to be exempted on 17 drugs and medicines, with duty-free personal imports extended to seven more rare diseases.
The Union Budget 2026-27 presents itself as a reform-continuity document that combines fiscal consolidation with high public investment, aiming to position India for long-term growth while navigating global uncertainty and domestic structural transitions. By pairing relief for small taxpayers and procedural decriminalisation with investment-friendly regimes and trade facilitation, the government signals an approach to improve compliance, reduce litigation, and enhance India’s attractiveness as an investment destination.
[DS]
Suggested Reading: