Finance Minister Introduces Finance Bill, 2026 Under Union Budget, 2026-27

The Union Minister for Finance and Corporate Affairs presented the Finance Bill, 2026 by Bill No. 3 of 2026 ("Union Budget")¹ in the Parliament on 01.02.2026.

The key proposals introduced under the Union Budget are as follows:

1. Reduction in Tax Collected at Source ("TCS"): The Union Budget proposes rationalisation of TCS rates under Section 394 of the Income-tax Act, 2025 ("IT Act 2025"), with effect from 01.04.2026, including the following revisions: (a) TCS on overseas tour programme packages is proposed to be reduced to a uniform rate of 2% without any threshold, in place of the existing structure of 5% up to INR 10 Lakhs and 20% on the excess amount; (b) TCS on remittances under the Liberalised Remittance Scheme ("LRS") for education and medical treatment exceeding INR 10 Lakhs is proposed to be reduced from 5% to 2%; (c) TCS on sale of tendu leaves is proposed to be reduced from 5% to 2%; and (d) other categories including scrap, specified minerals, and alcoholic liquor are proposed to be aligned to a uniform rate of 2%.
2. Investment limit for Persons Resident Outside India ("PROI") under FEMA (Nondebt Instruments) Rules, 2019 ("NDI Rules"): The Union Budget proposes to permit PROI India to invest in equity instruments of listed Indian companies under the Portfolio Investment Scheme ("PIS"), with the individual investment limit proposed to be increased from 5% to 10% of the paid-up capital of the company and the aggregate investment limit for all PROIs in a company proposed to be increased from 10% to 24%. These changes are proposed to be implemented through amendments to NDI Rules and related directions issued by the RBI. iii. Taxation of buy-back of shares: The Union Budget proposes a change in the taxation of share buybacks by treating the consideration received by shareholders as capital gains instead of taxing the entire amount as income from other sources. For buy-backs undertaken on or after 01.04.2026, the taxable amount shall be the excess of buy-back consideration over the cost of acquisition, chargeable as capital gains under the IT Act 2025. Long-term capital gains are proposed to be taxed at 12.5% and short-term capital gains at 20%. Promoter shareholders are proposed to be subject to higher effective tax rates, being approximately 22% where the promoter is a domestic company and 30% for other promoter categories. Any capital loss arising on account of buy-back shall be available for set-off in accordance with the prescribed provisions.
3. Tax holiday for foreign companies procuring data centre services from India: The Union Budget proposes an income-tax exemption for foreign companies by amending Schedule IV of the IT Act 2025, in respect of income accruing or deemed to accrue in India solely due to procurement of data centre services from a specified data centre in India. The exemption is proposed to be applicable from tax year 202627 up to the tax year ending on 31.03.2047, subject to the following conditions: (a) the foreign company is specifically notified for the purposes of the exemption; (b) the data centre is owned and operated by an Indian company and notified by the Ministry of Electronics and Information Technology ("MeitY") as a specified data centre; (c) the foreign company does not own or operate the data centre infrastructure; and (d) where services are provided to users in India, all sales are routed through an Indian reseller company, failing which the exemption shall not be available.
4. Amendments to Safe Harbour Rules: The Union Budget proposes consolidation of information technology, information technology enabled services, knowledge process outsourcing, and contract research and development services into a single category of "IT services" for safe harbour purposes, with a unified safe harbour margin of approximately 15.5% on costs. The turnover threshold for eligibility is proposed to be increased from INR 300 crores to INR 2,000 crores. The Union Budget also proposes introduction of new safe harbour provisions for Indian entities providing data centre services to foreign associated enterprises at 15% on costs and for bonded warehousing of electronic components at 2% on invoice value, along with a move towards automated and rule-based acceptance of safe harbour positions for multiple years.

Footnote

1. Finance Bill, 2026

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.