Budget 2026 Changes for Foreign Owned Companies and Non Residents

Written by CA Nandini Hasija, Krystal7 Consultants. Last updated 23 October 2026.

Union Budget 2026 was presented on 1 Feb 2026 and became the Finance Act, 2026 (Act No. 4 of 2026) on 30 Mar 2026. For foreign owned companies and non residents, the 35 percent foreign company rate stayed. MAT fell to 14 percent as a final tax, and a buy back became a capital gain. IT services safe harbour moved to 15.5 percent up to INR 2,000 crore. Schedule IV added exemptions for data centres, electronics tooling and non resident experts.

This page lists each Budget 2026 change that touches a foreign owned Indian company or a non resident. For each one it gives the section, the effective date and whether Parliament enacted it as proposed. It then covers what followed, up to 23 Oct 2026.

What did Union Budget 2026 change for foreign owned companies and non residents?

Budget 2026 left the headline corporate tax rates alone. It changed the tax bill in other ways. MAT fell and stopped creating credit, buy backs became capital gains and the IT services safe harbour widened. Schedule IV gained new exemptions, and several penalties became fees. Most changes start on 1 Apr 2026, the day the Income Tax Act, 2025 came into force.

Finance Minister Nirmala Sitharaman presented the Budget on 1 Feb 2026. Part A of the speech carries policy announcements. Part B and its Annexure carry the tax proposals, which the Finance Bill, 2026 put into draft law. The Memorandum explaining the Finance Bill gives each clause and its start date.

A speech paragraph is only a proposal. The table marks what became law.

Proposal (Budget speech paragraph)	What became law	Status on 23 Oct 2026
MAT at 14% as a final tax (paras 142, 143)	Finance Act, 2026, section 206 of the Income Tax Act, 2025	In force from tax year 2026-27
MAT credit set off only after a move to the new regime, capped at 25% (para 142)	Finance Act, 2026	In force from tax year 2026-27
Buy back taxed as capital gains, promoter rate 22% or 30% (para 138)	Finance Act, 2026: section 2(40)(f) omitted, section 69(2) and (3) substituted	In force from 1 Apr 2026
One IT services safe harbour at 15.5% up to INR 2,000 crore (paras 125, 126)	Rules 88 and 89, Income Tax Rules, 2026	Notified, from tax year 2026-27
15% safe harbour for data centre services to a related foreign company (para 131)	Rule 89, table row 9	Notified, from tax year 2026-27
Data centre tax holiday to 2047 (para 130)	Schedule IV, serial 13C	In force; widened by Act No. 21 of 2026
Five year exemption for tooling given to an electronics toll manufacturer (para 133)	Schedule IV, serial 13A, to tax year 2030-31	In force; extended to 2040-41 by Act No. 21 of 2026
2% safe harbour for components stored in a bonded warehouse (para 132)	Not in the Finance Act, 2026 or rule 89; replaced by an exemption, Schedule IV serial 13G	Exemption from 1 Oct 2026
Exemption of foreign income of non resident experts (para 134)	Schedule IV, serial 13B	In force from 1 Apr 2026
MAT exclusion for all presumptive non residents (para 135)	Section 206, read with section 61(2)	In force from tax year 2026-27
Review of the NDI Rules (para 44)	No replacement rules; amendments only	Pending
Individual PROIs in listed companies up to 10% each, all such individuals up to 24% (para 47)	NDI (Third Amendment) Rules, 2026, S.O. 3030(E): each individual below 10%, all together up to 24%	In force from 12 Jun 2026

For the wider move from the 1961 Act to the 2025 Act, see our guide to Income Tax Act, 2025 changes for foreign owned companies.

When was the Budget presented and when did the Finance Act, 2026 take effect?

The Budget and the Finance Bill, 2026 went to the Lok Sabha on 1 Feb 2026. The Lok Sabha passed the Bill on 25 Mar 2026 with amendments moved by the government, as All India Radio reported that day. The President gave assent on 30 Mar 2026, as the Gazette copy of the Finance Act, 2026 shows.

Different parts of the Act start on different dates. Section 1(2) brings sections 2 to 129 into force on 1 Apr 2026. Sections 153 to 155 wait for a date the Central Government notifies. Customs rate changes started the day after the speech. Customs Act amendments started on assent. Income tax changes mostly started on 1 Apr 2026. A few start later still.

Date	Event	Instrument
1 Feb 2026	Budget speech; Finance Bill, 2026 introduced	Budget speech; Memorandum
2 Feb 2026	Basic customs duty changes in Annexure C.1 and C.2 apply	Customs notifications under the Budget
20 Mar 2026	Income Tax Rules, 2026 notified	G.S.R. 198(E), Notification 22/2026
25 Mar 2026	Lok Sabha passes the Finance Bill with government amendments	Lok Sabha
30 Mar 2026	Assent; Customs Act amendments and the IGST section 13(8)(b) omission take effect	Finance Act, 2026 (Act No. 4 of 2026)
1 Apr 2026	Income Tax Act, 2025 and most Finance Act income tax changes in force; CGST section 101A change in force	Income Tax Act, 2025; Finance Act, 2026
1 Oct 2026	Resident individual or HUF buyer pays TDS on property bought from a non resident without a TAN	Section 397(1)(c), Income Tax Act, 2025
1 Apr 2027	Forms 121 (old 15G and 15H) can go through depositories	Section 393(6), Income Tax Act, 2025

Some changes to the 1961 Act took effect from 1 Mar 2026. They cover returns for assessment year 2026-27, such as the new due dates and the longer revised return window. The 2025 Act versions start on 1 Apr 2026.

What changed in corporate tax for foreign companies and Indian subsidiaries?

Nothing changed in the base rates. A foreign company still pays 35 percent on business income in India. A domestic company pays 22 percent under section 200 (old section 115BAA), or 25 or 30 percent under the normal regime. Surcharge and the 4 percent cess also stayed.

The rates now sit in Part III of the First Schedule to the Finance Act, 2026, as the Income Tax Department's text of the schedule shows. The 25 percent rate applies where turnover or gross receipts in tax year 2024-25 did not exceed INR 400 crore.

Taxpayer, tax year 2026-27	Base rate (%)	Surcharge (%)	Cess (%)
Foreign company, income up to INR 1 crore	35	0	4
Foreign company, above INR 1 crore up to INR 10 crore	35	2	4
Foreign company, above INR 10 crore	35	5	4
Domestic company in section 200	22	10	4
Domestic company, turnover in tax year 2024-25 up to INR 400 crore	25	7 above INR 1 crore, 12 above INR 10 crore	4
Other domestic company	30	7 above INR 1 crore, 12 above INR 10 crore	4
MAT on book profit, any company liable	14	As for normal tax	4

A branch or project office of a foreign company pays the foreign company rate. A subsidiary pays the domestic rate. Our page on corporate tax rates for foreign companies works through both.

Paragraph 136 also announced that separate ICDS adjustments will end from tax year 2027-28, once ICDS is folded into Indian Accounting Standards. That is not yet law.

How does the 14 percent MAT affect a foreign owned company?

From tax year 2026-27 MAT is 14 percent of book profit under section 206 of the Income Tax Act, 2025. It was 15 percent under section 115JB of the 1961 Act. MAT is now a final tax, so a company that pays MAT gets no new credit. Credit built up to 31 Mar 2026 survives with limits.

Paragraphs 142 and 143 of the speech set out the change. Annexure item 5(i) adds the detail. A domestic company can use old MAT credit only after it moves to the section 200 regime. The set off in a year cannot exceed 25 percent of the tax payable. A foreign company can set off old credit in a year when normal tax exceeds MAT, up to the difference.

The MAT and AMT page of the Income Tax Department now states the 14 percent rate and the 25 percent cap. The credit still lapses after the fifteenth year from the year it arose.

For an Indian subsidiary with a large MAT credit and tax holidays, this forces a decision. Staying in the normal regime keeps the deductions but freezes the credit. Moving to section 200 frees part of the credit but loses most deductions. The option under section 200 cannot be withdrawn. We cover the choice and the arithmetic in our batch guide to minimum alternate tax for foreign companies.

Income of financial year 2025-26 is still assessed under the 1961 Act for assessment year 2026-27. MAT on that income stays at 15 percent.

How is a buy back taxed for a foreign parent from 1 April 2026?

From 1 Apr 2026 the gain on a buy back is a capital gain for the shareholder. It is no longer a deemed dividend. A promoter also pays additional tax under section 69. On a long term gain the total reaches 22 percent for a domestic company promoter and 30 percent for any other promoter. A foreign parent is an other promoter.

Paragraph 138 of the speech proposed the change. The Finance Act, 2026 omitted clause (f) of section 2(40) of the Income Tax Act, 2025, which had treated buy back money as a dividend. It also substituted section 69(2) and (3) from 1 Apr 2026. For an unlisted company, a promoter includes any holder of more than 10 percent.

The enacted section 69(2) applies only to a buy back under section 68 of the Companies Act, 2013 where the holder is a promoter. The promoter pays the normal tax on the gain plus an additional income tax from a table:

Gain from the buy back	Normal rate (%)	Additional tax, domestic company promoter (%)	Additional tax, other promoter (%)	Total, other promoter (%)
Long term gain (section 197 or 198)	12.5	9.5	17.5	30
Short term gain on listed shares (section 196)	20	2	10	30
Short term gain taxed at normal rates	Slab or company rate	Nil	Nil	Normal rate only

The rates are before surcharge and cess. Section 69 does not say whether surcharge and cess apply to the additional tax.

From 1 Oct 2024 to 31 Mar 2026 the whole buy back price was a dividend in the shareholder's hands, often at a treaty rate. The shareholder's cost became a capital loss. For a foreign parent, the new rule changes both the base and the rate.

The capital gain for a non resident on unlisted shares is computed under section 197 of the 2025 Act. The foreign currency method does not apply to unlisted shares. Our page on repatriation of profits to a foreign parent compares buy back, dividend and capital reduction.

What changed in withholding tax on payments to non residents?

The withholding rates for non residents did not change. Part II of the First Schedule to the Finance Act, 2026 keeps the rates of financial year 2025-26, and the 4 percent cess applies. The changes are procedural: TDS on property bought from a non resident, electronic lower deduction certificates and the new form numbers.

Royalty and fees for technical services paid to a foreign company stay at 20 percent before surcharge and cess. A treaty rate still applies if the payee gives a Tax Residency Certificate and Form 41 (old Form 10F).

Item	Before 1 Apr 2026	After the Finance Act, 2026	Section	Start date
Rates on payments to non residents	Part II of the First Schedule, Finance Act, 2025	Same rates, Part II of the First Schedule, Finance Act, 2026	393(2)	1 Apr 2026
Resident individual or HUF buying property from a non resident	Needed a TAN and filed Form 27Q	Pays through a PAN based challan; no TAN	397(1)(c), 393(2) serial 17	1 Oct 2026
Lower or nil deduction certificate	Form 13, officer review	Form 128, electronic application; rule based processing for small taxpayers (para 106)	395	1 Apr 2026
Remittance forms	Forms 15CA and 15CB	Forms 145 and 146	Income Tax Rules, 2026	1 Apr 2026
Prosecution for TDS default	Rigorous imprisonment of three months to seven years under section 276B	Graded by amount: up to 2 years above INR 50 lakh, up to 6 months from INR 10 lakh to INR 50 lakh, fine only below	476	1 Apr 2026

Section 476 also gives no prosecution where the TDS is paid by the due date of the quarterly statement in Form 144. Our guide to TDS on payments to non residents covers the section 393 table, and our page on the lower deduction certificate in Form 128 covers the new process.

What changed in transfer pricing, safe harbour and APAs?

Budget 2026 merged software development, IT enabled services, knowledge process outsourcing and software contract R&D into one safe harbour category. The margin is 15.5 percent on operating expense. The revenue limit rose from INR 300 crore to INR 2,000 crore. Data centre services got a 15 percent safe harbour.

Paragraphs 125 to 128 of the speech made the IT proposals, and the PIB release of 1 Feb 2026 repeated them. The Income Tax Rules, 2026 carry them. Rule 88 lists the eligible transactions. Rule 89 sets the margins.

Eligible international transaction	Safe harbour margin or rate	Revenue or amount limit	Rule
Information technology services (software, IT enabled services, KPO, software contract R&D)	Operating profit at least 15.5% of operating expense	Operating revenue up to INR 2,000 crore	88(a), 89 row 1
Data centre services	Operating profit at least 15% of operating expense	No cap in the rule	88(h), 89 row 9

The other rule 89 rows cover rupee and foreign currency loans, corporate guarantees, pharmaceutical contract R&D, auto components and low value adding services. The speech said a company could stay in safe harbour for five years at its choice. Rule 89(4) applies the margins for a block of three tax years from 2026-27, and they continue for later blocks unless modified. A company opts in through Form 49 (old Forms 3CEFA to 3CEFC) within the time rule 91 sets.

Two APA changes came in. Section 169 now lets an associated enterprise of the APA party file a modified return within three months from the end of the month the APA is signed. It applies to APAs entered on or after 1 Apr 2026. The speech also set a target to finish a unilateral APA for IT services within two years, extendable by six months. That target is administrative, not a statutory time limit.

The penalty for not filing the accountant's report became a fee. Section 428(d) charges INR 50,000 for a delay of up to one month and INR 1,00,000 after that, as the section 428 page shows. Under the 1961 Act, section 271BA imposed a penalty of INR 1,00,000. Our guides to safe harbour rules and Form 3CEB, now Form 48 give the detail.

What new exemptions did the Budget give foreign companies?

The Finance Act, 2026 added three entries to Schedule IV of the Income Tax Act, 2025. Serial 13A exempts tooling supplied to electronics contract manufacturers. Serial 13B exempts the foreign income of certain non resident experts. Serial 13C exempts foreign cloud income earned through specified Indian data centres. All three start on 1 Apr 2026.

Paragraphs 130, 133 and 134 of the speech proposed them. Two later instruments added more. The Income Tax (Amendment) Ordinance, 2026 (No. 2 of 2026) of 5 Jun 2026 came first. The Taxation and Other Laws (Amendment) Act, 2026 (Act No. 21 of 2026) followed in August 2026 and carried the Ordinance's exemptions into the Act.

The footnotes to the Income Tax Department's text of Schedule IV record each insertion and its start date.

Schedule IV serial	Who	Income exempt	Period	Instrument
13A	Foreign company supplying capital goods, equipment or tooling to a contract manufacturer in a customs bonded warehouse	Income from that supply	To tax year 2030-31, extended to 2040-41 and limited to specified electronic goods from 1 Apr 2026	Finance Act, 2026; Act No. 21 of 2026
13B	Non resident expert providing services under a notified government scheme, non resident in the five prior years	Income from outside India	Five years	Finance Act, 2026
13C	Foreign company serving customers outside India through data centre services bought from a specified Indian data centre	Income from those services	To tax year ending 31 Mar 2047	Finance Act, 2026; conditions eased by Act No. 21 of 2026 from 1 Apr 2026
13D, 13E	Foreign Institutional Investor; Bank for International Settlements	Interest and capital gains on government securities	From 1 Apr 2026	Ordinance No. 2 of 2026, then Act No. 21 of 2026
13F	Foreign diamond miner, sightholder or connected seller	Sale of rough diamonds in a notified special zone	1 Oct 2026 to 31 Mar 2041	Act No. 21 of 2026
13G	Foreign company storing components in a customs bonded warehouse for an electronics contract manufacturer	Income from storing those components, available on their sale	1 Oct 2026 to 31 Mar 2041	Act No. 21 of 2026

The data centre exemption has conditions. The foreign company must not own or operate the data centre's physical infrastructure. It must sell to Indian users through an Indian reseller entity, which pays tax in India. An Indian company must operate the specified data centre, as owner or lessee, and meet prescribed conditions.

Act No. 21 of 2026 set this test with effect from 1 Apr 2026. It also dropped the need to notify the foreign company. The earlier test of an approved scheme notified through the Ministry of Electronics and Information Technology went too.

Paragraph 132 promised a 2 percent safe harbour on invoice value for components stored in a bonded warehouse. It would have given an effective tax of about 0.7 percent. It is not in the Finance Act, 2026 or in rule 89. Serial 13G now exempts that income instead, from 1 Oct 2026 to the tax year ending 31 Mar 2041. Act No. 21 of 2026 inserted serial 13G, and footnote 49b to Schedule IV records the 1 Oct 2026 start.

What changed for non residents taxed on a presumptive basis?

The presumptive rates in section 61 did not change. What changed is MAT. Before the Finance Act, 2026, only four of the six section 61 businesses were outside MAT. Paragraph 135 and Annexure item 4(iv) extended the exclusion to all non residents taxed on a presumptive basis.

Section 61(2) deems a share of gross receipts as profit:

1. Operating ships other than cruise ships: 7.5 percent.
2. Operating cruise ships: 20 percent.
3. Operating aircraft: 5 percent.
4. Turnkey power projects approved by the Central Government: 10 percent.
5. Services and plant hire for mineral oil exploration: 10 percent.
6. Services or technology to a resident company setting up an electronics manufacturing facility: 25 percent.

The Memorandum said cruise ships and electronics manufacturing services would join the MAT exclusion. The MAT and AMT page now refers to all of section 61(2) without listing serial numbers. A foreign company on the presumptive basis still pays tax on deemed profit at 35 percent plus surcharge and cess. Losses and allowances cannot be set off against the deemed profit.

What changed in penalties, returns and prosecution?

Several penalties became fees, returns got new due dates and the revised return window grew to twelve months. Prosecution now uses simple imprisonment graded by the amount involved. These changes apply under the 2025 Act from 1 Apr 2026, and some under the 1961 Act from 1 Mar 2026.

The main points, from the Memorandum and the Act:

1. Return due dates. Section 263(1)(c) sets 31 Aug for non audit business cases, 31 Oct for companies and audited cases, and 30 Nov for companies filing Form 48.
2. Revised return. The window is twelve months from the end of the tax year. A return revised after nine months pays a fee under section 428(b): INR 1,000 where total income is up to INR 5 lakh and INR 5,000 otherwise.
3. Audit and Form 48 defaults. Section 428(c) charges INR 75,000 for a tax audit delay of up to one month and INR 1,50,000 after that. Section 428(d) covers Form 48.
4. Updated return after a reassessment notice. A taxpayer can file an updated return in response to a section 280 notice by paying an extra 10 percent of tax and interest.
5. Prosecution. Sections 473 to 485 now use simple imprisonment, with grading at INR 10 lakh and INR 50 lakh.

For financial year 2025-26, CBDT Circular No. 07/2026 of 29 Sep 2026 moved the tax audit date to 21 Oct 2026 and the return date to 21 Nov 2026. Transfer pricing cases keep 31 Oct 2026 for Form 3CEB and 30 Nov 2026 for the return.

What did the Budget change in customs duty?

The customs changes are about faster clearance and fewer exemptions more than rate cuts. The duty on goods imported for personal use fell from 20 to 10 percent from 1 Apr 2026 (para 159). Advance rulings now last five years. Warehoused goods can move between bonded warehouses without prior permission. Courier exports lost their INR 10 lakh cap per consignment.

The speech and its Annexure list these changes:

1. Tariff clean up. Exemptions on goods made in India or rarely imported were removed (para 145). Rate changes took effect on 2 Feb 2026 and 1 Apr 2026.
2. Capital goods and inputs. Basic customs duty was exempted on capital goods for lithium ion cells for battery storage, capital goods for critical minerals processing, and components and parts for making civilian, training and other aircraft (paras 150, 153, 155).
3. Advance rulings. Section 28J of the Customs Act now gives five years, up from three. Holders of rulings in force on assent can ask for the longer period.
4. Warehousing. A substituted section 67 lets owners move goods between bonded warehouses on prescribed conditions (para 169).
5. Trusted importers. Duty deferral for Tier 2 and Tier 3 Authorised Economic Operators rose from 15 to 30 days (para 163).
6. SEZ units. A one time measure lets eligible SEZ manufacturing units sell to the domestic tariff area at concessional duty, capped by their exports (para 158).
7. Baggage and courier. New baggage rules raise duty free allowances, and the courier regulations dropped the export value cap (paras 175, 176).

Customs Act amendments took effect on assent, 30 Mar 2026. Our batch guides on customs duty basics and the Authorised Economic Operator programme apply these to importers.

Which GST changes came with the Finance Act, 2026?

The Finance Act, 2026 made six GST changes. The one that matters most to foreign groups is the omission of section 13(8)(b) of the IGST Act. An Indian intermediary arranging supplies for a foreign principal now follows the default rule in section 13(2), the recipient's location. That can make the service an export.

The Annexure to the speech lists the changes, and the GST Council's March 2026 newsletter gives their status:

1. Intermediary services. Section 13(8)(b) of the IGST Act omitted. The newsletter says the omission took effect on assent, 30 Mar 2026.
2. Appeals. Section 101A(1A) of the CGST Act lets the government authorise an existing tribunal to hear section 101B appeals until the National Appellate Authority is set up. In force from 1 Apr 2026.
3. Post sale discounts. Section 15(3) no longer needs a discount to be agreed before the supply.
4. Credit notes. Section 34 ties credit notes to the new section 15(3), where the recipient reverses input tax credit.
5. Provisional refunds. Section 54(6) extends provisional refunds to inverted duty structure claims.
6. Small export refunds. Section 54(14) loses its INR 1,000 floor for refunds on goods exported with tax paid.

The newsletter lists the discount and provisional refund changes as effective from dates to be notified. We could not confirm on an official page that the Central Government has notified a start date for items 3 to 6. Check the Central Tax notifications of 2026 on cbic-gst.gov.in for a notification appointing the date. Do this before you issue a credit note under the new section 15(3) or claim an inverted duty provisional refund. Our batch notes on GST on cross charges and OIDAR for foreign SaaS apply the intermediary change.

What did the Budget announce on FEMA and foreign investment?

Part A made two foreign investment announcements. Paragraph 44 promised a full review of the Foreign Exchange Management (Non Debt Instruments) Rules, 2019. Paragraph 47 proposed higher limits for individual persons resident outside India in listed Indian companies. The limit for each individual was to rise from 5 to 10 percent, and for all such individuals together from 10 to 24 percent.

The second announcement became law. The Foreign Exchange Management (Non Debt Instruments) (Third Amendment) Rules, 2026, S.O. 3030(E) of 12 Jun 2026, opened Schedule III to all individuals resident outside India. Before that, only NRIs and OCIs could use it.

Each individual must hold less than 10 percent of the paid up equity capital on a fully diluted basis. All such individuals together may hold up to 24 percent. The rules came into force on publication, 12 Jun 2026. RBI's A.P. (DIR Series) Circular No. 14 of 15 Jun 2026 told banks to apply it with immediate effect.

The first announcement has not produced new rules by 23 Oct 2026. The NDI Rules, 2019 still apply as amended. The Budget did not change FDI sector caps or the automatic route list. Our page on FDI automatic route sectors has the current list.

What has happened since the Budget?

This page was first published on 2 Feb 2026, the day after the speech. These events followed:

1. 10 Mar 2026. The Cabinet kept non controlling beneficial ownership of up to 10 percent from a land border country on the automatic route, per the PIB release. Our batch guide on Press Note 3 covers it.
2. 20 Mar to 1 Apr 2026. The Rules, the Lok Sabha vote, assent and commencement followed, as in the timeline table above.
3. 5 Jun 2026. The Income Tax (Amendment) Ordinance, 2026 (No. 2 of 2026) exempted government securities income of FIIs and the Bank for International Settlements, deemed from 1 Apr 2026, per the Gazette copy on legislative.gov.in.
4. 12 Jun 2026. The NDI (Third Amendment) Rules, 2026 opened listed shares to all individual PROIs.
5. August 2026. Parliament passed the Taxation and Other Laws (Amendment) Bill, 2026. The Lok Sabha took it up on 6 Aug 2026, per All India Radio. As Act No. 21 of 2026 it carried the Ordinance's exemptions into serials 13D and 13E, widened serials 13A and 13C and added serials 13F and 13G.
6. 29 Sep 2026. CBDT Circular No. 07/2026 extended the audit and return due dates for financial year 2025-26.
7. 1 Oct 2026. Serials 13F and 13G and the PAN based property TDS for resident buyers took effect.

What changed in 2026

Change	Old rule	New rule	Section	Effective date	Instrument
MAT rate	15% under section 115JB, credit for 15 years	14% final tax under section 206; no new credit	206	Tax year 2026-27	Finance Act, 2026
MAT credit use	Set off when normal tax exceeded MAT	Domestic company only after moving to section 200, capped at 25% of tax	206	Tax year 2026-27	Finance Act, 2026
Buy back	Deemed dividend in the shareholder's hands (from 1 Oct 2024)	Capital gain; promoter top up to 22% or 30%	2(40)(f) omitted; 69	1 Apr 2026	Finance Act, 2026
IT services safe harbour	Separate categories, limit INR 300 crore	One category, 15.5%, limit INR 2,000 crore	Rules 88, 89	Tax year 2026-27	Income Tax Rules, 2026
Data centre services	No safe harbour; no exemption	15% safe harbour; Schedule IV exemption to 2047	Rule 89; Schedule IV 13C	1 Apr 2026	Rules, 2026; Finance Act, 2026
APA modified return	Only the APA party	Associated enterprises too	169	APAs from 1 Apr 2026	Finance Act, 2026
Form 48 default	Penalty INR 1,00,000 (old 271BA)	Fee INR 50,000 up to one month, then INR 1,00,000	428(d)	1 Apr 2026	Finance Act, 2026
MAT for presumptive non residents	Excluded for four section 61 businesses	Excluded for all section 61 businesses	206 with 61(2)	Tax year 2026-27	Finance Act, 2026
Property bought from a non resident	Buyer needed a TAN	Resident individual or HUF uses a PAN based challan	397(1)(c)	1 Oct 2026	Finance Act, 2026
Intermediary place of supply	Supplier's location	Recipient's location under section 13(2)	IGST 13(8)(b) omitted	30 Mar 2026	Finance Act, 2026

Worked example

Two scenarios with assumed figures show the size of the main changes. Amounts are in INR crore.

Scenario 1: an IT subsidiary opts into safe harbour. A US parent owns an Indian subsidiary that writes software for the group. Operating expense for tax year 2026-27 is INR 80 crore. Operating revenue is well under INR 2,000 crore, so the subsidiary is eligible. It is in the section 200 regime.

1. Minimum operating profit at 15.5 percent: 80 × 15.5% = INR 12.4 crore.
2. Minimum price to charge the parent: 80 + 12.4 = INR 92.4 crore.
3. Tax rate in section 200: 22 percent, plus 10 percent surcharge, plus 4 percent cess = 25.168 percent.
4. Tax on INR 12.4 crore of profit, assuming taxable income equals operating profit: 12.4 × 25.168% = INR 3.1208 crore.

Before Budget 2026, a subsidiary with revenue above INR 300 crore could not use the IT safe harbour. It needed a benchmarking study instead.

Scenario 2: a buy back from a foreign parent. An unlisted Indian subsidiary buys back shares under section 68 of the Companies Act, 2013 from its UK parent. The parent holds 100 percent, is a promoter and has held the shares for more than 24 months. The price is INR 10 crore. The parent's cost under section 197 is INR 4 crore.

Item	Buy back on 15 Mar 2026 (deemed dividend)	Buy back on 15 Apr 2026 (capital gain)
Amount taxed in India	10.00, the full price	6.00, the gain (10 minus 4)
Rate before surcharge and cess	10%, India UK treaty dividend rate	30%: 12.5% under section 197 plus 17.5% additional tax under section 69(2)
Tax in India before surcharge and cess	1.00	1.80
Capital loss carried forward by the parent	4.00	Nil

Section 69 does not say whether surcharge and cess apply to the additional tax. The parent's income of INR 6 crore attracts a 2 percent surcharge and the 4 percent cess on its income tax.

1. Surcharge and cess on the 12.5 percent tax only: 6 × 12.5% × 1.02 × 1.04 = INR 0.7956 crore. Add the additional tax of 6 × 17.5% = INR 1.05 crore. Total INR 1.8456 crore.
2. Surcharge and cess on the whole INR 1.80 crore: 1.80 × 1.02 × 1.04 = INR 1.9094 crore.

The UK treaty lets India tax gains on shares of an Indian company, so no treaty relief removes the charge. Before surcharge and cess, the same buy back costs this parent INR 0.80 crore more after 1 Apr 2026. The INR 4 crore loss also disappears.

Common mistakes

1. Reading the Budget speech as law. The 2 percent component warehousing safe harbour in paragraph 132 never became law in that form. Fix: check the Finance Act, 2026, the Rules and the August 2026 amendments before you act.
2. Applying 14 percent MAT to financial year 2025-26. That income is assessed for assessment year 2026-27 under section 115JB at 15 percent. Fix: use 14 percent only from tax year 2026-27.
3. Assuming old MAT credit still flows in the normal regime. A domestic company in the normal regime cannot use it. Fix: model the section 200 move with the 25 percent cap before the return due date.
4. Treating a buy back as a dividend after 1 Apr 2026. The treaty dividend rate no longer applies. Fix: compute the capital gain under section 197 and add the promoter tax under section 69.
5. Claiming IT services safe harbour without checking the limit. The INR 2,000 crore test uses aggregate operating revenue. Fix: test revenue first, then file Form 49 within the rule 91 time.
6. Selling cloud services to Indian users straight from abroad. Serial 13C needs an Indian reseller entity for Indian users. Fix: put Indian customer contracts in the reseller before you claim the exemption.
7. Treating the Form 48 fee as a reason to file late. The fee doubles after one month, and late filing still invites scrutiny. Fix: diarise Form 48 one month before the 30 Nov return date.
8. Keeping the intermediary GST rule in invoices. Section 13(8)(b) of the IGST Act is gone. Fix: retest place of supply for services an Indian entity arranges for a foreign principal.

Checklist

1. List every flow between your Indian company and the foreign group: services, royalties, loans, guarantees, buy backs and dividends.
2. Map each flow to its section in the Income Tax Act, 2025 and its new form number.
3. Recompute tax for tax year 2026-27 under both regimes, with MAT at 14 percent and the 25 percent credit cap.
4. Decide on the section 200 option, and record the board's reasons, before the return due date.
5. Test IT services or data centre revenue against rule 89, and file Form 49 if safe harbour fits.
6. Review any planned buy back with the capital gain and promoter tax in the model.
7. Update withholding files with a current Tax Residency Certificate, Form 41 and Forms 145 and 146.
8. Diarise Form 48 for one month before 30 Nov, and the return for 30 Nov.
9. Retest GST place of supply for intermediary type services and refresh the Letter of Undertaking for exports.
10. Check customs advance rulings, warehousing and AEO status against the new rules.
11. Confirm FEMA and FDI filings under the NDI Rules as amended to 12 Jun 2026.

For a review of your group's position against these changes, email [email protected] with your last return and the intra group agreements.

Frequently Asked Questions

When was Union Budget 2026 presented?+

Finance Minister Nirmala Sitharaman presented Union Budget 2026-27 in the Lok Sabha on 1 Feb 2026, with the Finance Bill, 2026. The Lok Sabha passed the Bill on 25 Mar 2026 with government amendments. It became the Finance Act, 2026 (Act No. 4 of 2026) on assent on 30 Mar 2026.

Did Budget 2026 change the corporate tax rate for foreign companies?+

No. A foreign company still pays 35 percent on income in India, plus 2 percent surcharge above INR 1 crore and 5 percent above INR 10 crore, and 4 percent cess. Part III of the First Schedule to the Finance Act, 2026 sets these rates for tax year 2026-27.

What is the MAT rate from 1 April 2026?+

MAT is 14 percent of book profit from tax year 2026-27, under section 206 of the Income Tax Act, 2025, plus surcharge and cess. It is a final tax, so no new MAT credit arises. Income of financial year 2025-26 still faces 15 percent under section 115JB.

How is a buy back taxed for a foreign parent now?+

From 1 Apr 2026 the shareholder pays capital gains tax on the buy back gain, after clause (f) of section 2(40) was omitted. For a buy back under section 68 of the Companies Act, 2013, a promoter pays additional tax under section 69(2). A foreign parent pays 30 percent in all on a long term gain, before surcharge and cess.

Did TDS rates for non residents change in Budget 2026?+

No. Part II of the First Schedule to the Finance Act, 2026 keeps the financial year 2025-26 rates under section 393(2), with 4 percent cess. Royalty and fees for technical services stay at 20 percent before surcharge and cess. A lower treaty rate still needs a Tax Residency Certificate and Form 41.

Does a resident buyer need a TAN to buy property from a non resident?+

Not from 1 Oct 2026, if the buyer is a resident individual or HUF. Section 397(1)(c) of the Income Tax Act, 2025 lets the buyer deduct and pay TDS through a PAN based challan. Before that date the buyer needed a TAN and filed a quarterly statement.

What is the IT services safe harbour margin from tax year 2026-27?+

An operating profit of at least 15.5 percent of operating expense, under rule 89 of the Income Tax Rules, 2026. It covers software development, IT enabled services, KPO and software contract R&D as one category. Aggregate operating revenue must not exceed INR 2,000 crore. The company opts in through Form 49.

What is the data centre tax holiday in Budget 2026?+

Schedule IV, serial 13C of the Income Tax Act, 2025 exempts a foreign company's income from cloud services to customers outside India delivered through a specified Indian data centre. It runs to the tax year ending 31 Mar 2047. Indian users must be served through an Indian reseller entity.

Did the 2 percent component warehousing safe harbour become law?+

Not in that form. Paragraph 132 of the speech proposed it, but neither the Finance Act, 2026 nor rule 89 carries it. Instead, Schedule IV serial 13G, added by the Taxation and Other Laws (Amendment) Act, 2026 (Act No. 21 of 2026), exempts that income from 1 Oct 2026 to the tax year ending 31 Mar 2041.

What did Budget 2026 change in GST for foreign groups?+

The Finance Act, 2026 omitted section 13(8)(b) of the IGST Act, so intermediary services now follow the recipient's location under section 13(2). It also changed the CGST Act on post sale discounts, provisional refunds, small export refunds and the appellate tribunal under section 101A. The discount and refund changes start on dates the government notifies.

Did Budget 2026 bring back the equalisation levy?+

No. The 2 percent levy on e commerce operators stopped from 1 Aug 2024 and the 6 percent levy on online advertising from 1 Apr 2025. Foreign digital businesses now face income tax through significant economic presence and GST. Our equalisation levy guide gives the history.

Which law applies to income of financial year 2025-26?+

The Income Tax Act, 1961, as amended by the Finance Act, 2026. That income is assessed for assessment year 2026-27 on the old forms. The Income Tax Act, 2025 applies from tax year 2026-27. Our page on the tax year under the Income Tax Act, 2025 explains the switch.

Sources

• Ministry of Finance, Budget 2026-2027 Speech of Nirmala Sitharaman, 1 Feb 2026, https://www.indiabudget.gov.in/doc/budget_speech.pdf
• Ministry of Finance, Memorandum explaining the provisions in the Finance Bill, 2026, 1 Feb 2026, https://www.indiabudget.gov.in/doc/memo.pdf
• Press Information Bureau, Threshold for availing safe harbour for IT services enhanced from Rs 300 crore to Rs 2000 crore, 1 Feb 2026, https://www.pib.gov.in/PressReleasePage.aspx?PRID=2221428
• All India Radio News, Lok Sabha passes the Finance Bill, 25 Mar 2026, https://www.newsonair.gov.in/fm-nirmala-sitharaman-asserts-government-empowering-msmes-farmers-and-cooperatives-to-boost-jobs-and-overall-developm
• GST Council Secretariat, Newsletter March 2026 (assent to the Finance Act, 2026 and GST amendments), https://gstcouncil.gov.in/sites/default/files/2026-04/newsletter-march-2026.pdf
• Income Tax Department, First Schedule to the Finance Act, 2026, accessed 23 Oct 2026, https://www.incometaxindia.gov.in/w/first-schedule-104
• Income Tax Department, MAT and AMT, accessed 23 Oct 2026, https://www.incometaxindia.gov.in/w/mat-and-amt
• Income Tax Department, Rule 88, Income Tax Rules, 2026, https://www.incometaxindia.gov.in/w/rule-88-3
• Income Tax Department, Rule 89, Income Tax Rules, 2026, https://www.incometaxindia.gov.in/w/rule-89-3
• Income Tax Department, Section 428, Income Tax Act, 2025, https://www.incometaxindia.gov.in/w/section-428-6
• Legislative Department, Gazette of India Extraordinary: Income Tax (Amendment) Ordinance, 2026 (No. 2 of 2026), 5 Jun 2026, https://www.legislative.gov.in/static/uploads/2026/05/61eb3f0307259c025404ddeaa563b08e.pdf
• Income Tax Department, Income Tax (Amendment) Ordinance, 2026, Gazette copy, https://www.incometaxindia.gov.in/documents/d/guest/doc202665883801-pdf
• Legislative Department, The Finance Act, 2026 (No. 4 of 2026), Gazette of India Extraordinary, 30 Mar 2026, copy on incometaxindia.gov.in, https://www.incometaxindia.gov.in/documents/d/guest/finance-act-2026-pdf-1
• Income Tax Department, Schedule IV, Income Tax Act, 2025, with footnotes 48 to 51b (Act No. 4 of 2026 and Act No. 21 of 2026), read 23 Oct 2026, https://www.incometaxindia.gov.in/w/schedule-iv-4
• Income Tax Department, Section 69, Income Tax Act, 2025, as substituted by Act No. 4 of 2026 from 1 Apr 2026, https://www.incometaxindia.gov.in/w/section-69-127
• Income Tax Department, Section 397, Income Tax Act, 2025 (clause (c) substituted by Act No. 4 of 2026 from 1 Oct 2026), https://www.incometaxindia.gov.in/w/section-397-6
• Income Tax Department, FAQs on the Taxation and Other Laws (Amendment) Bill, 2026, https://www.incometaxindia.gov.in/documents/d/guest/faqs_the_taxation_and_other_laws_amendment_bill_2026
• All India Radio News, Lok Sabha to take up Taxation and Other Laws (Amendment) Bill, 2026 today, 6 Aug 2026, https://newsonair.gov.in/lok-sabha-to-take-up-taxation-and-other-laws-amendment-bill-2026-today/
• Department of Economic Affairs, Foreign Exchange Management (Non Debt Instruments) (Third Amendment) Rules, 2026, S.O. 3030(E), 12 Jun 2026, https://egazette.gov.in/WriteReadData/2026/273406.pdf
• Reserve Bank of India, A.P. (DIR Series) Circular No. 14, Liberalisation of Foreign Portfolio Investment under Schedule III of the NDI Rules, 15 Jun 2026, https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=13483&Mode=0
• Press Information Bureau, Cabinet approves changes in guidelines on investments from countries sharing land border with India, 10 Mar 2026, https://www.pib.gov.in/PressReleseDetailm.aspx?PRID=2237806&reg=3&lang=2
• Central Board of Direct Taxes, Circular No. 07/2026, 29 Sep 2026, https://www.incometax.gov.in/iec/foportal/sites/default/files/2026-09/Circular-7-2026.pdf