Key Highlights of Union Budget FY 26-27

Direct Tax Proposals under Income-tax Act 2025

• The Minimum Alternate Tax (MAT) rate is proposed to be reduced from 15% to 14%. Under the old tax regime, MAT paid will be treated as final tax with no further credit. Under the new regime, limited MAT credit set-off will be allowed – upto 25% of tax liability for domestic companies and upto the difference between normal tax and MAT for foreign companies. 

• Employee contributions to welfare funds proposed to be allowed as a deduction if paid on or before the due date for filing the income-tax return, instead of the statutory payment due date. 

• The due date for filing returns by non-audit business taxpayers, non-audit firm partners and certain trusts proposed to be extended from 31 July to 31 August. All other return filing timelines to remain unchanged. 

• The time limit for filing a revised return proposed to be extended from 9 months to 12 months from the end of the relevant tax year, with a prescribed fee for revisions filed after 9 months. 

• Taxpayers proposed to be allowed to file an updated return to reduce losses originally declared. 

• Updated returns may also be filed after receipt of a reassessment notice, subject to payment of additional tax plus 10%, with immunity from penalty on such disclosed income. 

• Supply of manpower proposed to be expressly classified as “work”, and TDS proposed to apply under contractor provisions at 1% for individuals/HUFs and 2% for others, eliminating ambiguity with professional or technical services. 

• Consideration received on buy-back of shares proposed to be taxed as capital gains instead of dividend income, resulting in higher effective tax rates for promoters (30% for individuals and 22% for companies). 

• The tax holiday for IFSC units and Offshore Banking Units proposed to be extended from 10 years to 20 years, after which such units proposed to be taxed at a concessional rate of 15%. 

• TCS on alcoholic liquor, scrap and minerals proposed to be increased to 2%. TCS on tendu leaves, LRS remittances for education/medical purposes and overseas tour packages proposed to be reduced from 5% to 2%. 

• Existing penalties for delay in tax audit, transfer pricing audit, and filing of SFT/reportable accounts proposed to be replaced with graded mandatory fees (upto ₹1.5 lakh), with an overall cap of ₹1 lakh for certain SFT defaults. 

• Penalty for under-reporting or misreporting of income proposed to be levied within the assessment order itself, removing the requirement for separate penalty proceedings. 

• The tax rate on unexplained income proposed to be reduced from 60% to 30%, and the separate penalty provision proposed to be removed and aligned with misreporting penalties. 

• Associated enterprises covered under an Advance Pricing Agreement (APA) proposed to be allowed to file or revise returns to give effect to the agreement and claim refunds within three months. 

• Income of a foreign company from procuring data centre services from a notified Indian-owned data centre proposed to be exempt from tax upto 31 March 2047, provided services are routed through an Indian reseller. 

• Small taxpayers and other eligible payees to be permitted to apply electronically for lower or nil TDS/TCS certificates before the prescribed income-tax authority. 

• In the case of general insurance businesses, expenditure disallowed due to non-deduction or non-payment of TDS proposed to be allowed as a deduction in the year in which such tax is subsequently deducted and paid. 

• Income of a foreign company from supplying capital goods, equipment or tooling to an Indian contract manufacturer in a customs-bonded area for electronics manufacturing proposed to be exempt upto Tax Year 2030–31. 

• It is being clarified that an assessment order will remain valid despite minor defects in quoting the computer-generated Document Identification Number (DIN), as long as the DIN is referenced in any manner. This clarification will apply retrospectively from 1 October 2019. 

• No deduction for interest expenditure proposed to be allowed against dividend income or income from mutual fund units, removing the existing 20% cap. 

• Securities Transaction Tax (STT) on derivatives proposed to be increased – options to 0.15% and futures to 0.05%. 

• Safe harbour regime for IT services proposed to be liberalised, with all IT services clubbed under a single category, a uniform 15.50% margin, threshold increased from ₹300 crore to ₹2,000 crore, automated rule-based approvals, and an option to lock in safe harbour for five years.  

• Transfer pricing certainty proposed to be strengthened through time-bound unilateral APAs for IT services and introduction of a 15% safe harbour on cost for related entities providing data centre services from India. 

Indirect Taxes Proposals under Goods & Services Tax Act, 2017 

• Post-sale discounts proposed to be allowed through issuance of credit notes without requiring linkage to a pre-existing agreement, subject to reversal of corresponding input tax credit by the recipient. 

• Provisional refund facility proposed to be extended to cases involving inverted duty structure, in addition to zero-rated supplies. 

• Existing monetary threshold for grant of refund in cases of exports with payment of tax proposed to be removed. 

• Mandatory pre-deposit of 10% of the penalty amount proposed for filing appeals in cases involving only penalty, where no tax demand is involved. 

• Supply of goods warehoused in an SEZ or FTWZ before clearance proposed to be treated as neither supply of goods nor supply of services, with no refund eligibility on such transactions. 

Proposals under Customs Act, 1962 and Customs Tariff Act, 1975 

• Advance rulings proposed to remain valid for a period of 5 years or until there is a change in law or facts based on which the ruling was issued, whichever is earlier. 

• The requirement of obtaining prior permission for removal of warehoused goods from one custom bonded warehouse to another is proposed to be removed. The owner of warehoused goods may transfer such goods between warehouses, subject to prescribed conditions. 

• A new class of eligible importers proposed to be introduced by amending the Deferred Payment of Import Duty Rules, 2016, thereby expanding the scope of deferred duty benefits. 

• Courier regulations are proposed to be amended to remove the ₹5 lakh value cap on exports sent via courier, enabling exporters (especially e-commerce sellers) to send higher-value consignments through courier services.