In anticipation of the Union Budget 2026-27, the Finance Ministry has highlighted significant strides in tax reforms and investment incentives, signaling a continued commitment to streamlining the national tax architecture and providing relief to various taxpayer segments. The government aims to strike a balance between investor confidence, taxpayer relief, and administrative efficiency.
Several key direct tax reforms announced in previous Union Budgets have been fully implemented, designed to enhance investment certainty and reduce the compliance burden for taxpayers. These measures range from startup incentives to infrastructure funding.
Key Tax Reform Highlights
- Alternative Investment Funds (AIFs): To provide "certainty of taxation" to AIFs, the Finance Act, 2025, has amended Section 2(14) to explicitly include any securities held by Category I and Category II AIFs as capital assets. Effective from April 1, 2026, this reclassification ensures that income from the transfer of such securities is taxed under "Capital Gains" rather than "Profits and Gains of Business or Profession," aligning Indian AIFs with Foreign Portfolio Investors.
- Startup and Manufacturing Incentives: The government has extended significant tax holidays to boost the domestic startup and electronics manufacturing ecosystems. Section 80-IAC has been amended to extend the incorporation deadline for eligible startups to March 31, 2030. These entities can claim a 100% profit deduction for three consecutive years within their first 10 years of operation. The electronics manufacturing sector also benefits from a new presumptive taxation regime, introducing a deemed profit of 25% of gross receipts for non-residents providing services or technology to these units.
- Infrastructure and Individual Relief: The infrastructure sector benefits from the extension of the Tonnage Tax Scheme to inland vessels, effective April 1, 2026. Individual taxpayers also see substantial benefits, as withdrawals from National Savings Scheme (NSS) accounts on or after August 29, 2024, are now fully tax-exempt.
- Property Tax Simplification: Property tax rules have been simplified, allowing a nil annual value for two self-occupied properties without additional conditions.
- Dispute Resolution: To streamline tax disputes, the finance act introduces a three-year block period for transfer pricing assessments. Safe Harbour rules are also expanded, increasing the turnover threshold to ₹300 crore and incorporating new sectors, including electric vehicle components.
Additional Focus Areas
The Finance Ministry also reflected on other significant budget announcements and progress, including changes to the Personal Income Tax structure under the New Tax Regime (NTR), designed to leave more money in taxpayers' hands. Individuals earning up to Rs 12 lakh (Rs 12.75 lakh effectively for salaried tax payers, due to standard deduction of Rs. 75,000) are not required to pay tax by these slabs, rates and rebates.
The Finance Act 2025 extended Section 10 (23FE) benefits, allowing eligible Sovereign Wealth Funds (SWFs) and Pension Funds to make qualifying infrastructure investments until March 31, 2030, with continued tax exemption on dividends, interest, and Long Term Capital Gains (LTCG).
Expert Perspectives
Tax experts suggest that the government should prioritize administrative fixes rather than dramatic rate changes, focusing on simplifying compliance, reducing TDS rates, and ensuring faster dispute resolution. They also suggest simplifying income tax return forms. On the corporate front, expectations are closely tied to investment and business restructuring.
The Income Tax Bill, 2025, which is due to take effect from April 1, 2026, marks a significant step towards replacing India's six-decade-old direct tax framework.
