The Union Budget 2026 has introduced pivotal amendments to India’s direct tax landscape. While the announcement of a new Income Tax Act has been a headline, the immediate changes proposed in the Finance Bill signal a clear legislative intent towards simplifying compliance, rationalizing tax structures, and strategically guiding investment behaviour.
For tax professionals, understanding the nuances of these reforms is critical for advising clients effectively.
1. TCS/TDS Rationalization: Easing Compliance and Cash Flow
The Budget has significantly overhauled the Tax Collected at Source (TCS) and Tax Deducted at Source (TDS) framework, focusing on reducing the upfront tax burden and simplifying procedural complexities, especially for overseas remittances and specific services.
Old Regime: High Rates and Procedural Hurdles
Previously, the tax provisions for certain transactions were perceived as cumbersome and financially straining.
- Overseas Tour Packages: A TCS of 5% was levied on overseas tour packages, which increased to a steep 20% for amounts exceeding ₹7 lakh in a financial year under the Liberalised Remittance Scheme (LRS).
- Education & Medical Remittances: Remittances for education (if a loan was not taken) and medical purposes abroad attracted a TCS of 5% above the ₹7 lakh threshold.
- NRI Property Sales: When a Non-Resident Indian (NRI) sold a property in India, the resident buyer was required to obtain a Tax Deduction and Collection Account Number (TAN) to deduct and deposit the TDS, adding a layer of compliance.
- Manpower Services: There was ambiguity in the classification of manpower supply services, often leading to litigation over the applicable TDS rate.
This framework increased the immediate financial burden on individuals, leading many to defer or scale down their foreign expenditure plans. Data indicated that remittances under the LRS had declined by 6.84% to $29.563 billion in FY 2025, partly due to the higher upfront tax requirement.
New Regime: Reduced Rates and Simplified Processes
The Budget introduces targeted relief and clarity to address these pain points.
| Provision | Old Rule | New Rule (Effective Oct 1, 2025 / Apr 1, 2026) |
|---|---|---|
| TCS on Overseas Tour Packages | 5% up to ₹7 lakh, 20% above | Flat 2% with no threshold |
| TCS on LRS (Education/Medical) | 5% above ₹7 lakh | Flat 2% above ₹7 lakh |
| TDS on Manpower Services | Ambiguity, potential for higher rates | Specifically classified under contractor payments (Section 194C), TDS at 1% or 2% |
| TDS on NRI Property Sale | Buyer required TAN to deposit TDS | Buyer can use their PAN-based challan to deposit TDS |
| Lower/Nil TDS Certificate | Manual application and AO approval | Rule-based automated process for small taxpayers |
Impact and Analysis
These changes are a welcome relief for taxpayers. As Experts note, “Cutting TCS on education and medical remittances under the LRS offers meaningful relief to families funding overseas education and critical medical needs, improving cash flows at a time when global costs remain elevated.”
The reduction in TCS on tour packages is expected to boost the outbound tourism sector, which had seen a slowdown.
For professionals, the simplification of TDS compliance for NRI property sales is a significant process improvement, eliminating a procedural bottleneck. The clarification on manpower services provides much-needed certainty and will likely reduce litigation. The move towards an automated process for lower TDS certificates further underscores the government’s commitment to leveraging technology for “Ease of Living.”
2. MAT Regime Overhaul: A Shift in Corporate Tax Philosophy
The provisions related to Minimum Alternate Tax (MAT) have been fundamentally altered, moving from a credit-based system to a final tax, signaling a major shift in corporate tax policy.
Old Regime: MAT as a Deferral Mechanism
Under the erstwhile provisions, MAT was levied at 15% on the book profits of a company if the tax payable as per normal provisions was lower than the MAT liability.
The excess MAT paid over the normal tax liability could be carried forward as a MAT credit for up to 15 assessment years and set off in a year when the normal tax liability exceeded the MAT liability. This positioned MAT as a tax deferral mechanism, ensuring companies paid a minimum level of tax while allowing them to eventually utilize the credit.
New Regime: MAT as a Final Tax
The Budget proposes a paradigm shift in this regime, effective from April 1, 2026.
- MAT as a Final Tax: The concept of MAT credit accumulation will cease. MAT paid will be treated as the final tax for the year, with no credit to be carried forward for future set-off.
- Rate Reduction: The MAT rate is proposed to be reduced from 15% to 14%.
- Transitional Relief for Existing Credits: Companies will not lose their MAT credit accumulated up to March 31, 2026. A transitional provision allows for the set-off of this brought-forward credit, but with a limitation. The set-off will be restricted to one-fourth of the tax liability in the new regime for a given year.
Impact and Analysis
This is a double-edged sword for corporates. The reduction in the MAT rate is a positive, but the discontinuation of the credit mechanism fundamentally changes financial planning for companies that have historically been MAT-payers.
The limited set-off of existing credits means that companies with large accumulated MAT credits may not be able to fully utilize them, potentially impacting their deferred tax assets.
This move appears to be aligned with the government’s broader strategy of simplifying the tax structure and moving away from complex deferral and credit systems. For tax professionals, this requires a re-evaluation of clients’ future tax projections and a strategic assessment of how to best utilize the available brought-forward credit within the new, more restrictive framework.
3. NRI Investment Liberalization: Opening the Floodgates for PROIs
In a significant move to attract foreign capital and deepen Indian equity markets, the Budget has substantially liberalized the investment framework for Persons Resident Outside India (PROIs).
Old Regime: A Restrictive Path for Individual Overseas Investors
Previously, the route for individual foreign investors (who are not NRIs or OCIs) to invest in the Indian stock market was restrictive.
While the Portfolio Investment Scheme (PIS) existed, the overall investment by all PROIs in a single Indian company was capped at 10% of the paid-up capital, with an individual PROI’s holding capped at 5%.
For larger, more direct access, these individuals often had to register as Foreign Portfolio Investors (FPIs) with SEBI, a process that Experts describe as involving “complex KYC, net worth thresholds, and higher costs,” or invest indirectly through offshore funds.
This restrictive environment was seen as a hurdle, especially at a time when India faced significant capital outflows, with net FII outflows reaching almost $19 billion in 2025 and FPIs dumping shares worth $4 billion in January 2026 alone.
New Regime: A Wider, More Direct Investment Avenue
The Budget proposes to dramatically widen this investment avenue.
| Provision | Old Limit | New Limit |
|---|---|---|
| Individual PROI Investment Limit | 5% of paid-up capital | 10% of paid-up capital |
| Aggregate PROI Investment Limit | 10% of paid-up capital | 24% of paid-up capital |
Crucially, the Finance Minister announced that PROIs would be permitted to invest in equity instruments of listed Indian companies directly through the PIS.
Impact and Analysis
This is a strategic masterstroke aimed at boosting foreign investment and strengthening capital inflows. By more than doubling the aggregate investment limit and allowing direct access via the PIS, the government is effectively rolling out the red carpet for a broader base of global retail investors.
Experts believe this move “eliminates FPI registration hurdles for direct retail access, cuts compliance costs/time, boosts market liquidity/depth, and channels more diverse foreign inflows without diluting control safeguards.”
For tax professionals advising foreign clients, this opens up a simplified and more attractive route for portfolio investment into India. It is expected to deepen the market and provide a much-needed cushion against global capital volatility, strengthening India’s position as a premier investment destination.
4. STT Hike: A Surgical Strike on Derivative Speculation
Perhaps the most debated change in the Budget, the sharp increase in the Securities Transaction Tax (STT) on derivatives, is a clear signal of the government’s intent to curb speculative trading and encourage long-term investment.
Old Regime: A Lower-Cost Environment for F&O Trading
Prior to the budget, the STT rates on futures and options (F&O) were relatively lower, which contributed to an explosive growth in derivative volumes, particularly among retail investors.
However, this surge came with a dark side. A SEBI study revealed that 9 out of 10 individual traders in the equity F&O segment incurred net losses, with these losses widening by 41% to a staggering ₹1.06 lakh crore in FY 2024-25.
New Regime: A Significant Increase in Transaction Costs
The Budget has proposed a steep hike in STT rates for derivative trades.
| Derivative Transaction | Old STT Rate | New STT Rate | Percentage Increase |
|---|---|---|---|
| Sale of a Futures Contract | 0.02% | 0.05% | 150% |
| Sale of an Options Contract (Premium) | 0.10% | 0.15% | 50% |
| Sale of an Option (on Exercise) | 0.125% | 0.15% | 20% |
Impact and Analysis
The market’s reaction was immediate and severe, with benchmark indices falling nearly 2% and the market capitalization of BSE-listed companies eroding by ₹6 lakh crore during the special Budget day trading session. Brokerage and exchange stocks were hit particularly hard.
The financial impact on traders is substantial. For a single Nifty futures lot, the STT would increase by nearly ₹500. This directly increases the break-even point for traders, especially high-frequency and algorithmic traders who rely on small price movements.
Experts are divided on the move. One view is that it is a “structurally negative for the capital market ecosystem,” likely to “cool derivative activity and lead to a reduction in volumes.” Another perspective is that this is a necessary “reasonable course correction” to protect retail investors from significant losses and shift the market’s focus from short-term speculation to long-term value investing.
While the government aims to generate additional revenue (targeting ₹73,700 crore from STT in FY 2026-27), the primary intent appears to be volume moderation.
For tax professionals, this change has significant implications for clients involved in active trading, requiring a re-evaluation of trading strategies and cost structures.
