Union Budget 2026 27 Impact on Taxation MSME Growth and FDI

On 1 February 2026, Nirmala Sitharaman, the Finance Minister of India, presented the Union Budget for the financial year 2026–27.

This year’s Budget sends a strong signal to global investors—India is committed to stability, transparency, and long-term growth.

Through simplified tax structures, MSME-friendly reforms, and investor-oriented policy updates, the Budget aims to strengthen confidence among foreign companies, NRIs, and international businesses to freely invest in India.

This article analyses the key taxation and regulatory changes and their implications for investing and operating in India.

Table of Contents

Key Changes in Taxation Policy under Union Budget 2026

The Union Budget 2026 introduces focused taxation reforms to simplify the tax system and improve ease of compliance. These measures encourage voluntary compliance, reduce disputes, and provide greater certainty, while promoting transparency, protecting revenue, and preventing tax evasion.

1. Direct Taxation Reforms (Budget 2025 vs Budget 2026)

Area Budget 2025 (Earlier Position) Budget 2026 (Revised Position) Impact / What It Means
Foreign Assets Disclosure No specific scheme for small taxpayers Foreign Assets of Small Taxpayers Disclosure Scheme, 2026 introduced One-time opportunity to disclose undisclosed foreign income/assets with immunity
Immunity for Misreporting Immunity available mainly for under-reporting, not misreporting Immunity extended to misreporting cases on payment of additional tax Reduced litigation and prosecution exposure
Penalty Framework Separate penalty orders and longer processes Penalty linked directly to assessment order Faster closure and procedural clarity
Minimum Alternate Tax (MAT) Rate MAT @ 15% MAT reduced to 14% Lower tax burden for companies
MAT Credit Usage MAT credit available broadly MAT credit allowed only in New Regime, capped at 25% Push towards new tax regime
MAT Nature Adjustable tax with carry-forward credit MAT becomes final tax in old regime Certainty in tax liability
Co-operative Dividend Deduction Deduction mainly under old regime Deduction allowed in new regime also, limited to dividend distributed Relief for cooperative societies
Eligible Agricultural Produce (Co-ops) Limited list Cotton seeds and cattle feed added Broader deduction coverage
IFSC / Offshore Units Tax Holiday Tax holiday for 10 years Extended to 20 consecutive years Strong incentive for IFSC investments
Updated Return – Additional Tax Additional tax without extra notice-linked levy Extra 10% if updated return filed after notice Discourages delayed compliance
Disability Pension Exemption Partial / unclear treatment Full exemption (service + disability element) Relief to disabled individuals
Motor Accident Compensation Interest Taxable in many cases Exempt from tax Relief to accident victims
Land Acquisition Compensation Limited exemptions Exemption for compulsory acquisition (post 1 Apr 2026) Relief to landowners,
Reduced disputes
Exemption for Non-Resident Experts No broad exemption for global income of non-resident experts Exemption of global income of non-resident experts for 5 years under notified schemes Attracts global talent and technical experts to India
TDS on Property Purchase from Non-Residents TDS compliance required TAN PAN-based TDS allowed instead of TAN Simplifies compliance for buyers of property from non-residents
Updated Return (Section 139(8A)) Updated return could not be filed as a loss return Updated return can be filed as a return of loss, if loss is lower than original return (effective 1 March 2026) Provides relief to taxpayers correcting earlier returns
Revised Return – Time Limit Revised return allowed up to 9 months from end of relevant tax year Revised return allowed up to 12 months with fee (effective 1 April 2026) More time to correct mistakes with nominal cost
Fee for Extended Revised Return Not applicable Income ≤ ₹5,00,000 →₹1000 Income > ₹5,00,000 → ₹5,000 Discourages delay but allows flexibility
Due Date – Non-Audit Business / Profession 31st July following the relevant tax year 31st August following the relevant tax year Additional one month for compliance
Overall Revision Window Revision allowed up to 31st December Revision allowed up to 31st March with nominal fee Reduces hardship and litigation

TCS Rationalization

(As per Finance Bill, 2026 – Clause 73)

The government has introduced changes to Tax Collected at Source (TCS), effective 1 April 2026. TCS rates are rationalized and standardized at 2%, simplifying compliance. Let’s understand in detail:

Transaction / Purpose Existing TCS Rate (Budget 2025) Revised TCS Rate (Budget 2026) Simple Explanation
Alcoholic liquor for human consumption 1% 2% Rate increased and made uniform
Tendu leaves 5% 2% Rate reduced
Scrap 1% 2% Slight increase
Minerals (coal, lignite, iron ore) 1% 2% Single uniform rate
LRS – Education 5% 2% Relief for students
LRS – Medical treatment 5%  exceeding 7 lakh 2% Relief for medical expenses
Overseas tour package – 5% upto 7 lakh 2% Threshold removed
Overseas tour package – a 20% above 7 lakh 2% Major reduction and also threshold removed

Capital Market Taxation Updates – Budget 2026–27 (Investor Focus)

The Union Budget 2026–27 updates capital market taxation to simplify rules, curb speculation, and align with market practices. If you are considering investing in India, it is important to keep these investor-friendly changes in mind before entering the Indian market. Key changes include:

Securities Transaction Tax (STT) Changes

  • Futures (sale): STT increased from 0.02% → 0.05%
  • Options (premium): STT increased from 0.10% → 0.15%
  • Options (exercise): STT increased from 0.125% → 0.15%
  • Impact for investors: Derivatives trading (F&O) will become slightly more expensive; reduces speculative trading.

 Share Buyback Taxation

  • Buyback proceeds now taxed as capital gains, not deemed dividends
  • Capital gain rates to be taken to be :-
  • Short-Term Capital Gains (STCG)
  • Listed shares (Section 111A): 20%
  • Applicable if shares are held for up to 12 months
  • Long-Term Capital Gains (LTCG):
  • Listed shares (Section 112A): 12.5%
  • Exemption up to ₹1.25 lakh
  • Applicable if shares are held for more than 12 months
  • Unlisted shares:
  • STCG: Taxed at applicable slab rates
  • LTCG: 12.5%

 Capital Gains & Other Market Provisions

  • Cash equity capital gains: No change in existing rates
  • Sovereign Gold Bonds (SGB): Capital gains exemption continues only if held till maturity
  • Impact for investors: Encourages long-term holding of SGBs and careful buyback participate

2. Indirect Taxation

GST Law Updates Simplified (Changes in GST

(Effective from a date to be notified in coordination with States, as per GST Council recommendations)

The GST framework is being updated to make compliance simpler, faster, and clearer. Key changes are:

Post-Sale Discounts (Section 15, CGST Act, 2017)

  • No need for a formal agreement for post-sale discounts.
  • Credit notes under Section 34 used for reversing Input Tax Credit.

Provisional Refunds for Inverted Duty (Section 54) ( Recently Added)

  • Refunds allowed when tax on inputs > tax on outputs.
  • Refunds Below ₹1,000 (Section 54)
  • No minimum limit for refund claims on exported goods with tax paid.

Temporary Empowerment of Tribunals (Section 101A)

  • Central Government can empower existing tribunals to hear appeals until National Appellate Authority is formed.
  • 13(2) do not apply in this case.
  • Effective 1 April 2026.

Place of Supply for Intermediary Services (Section 13, IGST Act, 2017)

  • Specific rule for intermediary services removed.
  • Place of supply now follows default rule under Section 13(2) i.e Location of Recipient

GST Procedures

  • Ambiguities in refunds, credit notes
  • Procedural clarifications introduced
  • Reduced disputes

Fisheries Sector

  • No special treatment earlier
  • Duty-free import of fish caught beyond Indian waters i.e in high sea
  • Boost to fishing industry

Customs Duty Reliefs & Revisions

(Effective from 02 February 2026 unless specified)

The Budget 2026–27 updates customs duties to help businesses and consumers save costs. Key reductions cover raw materials, renewable energy, nuclear & defence components, medicines, and personal imports, boosting manufacturing and exports. Some duties are increased or exemptions removed to streamline imports and make planning easier.

Sector Items Duty Before Duty After
Critical Minerals Monazite 2.5% Nil
Renewable Energy Sodium antimonate for solar glass 7.5% Nil
Capital goods for lithium-ion battery cells As applicable Nil
Nuclear Energy Goods for nuclear power generation (8401 30 00) 7.5% Nil
Control & burnable absorber rods (8401 40 00) 7.5% Nil
Electronics Goods for microwave ovens (8516 50 00) As applicable Nil
Civil Aviation Aircraft components & engines As applicable Nil
Defence Raw materials for aircraft maintenance & parts As applicable Nil
Drugs / Medicines 17 new drugs/medicines 5% / 10% Nil
7 rare disease drugs (personal use) As applicable Nil
Customs Duty on Inputs Higher or varied duties Many raw materials made duty-free Lower manufacturing costs
Personal Imports Dutiable goods under Chapter 9804 10% / 20% 10% (from 01.04.2026)

MSME Growth & Relief Measures – Budget 2026

Tax simplification significantly reduces compliance burden, costs, and litigation exposure for SMEs, enabling them to focus on business operations, scalability, and growth rather than navigating complex tax laws

Impact of Tax Simplification on Small and Medium Businesses

Tax Simplification Area What Changed Impact on SMEs
Simpler Income Tax Law New Income Tax Act, 2025 replaces complex old law Easy understanding; fewer compliance errors
Simplified Tax Forms Returns and rules redesigned for common taxpayers Less paperwork and lower compliance cost
Clear TDS Rules Manpower services taxed as contractor payments No confusion; smoother cash flow
Automated TDS Relief Online lower / nil TDS certificate system Faster cash release; better working capital
Centralised Declarations Single Form 15G / 15H shared with all payers Saves time; avoids repeated filings
Extended Revision Time Returns can be revised till 31 March Lower penalties for genuine mistakes
Relaxed Filing Deadlines More time for non-audit businesses Reduced last-minute pressure
Reduced Penalty Exposure Penalty waiver and immunity provisions expanded Lower litigation risk
Encourages Voluntary Compliance No penalty if extra tax is paid Promotes honest reporting

Foreign Investment & FDI Perspective

Budget 2026 gives a clear and positive message to foreign investors. It focuses on stable policies, simpler tax rules, and easier compliance. With fewer disputes, predictable taxes, and smoother procedures, investors face lower risk and greater confidence. By continuing reforms while keeping fiscal discipline, India positions itself as a safe, reliable, and attractive long-term destination for foreign investment, especially for businesses looking for stability, growth, and scale

Why Union Budget 2026 Is FDI-Friendly?

 Clear Commitment to Global Integration

  • The Budget makes it clear that India wants to stay closely connected with global markets. It encourages exports, foreign capital, and long-term foreign investment. This gives foreign investors confidence that India remains open and welcoming to FDI.

Strong Focus on Policy Certainty and Stability

  • By introducing a new and simpler Income Tax Act from 1 April 2026, the government brings clear and predictable tax rules. This helps foreign investors plan long-term investments with more confidence

Simplified Tax Laws and Procedures

The Budget announces:

  • Simplified tax rules and redesigned forms
  • Clearer TDS provisions
  • Automated, rule-based compliance processes
  • These measures reduce regulatory friction, making it easier for foreign companies to operate and comply in India.

 Ease of Doing Business Orientation

The Budget continues the reform momentum with:

  • Reduced compliance burden
  • Trust-based and faceless processes
  • Digital and automated tax administration
  • This improves India’s business environment, a critical factor for attracting FDI.

Fiscal Discipline with Reform Momentum

The Budget balances fiscal consolidation with ongoing reforms. For foreign investors, this signals macroeconomic stability, responsible governance, and lower sovereign risk

Union Budget 2026 clearly shows that India is focused on stable policies, clear rules, and long-term economic reforms, giving confidence to global investors planning long-term investments in India

Key FDI-positive signals

Budget 2026 strengthens investor confidence by offering policy stability, simpler tax laws, fewer disputes, and a predictable business environment, all of which are positive signals for long-term FDI

Commitment to Global Market Integration

  • The Budget states that India will remain deeply integrated with global markets, focusing on exports, trade, and long-term capital inflows.

Stable and Reform-Oriented Policy Direction

  • Emphasis on continuous structural reforms, fiscal discipline, and predictable governance provides comfort to long-term foreign investors.

New Income Tax Act, 2025

  • Replacement of the Income-tax Act, 1961 with a simplified law effective from 1 April 2026 improves clarity and predictability for foreign investors.

Simplified Tax Rules and Compliance

  • Redesigned tax rules and forms aim to reduce complexity and make compliance easier for businesses, including foreign companies operating in India.

Reduced Litigation and Penalty Exposure

  • Expanded Dispute Resolution Committee powers, penalty waivers, and immunity provisions lower tax dispute risks for investors.

Predictable Corporate Tax Framework

  • MAT made a final tax at a reduced rate of 14%, reducing uncertainty in corporate tax planning for foreign investors.

Ease of Doing Business Focus

  • Continued emphasis on deregulation, reduced compliance burden, and automated processes supports a more investor-friendly business environment.

Fiscal Consolidation with Growth Focus

  • Balanced approach of fiscal discipline alongside reforms signals macroeconomic stability, important for foreign capital.

Conclusion

Overall, Budget 2026–27 is not just a fiscal announcement—it is a strategic roadmap for sustainable economic growth, investor confidence, and global integration. Businesses and investors who align early with these reforms can unlock significant opportunities in India’s evolving regulatory and economic landscape.

Foreign investors, NRIs, and global companies benefit from predictable tax policies, reduced litigation risk, and sector-specific incentives that make India a more attractive and reliable investment destination.

How can Mercurius help?

If you are an investor or an individual interested in investing in India, or if you would like to understand how these policies can benefit you from an investment perspective, you can seek guidance from our professionals.

At Mercurius, we help businesses, MSMEs, and foreign investors navigate tax reforms, regulatory changes, and cross-border investment structures with clarity and confidence. Our expertise in taxation, compliance, and global business advisory enables clients to make informed decisions and maximize value under India’s changing policy framework.

For more details, you can contact us or book a one-time free consultation with our team.

Reference: https://www.indiabudget.gov.in/doc/Finance_Bill.pdf