Share Buybacks: Tax Character Fundamentally Restructured
Consideration received on buyback was treated as deemed dividend income, taxable at the shareholder’s applicable slab rate without offset of acquisition cost. Separately, the cost of the extinguished shares was recognised as a capital loss — creating a structural mismatch that disproportionately disadvantaged retail shareholders, who often had no other capital gains against which to set it off.
- Buyback consideration will be taxed entirely as capital gains, with cost of acquisition deducted in the computation.
- For shareholders other than promoters: LTCG at 12.5% (listed and unlisted); STCG at 20% (listed) or slab rates (unlisted).
- Promoter safeguards: effective tax of 22% for domestic-company promoters and 30% for non-domestic promoters, to prevent tax arbitrage
- For non-promoter and retail shareholders, buybacks become structurally more tax-efficient — tax now falls only on the actual economic gain, not on the full consideration.
- Cash-rich corporates (particularly in IT) may once again prefer buybacks over dividends as a distribution tool for minority shareholders.
- For promoters, the differential rate neutralises the previous arbitrage window but does not categorically rule out buybacks; structuring will need to factor in the 22%/30% effective rate.
- PE exits via buyback remain viable but require cost-benefit benchmarking against secondary sales and dividends on a case-by-case basis.
Dividend Income: Interest Deduction Completely Disallowed
Interest expenditure incurred to earn dividend or mutual fund income was deductible, subject to a cap of 20% of gross dividend or mutual fund income received.
- No deduction whatsoever — including interest — will be allowed against dividend income or income from mutual fund units.
- Dividend and mutual fund income will be taxed on a gross basis, irrespective of financing costs.
- Effective from 1 April 2026 (Tax Year 2026–27 onwards).
- Leveraged equity and mutual fund strategies become structurally more expensive — particularly for HNIs and corporate treasuries using margin or loan funding.
- Yield-focused holding company models face higher effective tax leakage on passive investment income.
- The change eliminates a long-standing litigation grey area, but at the cost of funding-neutrality for passive portfolios.
Securities Transaction Tax: Derivatives Trading Costs Rise
Lower STT rates applied to futures and options, supporting derivatives market depth: futures at 0.02%; options premium at 0.10%; options exercised at 0.125%.
- Futures: 0.02% → 0.05% (a 150% increase).
- Options premium: 0.10% → 0.15% (a 50% increase).
- Options exercised: 0.125% → 0.15% (a 20% increase).
- STT on equity delivery trades remains unchanged.
- Transaction costs rise materially for proprietary desks, high-frequency traders, arbitrageurs, and hedgers in the F&O segment.
- Volumes and product-mix behaviour on exchanges may shift; the government has explicitly signalled intent to curb speculative activity (SEBI data shows 90%+ of retail F&O traders incur losses).
- Legitimate hedging by corporates and institutions will also absorb higher cost — structuring of commodity and equity hedges needs revisiting.
Sovereign Gold Bonds: Exemption Sharply Narrowed
Capital gains on redemption of SGBs at maturity were exempt from tax. In practice, this exemption was widely understood to apply to all holders at maturity, whether they subscribed at original issue or acquired SGBs through the secondary market.
- Exemption is now available only to the original subscriber at the time of RBI issuance.
- The bond must be held continuously until redemption on maturity.
- Both conditions must be satisfied simultaneously. Premature redemption — even after the lock-in period — is not eligible for exemption.
- Effective from 1 April 2026; applies uniformly across all RBI SGB series.
- Secondary market buyers lose the tax-free redemption benefit. Gains on maturity will be taxed as LTCG at 12.5%.
- The secondary market premium on SGBs (historically 10–15% over NAV) is likely to be repriced downward, dampening exchange-traded SGB liquidity.
- Portfolio strategies relying on post-issue SGB acquisition for gold exposure need immediate reassessment; gold ETFs or physical gold may now be comparatively more attractive for secondary-market-style entry.
Foreign Cloud Providers & Indian Data Centres: Long-Term Tax Holiday
No specific exemption existed for foreign companies providing cloud services through Indian data centres. Income attributable to Indian operations risked permanent establishment exposure and withholding or tax liability under general provisions.
- Foreign companies providing cloud services to global customers via Indian data centres will enjoy a tax holiday until 31 March 2047.
- Services to Indian customers must be routed through a notified Indian reseller entity (which will be taxed under standard provisions).
- Where the Indian data centre provider is a related party, a safe harbour of 15% on cost is proposed to reduce transfer-pricing disputes.
- A strong policy signal positioning India as a global data-centre and cloud hub, with long-term certainty that competes directly with Singapore and Dubai incentive regimes.
- Reduces permanent establishment and profit-attribution risk for global tech and cloud companies scaling India operations.
- The Indian reseller requirement ensures domestic participation and tax capture on locally consumed services — structuring of inbound cloud arrangements will need to account for this.
IFSC Regime: Tax Holiday Doubled, Post-Holiday Rate Capped
IFSC units enjoyed a 100% tax deduction for 10 consecutive years out of 15. Normal corporate tax rates applied thereafter.
- Tax holiday extended to 20 consecutive years out of 25.
- Post-holiday business income taxed at a concessional 15% rate — significantly below the 25–38% that would otherwise apply.
- Deemed dividend rules for intra-group loans through IFSC treasury centres are clarified and tightened: the benefit applies only where both parent and transacting entities are in notified foreign jurisdictions.
- IFSCs become credible long-term treasury, fund management, and capital formation hubs — not merely short-term incentive vehicles.
- The lifecycle tax framework (20-year holiday + 15% steady state) directly competes with Singapore and Dubai structures and improves IRR modelling for global institutions.
- Tightening of deemed dividend rules closes an arbitrage window; genuine intra-group treasury operations remain supported, but structures must be reviewed for compliance with the new jurisdictional conditions.
MAT: Made Final Tax; Credit Tied to New Regime
MAT was levied at 15% on book profits for companies under the old tax regime with exemptions or deductions. Excess MAT paid over regular tax liability was available as credit, carry-forwardable for up to 15 years.
- MAT rate reduced from 15% to 14%.
- MAT paid under the old regime becomes final tax — no fresh credit accrual going forward.
- Brought-forward MAT credit (as at 31 March 2026) can be set off only under the new tax regime, and only up to 25% of tax liability per year for domestic companies. The balance can be carried forward up to 15 tax years.
- For foreign companies, set-off is limited to the difference between regular tax and MAT.
- Non-residents on presumptive taxation are fully exempt from MAT.
- MAT planning strategies under the old regime lose relevance entirely.
- Companies with large accumulated MAT credits must urgently assess recoverability timelines under the 25% annual cap — credits that cannot be utilised within 15 years will lapse.
- The structure is an unmistakable nudge toward migration to the new regime. Companies that remain in the old regime will find credit utilisation severely constrained.
FEMA Portfolio Investment: Wider Access for Foreign Investors
Portfolio investment in listed Indian equities under FEMA rules was available to NRIs and OCIs. The individual investment limit was 5% of the equity of a listed company, with an aggregate cap across all such investors of 10%.
- Scheme extended to all Persons Resident Outside India (PROI) — not limited to NRIs/OCIs.
- Individual PROI limit increased from 5% to 10%.
- Aggregate PROI limit increased from 10% to 24%.
- Significantly broadens the pool of eligible foreign portfolio investors, improving liquidity in listed Indian securities.
- Listed companies may see higher foreign shareholding without triggering FDI thresholds or associated compliance.
- Signals a more open and investor-friendly capital markets regime; particularly relevant for diaspora capital and global high-net-worth allocation strategies.
GST: Intermediary Services — Place of Supply Corrected
Under Section 13(8)(b) of the IGST Act, intermediary services were deemed supplied at the location of the supplier. This resulted in Indian GST being levied even on services whose economic substance was directed entirely at overseas recipients — a long-standing export distortion.
- Section 13(8)(b) is omitted.
- Place of supply for intermediary services now falls under the default rule under Section 13(2): the location of the recipient of the service.
- Effective from 1 April 2026.
- Indian intermediaries serving overseas clients — in IT, sourcing, consulting, BPO, and GCC operations — may now qualify their services as zero-rated exports, removing a significant cost layer.
- Aligns India’s GST framework with global norms and is expected to reduce litigation that has persisted since the service tax era.
- Conversely, Indian importers of intermediary services from overseas providers will now face reverse-charge GST liability — a cost factor to be assessed in procurement structures.
Closing Observations
Budget 2026–27 is not a rate-driven Budget. Its real impact lies in the restructuring of transaction mechanics across several dimensions simultaneously.
The full commercial impact will materialise as proposals are enacted through the Finance Act and operationalised via delegated legislation and notifications.
SD Partners will continue to track enactment, notifications, and regulatory guidance and share targeted implementation updates relevant to companies and investors.