Union Budget 2026: Big Bets In Tech

As India advances towards its long-term development goals, the Union Budget 2026-27 ("Budget") is presented against the backdrop of a technology-driven global economy and India's expanding role in services, manufacturing and digital infrastructure. The Finance Minister, while outlining the Government's vision of fulfilling its "kartavya" towards the nation, underscored that a robust and resilient financial sector is central to mobilising savings, allocating capital efficiently, and managing risks. Further, the minister heavily emphasised on reliance of cutting-edge technologies, including Artificial Intelligence ("AI") applications, which she believed would serve as force multipliers for improved governance and prosperity of the nation going forward.

The Finance Minister also highlighted that the initiatives announced in recent years relating to digital public infrastructure, financial sector reforms and regulatory simplification are being carried forward and strengthened. The Budget builds on this foundation through measures spanning AI, advanced manufacturing, micro, small and medium enterprises, capital markets and digital infrastructure. These proposals are complemented by targeted tax and regulatory changes under the Finance Bill 2026-27 ("Finance Bill"), aimed at providing certainty, improving compliance and aligning India's policy framework with evolving economic priorities. In this article, we set out our preliminary observations on key proposals relevant to the technology and fintech sector.

Highlights and Analysis:

2.1AI and Other Emerging Technologies Initiatives

The Budget reiterates that adoption of emerging technologies, including AI, is central to fulfilling aspirations and building capacity across society, benefiting farmers, women in STEM, youth seeking to upskill and persons with disabilities. AI is being positioned as an instrumental tool to improve governance and service delivery. Some key developments include the following:

(a)High-Powered 'Education to Employment and Enterprise' Standing Committee

The Budget contemplates setting up of a High-Powered 'Education to Employment and Enterprise' Standing Committee to assess the impact of emerging technologies, including AI, on jobs and skill requirements, and to recommend measures for embedding AI in education curricula, upskilling and reskilling technology professionals, and enabling AI-based matching of workers, jobs and training opportunities.

(b) Bharat-VISTAAR

The Budget proposes the launch of a multilingual AI tool integrating the AgriStack digital agriculture platform and agricultural practice packages developed by the Indian Council of Agricultural Research with AI systems under the Bharat-VISTAAR (Virtually Integrated System to Access Agricultural Resources). The tool is intended to provide customised advisory support to farmers, with the objective of enhancing farm productivity, enabling informed decision-making and reducing agricultural risk through data-driven insights.

(c)Animation, Visual Effects, Gaming and Comics Content Creator Labs

The Budget proposes establishment of Animation, Visual Effects, Gaming and Comics ("AVGC") Content Creator Labs under support of the Indian Institute of Creative Technologies, Mumbai. These labs are planned to be set up in 15,000 (fifteen thousand) secondary schools and 500 (five hundred) colleges across the country, aimed at building skills in creative technology fields. The Finance Minister notes that the AVGC sector is a key component of India's "orange economy," with a projected demand of 2 (two) million skilled professionals in animation, visual effects, gaming and related digital creative activities by 2030.

Analysis:

The Budget's focus on AI initiatives reflects an emphasis on capacity building and integration of emerging technologies across sectors, with AI positioned as an enabler for governance, service delivery and sector-specific applications. This signals the Government's intent to move beyond foundational digital infrastructure and towards embedding advanced technologies within governance and economic activity. However, the Budget offers limited clarity on implementation frameworks, institutional readiness, and the mechanisms required to translate policy intent into scalable outcomes. Therefore, for industry participants and investors, the emphasis on AI is directionally positive but there remains uncertainty around timelines, policy coherence, and commercial viability.

2.2Information Technology Services and Digital Infrastructure

(a)Information Technology Services and Transfer Pricing

To address long-standing interpretational ambiguities around service classification, which have historically resulted in protracted transfer pricing disputes, the Budget has proposed the following key reforms:

(i)The Budget recognises India's position as a global leader in software development services, IT-enabled services (ITeS), knowledge process outsourcing (KPO), and contract Research and Development services relating to software development, and proposes to club these inter-connected activities under a single category of "Information Technology (IT) Services".

(ii)A common safe harbour margin of 15.5% (fifteen point five percent) is proposed to apply to all such IT services.

(iii)the transaction value threshold for availing the safe harbour is proposed to be enhanced substantially from INR 300 (Indian Rupees three hundred) crore to INR2,000 (Indian Rupees two thousand) crore.

(iv)safe harbour applications for IT services to be approved through an automated, rule-driven process without the need for examination or acceptance by a tax officer.

(v)Once opted for, the safe harbour may be continued for a period of 5 (five) consecutive years at the option of the IT services company.

(b)Data Centres and Cloud Services

(i) To enable critical digital infrastructure and boost investment in data centres, the Budget proposes to provide a tax holiday up to 31 March 2047, to foreign companies providing cloud services to customers globally by procuring data centre services from India. This tax holiday will only apply where such services are availed from a "specified data centre" which: (x) is set up under an approved scheme and is notified by the Ministry of Electronics and Information Technology; and (y) is owned and operated by an Indian company.

(ii)One of the conditions for this exemption is that where such services is being provided to Indian customers by the foreign company, it should be routed through an Indian reseller entity.

(iii)A safe harbour of 15% (fifteen percent) on cost is also proposed where data centre services are provided by a resident entity to a related foreign company.

Analysis:

The proposals signal a clear policy intent to reinforce the IT sector's role as a growth engine by combining certainty in transfer pricing outcomes with targeted incentives for digital infrastructure. The consolidation of IT services under a unified safe harbour regime, higher thresholds and automation of approvals is likely to reduce compliance friction and provide predictability for large and mid-sized IT services providers. By eliminating classification-based arbitrage, the proposal has the potential to unclog a substantial number of cases pending before the Income Tax Appellate Tribunal , reduce litigation risk, and enhance certainty for multinational enterprises operating captive and outsourced IT service models in India.

In parallel, long-term tax incentives for data centres and cloud services reflect a strategic push to position India as a global hub for digital infrastructure and cross-border service delivery, while retaining appropriate taxability for domestic consumption through Indian reseller structures. The proposal seeks to elevate the data centre sector from a supporting industry to a strategic national asset, particularly in the context of evolving data localisation requirements under the Digital Personal Data Protection Act, 2023 ("DPDP Act"). By lowering the tax and regulatory burden associated with operating data centres in India, the Government is seeking to convert regulatory compliance from a cost centre into a source of competitive advantage.

2.3Fintech and Financial Sector

(a)High-Level Committee on Banking for Viksit Bharat

The Budget proposes the constitution of a High-Level Committee on Banking for Viksit Bharat to undertake a comprehensive review of the banking sector. The Committee is intended to evaluate measures required to sustain reform-led growth, while safeguarding financial stability, inclusion and consumer protection, against the backdrop of improved asset quality and strong balance sheets across the sector.

(b)UPI and RuPay Subsidy

The Budget allocates ₹2,000 (Indian Rupees two thousand) crore as an incentive subsidy to support Unified Payments Interface ("UPI") and RuPay debit card transactions in the coming financial year. This allocation is designed to continue promoting zero merchant discount rate ("MDR") digital payments by helping banks and payment service providers cover costs for low-value person-to-merchant transactions, allowing users and merchants to transact without fees.

While the subsidy demonstrates the Government's ongoing commitment to a cashless economy and widespread digital payment adoption, there are concerns that the allocation remains insufficient given the rapid growth in transaction volumes and the financial demands of maintaining and expanding digital payment infrastructure. Industry stakeholders would have hoped for a significantly larger support pool, arguing that higher incentives are needed to sustain zero-MDR transactions and encourage further innovation, particularly as UPI continues to process record numbers of payments.

(c)Virtual Digital Assets

To ensure compliance with the reporting requirements under Section 509 of the Income-tax Act, 2025, the Finance Bill proposes the introduction of a specific penalty framework for transactions involving crypto-assets. A penalty of INR 200 (Indian Rupees two hundred) per day is proposed for failure to furnish the prescribed statement within the stipulated time. In addition, a penalty of INR 50,000 (Indian Rupees fifty thousand) is proposed for furnishing inaccurate particulars in such statements and failure to rectify the inaccuracy.

While reporting obligations for virtual digital asset transactions already existed, the absence of a specific penalty regime limited their enforceability. The proposed penalties for non-furnishing and inaccurate reporting seeks to close this gap by creating clear consequences for non-compliance. By doing so, the measures are intended to improve accuracy of disclosures and strengthen traceability of crypto-asset transactions within the existing tax framework, without changing their substantive tax treatment.

(d)Tax Incentives and Rationalisation for IFSC Units and Treasury Centres

The provisions of Section 147 of the Income Tax Act provide for deduction of 100% (one hundred percent) on certain incomes to the units of International Financial Services Centre ("IFSC") and Offshore Banking Units ("OBUs"). This is available for 10 (ten) consecutive years out of 15 (fifteen) years for units in IFSC and 10 (ten) consecutive years for OBUs. The Finance Bill proposes to extend this period of deduction available to units in the IFSC and OBUs to 20 (twenty) consecutive years out of 25 (twenty five) years for units in the IFSC. For OBUs, the deduction period is similarly proposed to be extended to 20 (twenty) consecutive years. It is further proposed that business income of such units arising from the IFSC after the expiry of the deduction period shall be taxed at a concessional rate of 15% (fifteen percent).

The Finance Bill also proposes to rationalise the provisions relating to deemed dividend applicable to treasury centres in the IFSC. Advances or loans between group entities are proposed to be excluded from the scope of deemed dividend where the parent or principal entity of the group is listed in a country or territory outside India, and both the parent or principal entity and the other group entity to the transaction are located in such notified foreign jurisdictions.

(e)Non-Banking Financial Companies

As part of the vision for Non-Banking Financial Companies ("NBFCs") for Viksit Bharat, the Budget outlines a restructuring of the Power Finance Corporation and the Rural Electrification Corporation as an initial step towards achieving scale, efficiency and enhanced technology adoption in public sector NBFCs.

Analysis:

The proposals reflect a multi-pronged approach to strengthening financial sector intermediation and market depth. While the proposed banking sector review signals an intent to recalibrate institutional frameworks for the next phase of growth, the restructuring of public sector NBFCs points to a focus on efficiency and scale in specialised lending. The Government's stance on crypto and virtual digital assets remains conservative at best. While reporting obligations already existed under law, the proposal to insert a penalty under the Income Tax Act specifically for either failing to furnish statements on crypto transactions or providing inaccurate statements demonstrates the Governments clear no nonsense approach to ensuring strict governance of crypto players and transactions, leaving the market with lesser clarity than before on what the future holds for such instruments. Separately, the announcement to enhance the competitiveness of the IFSC, the introduction of a concessional post-holiday tax rate provide greater long-term tax certainty for IFSC units. By extending the deduction period and reducing the effective tax burden thereafter, the proposals address concerns around cliff-edge taxation for early entrants and may support retention of existing units while attracting new financial institutions seeking a stable, long-term operating base.

2.4Other key announcements

(a) Enhanced expenditure allocation for Data Protection Board

The Data Protection Board ("DPB"), established under the DPDP Act has been allocated INR10 (Indian Rupees ten) crore in the Budget, representing a fivefold increase from the INR 2 (Indian Rupees two) crore provided in the previous year's budget estimates. The accompanying explanatory note clarifies that this enhanced allocation is intended to meet the salary and other establishment related expenses of the DPB.

As the regulatory architecture transitions from a largely legislative phase to an implementation driven phase, the increased allocation signals a recognition of the administrative and institutional demands associated with enforcement, including staffing, adjudicatory capacity and internal processes.

(b)Industry stakeholders registered as Micro, Small and Medium Enterprises ("MSMEs") may benefit from the following proposed MSMEs incentives:

(i) introduction of a dedicated INR 10,000 (Indian Rupees ten thousand) crore Small and Medium Enterprises Growth Fund ("Fund") aimed at supporting the creation of "Champion" MSMEs. The Fund is intended to provide equity support to enterprises based on select criteria, with a view to enabling scale, competitiveness and long-term growth.

(ii)a top-up of INR 2,000 (Indian Rupees two thousand) crore to the Self-Reliant India Fund established in 2021. The additional allocation seeks to maintain access to risk capital for micro enterprises and support their growth trajectory.

(iii)series of measures to enhance liquidity and financing access for MSMEs through the Trade Receivables Discounting System ("TReDS"). These include: (a) mandating TReDS as the transaction settlement platform for all purchases from MSMEs by central public sector enterprises;(b) introduction of credit guarantee support through Credit Guarantee Fund Trust for Micro and Small Enterprises for invoice discounting;(c) integration of Government e-Marketplace with TReDS to improve information flow to financiers; and (d) enabling securitisation of TReDS receivables to develop a secondary market.

The expanded support for MSMEs in recent years reflects recognition of the sector's role as a key engine of employment and growth and is likely to improve cash flow and reduce working capital constraints for the sector. Several banks and fintechs (typically being NBFCs or entities partnering with NBFCs) that historically stayed away from the MSME sector owing to several challenges may now reconsider the MSME markets as a viable commercial option drawing comfort from recent measures including increased liquidity and finance access through TReDS and other measures like increase in credit guarantee covers that were implemented over the last year.

(c)India Semiconductor Mission 2.0

Building on the expansion of capabilities under India Semiconductor Mission ("ISM") 1.0, the Budget proposes the launch of ISM 2.0 to support production of semiconductor equipment and materials, development of full-stack Indian intellectual property, and strengthening of semiconductor supply chains. The initiative also places emphasis on industry-led research and training centres to develop technology capabilities and a skilled workforce.

(d)Foreign Exchange Management (Non-debt Instruments) Rules, 2019

The Budget proposes a comprehensive review of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 with a view to creating a more contemporary and user-friendly framework for foreign investments. The proposed review is aimed at aligning foreign investment regulations with India's evolving economic priorities.

Conclusion

The Budget reflects a continued emphasis on reform-led growth, with AI, technology, skills and institutional capacity positioned as central to India's economic trajectory. The proposals across emerging technologies, manufacturing, financial markets and digital infrastructure indicate a policy approach focused on strengthening foundational ecosystems rather than short-term interventions. In conclusion, while the Budget presents a sophisticated blueprint for "Viksit Bharat", its success hinges on bridging a significant execution gap between high-level structural ambition and ground-level fiscal reality within the technology sector.

Notably, the Budget moves towards technology-led "Atmanirbharta", reflected in initiatives such as ISM 2.0, tax cuts for local data centres and measures relating to skill development and AI. These interventions seek to align workforce capabilities with evolving industry requirements and support services-led growth. Parallel reforms in the financial sector, capital markets and the tax framework aim to enhance regulatory certainty, deepen liquidity and improve access to capital. The continued focus on ease of doing business and regulatory rationalisation is likely to remain relevant for both domestic and foreign investors.

Taken together, the Budget and the Finance Bill indicate a calibrated approach to advancing long-term growth objectives, however, one that will be tested by the effectiveness of execution and inter-institutional coordination.

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