Budget 2026: How Tax Reforms & AI Push Impact Indian Infotech

Introduction: A Budget for Digital Transformation

Union Budget 2026, presented by Finance Minister Nirmala Sitharaman on February 1, 2026, lays a clear emphasis on fiscal discipline while strategically boosting digital infrastructure, emerging technologies like AI, and simplifying the tax landscape for key sectors. For a company like Indian Infotech and Software Ltd. (IISL), which operates as a Non-Banking Financial Company (NBFC) with a focus on investing in promising businesses including startups, the budget presents a multi-faceted impact. The announcements create significant tailwinds for the broader IT and software industry, directly influencing the valuation and growth potential of IISL's investment portfolio and strengthening the ecosystem for its lending operations.

Major Tax Overhaul for the IT Sector

The most significant announcement for the IT services industry is a comprehensive simplification of its tax structure, particularly concerning transfer pricing. The Finance Minister proposed clubbing software development, IT-enabled services (ITES), knowledge process outsourcing (KPO), and contract R&D services under a single category of 'Information Technology Services'.

This unified category will have a common safe harbor margin of 15.5%. Safe harbor rules provide a defined framework that, if followed, assures taxpayers that their transfer pricing will be accepted by tax authorities, thereby reducing litigation and compliance burdens. Furthermore, the budget dramatically increases the eligibility threshold for availing these safe harbor provisions from the current ₹300 crore to ₹2,000 crore. This move is set to benefit a large number of mid-sized IT firms, fostering a more predictable and stable tax environment that encourages investment and growth.

Fueling the Data Center and AI Revolution

Recognizing the critical role of digital infrastructure, Budget 2026 introduced powerful incentives for the data center industry. A tax holiday has been announced until 2047 for any foreign company that provides cloud services globally by using data center services from India. This long-term incentive is designed to attract massive global investment from hyperscalers and tech firms, positioning India as a global data hub. A CRISIL report estimates the sector's revenue to reach ₹20,000 crore by FY28, and these budgetary measures will likely accelerate that growth.

Simultaneously, the government's continued focus on the AI Mission and the launch of initiatives like 'Bharat Vistar'—a multilingual AI tool for agriculture—signal a strong commitment to developing a domestic AI ecosystem. Industry expectations for increased funding for GPU infrastructure and incentives for industrial-scale AI deployment align with the government's vision, creating a fertile ground for innovation.

Direct and Indirect Impact on Indian Infotech & Software Ltd.

As an NBFC that invests in startups and other businesses, IISL is poised to benefit from these pro-tech policies in several ways:

1. Enhanced Investment Portfolio: The budget's focus on supporting AI, deep tech, and next-generation startups through targeted incentives and funding mechanisms like the proposed ₹10,000 crore SME Growth Fund improves the operating environment for IISL's potential investment targets. A thriving startup ecosystem increases the pool of high-potential companies for IISL to invest in, potentially leading to better returns.

2. Favorable Sectoral Sentiment: The tax simplification and pro-growth measures for the IT and software sector are expected to boost investor confidence. This positive sentiment can lead to higher valuations for technology companies, directly benefiting the existing tech-focused holdings within IISL's portfolio.

3. Stronger Lending Environment: As an NBFC, IISL's health is tied to the broader economy. The budget's emphasis on supporting MSMEs through enhanced credit guarantees and improved liquidity via platforms like TReDS expands the market for formal credit providers. A growing digital economy, fueled by investments in data centers and AI, creates new business opportunities and strengthens the creditworthiness of borrowers in the tech sector.

Broader Market Outlook

While the budget avoids populist measures and maintains a path of fiscal consolidation, its targeted interventions are designed to build long-term capacity. The push for digital infrastructure, coupled with a stable tax regime for the IT sector, reinforces India's position as a global technology and services powerhouse. For investors, the budget signals continuity and a commitment to structural reforms, which is crucial for attracting long-term foreign and domestic capital into the technology and financial services sectors.

Conclusion: A Strategic Push for a Digital Future

Union Budget 2026 provides a clear, strategic direction for India's technology sector. The simplification of tax norms for IT services is a landmark reform that will reduce friction and enhance competitiveness. For Indian Infotech and Software Ltd., the budget acts as a catalyst, creating a more favorable environment for its dual operations as an investor in technology and a provider of financial services. The policies are set to unlock significant value across the digital ecosystem, benefiting companies that are strategically positioned to participate in India's next phase of tech-led growth.