Budget 2026: IT Sector Rallies on Tax Breaks as STT Hike Hits Market

Introduction

The Union Budget 2026 created a starkly divided market on February 1, with the information technology sector emerging as a clear winner while broader indices faced a sharp sell-off. Key policy announcements, including a long-term tax holiday for data centres and expanded safe harbour provisions, provided a significant boost to IT stocks. This positive sentiment allowed the sector to defy a market-wide downturn triggered by an unexpected hike in the Securities Transaction Tax (STT).

Broader Market Turmoil: The STT Impact

While the IT sector celebrated, the overall market sentiment was decidedly negative. The BSE Sensex plunged 1,547 points to close at 80,722, and the Nifty 50 fell 495 points to 24,825. The primary catalyst for this crash was the Finance Minister's proposal to increase the STT on derivatives trading. The STT on futures contracts was raised from 0.02% to 0.05%, while the tax on options premiums and exercise was increased to 0.15%.

This move was seen by analysts as a measure to curb speculative trading in the futures and options segment. However, it immediately increased transaction costs, leading to widespread selling pressure. Brokerage and exchange-related stocks were hit particularly hard, with shares of BSE Ltd. and Angel One falling up to 10%. The sell-off was broad-based, with small-cap and mid-cap indices falling 3% and 2%, respectively.

A Landmark Budget for the IT Sector

In sharp contrast to the market's performance, the IT sector received several favourable proposals that strengthened investor confidence. Finance Minister Nirmala Sitharaman unveiled a multi-pronged strategy to position India as a global technology and data hub. These measures are expected to attract foreign investment, simplify compliance, and support the growth of high-value services.

Tax Holiday for Data Centres

One of the most significant announcements was a tax holiday until 2047 for foreign companies that provide global cloud services using data centres located in India. This long-term incentive is designed to attract substantial capital investment into the country's digital infrastructure. Vinish Bawa, a leader at PwC India, noted that this move, along with others, aims to bridge the capacity gap and establish India as a "scalable, cost-competitive data centre hub."

Enhanced Safe Harbour Provisions

The budget also brought welcome changes to the safe harbour rules, which provide tax certainty for companies. The limit for availing safe harbour for IT services was increased substantially from ₹300 crore to ₹2,000 crore. Additionally, a uniform safe harbour margin of 15.5% was proposed for resident entities providing data centre services to related foreign companies. Meyyappan Nagappan of Trilegal explained that this would likely "incentivise the shifting of higher value-added tech functions to Global Capability Centers (GCCs) in India."

Favourable Change in Buyback Taxation

Another key reform was the change in the taxation of share buybacks. The budget proposed that proceeds from buybacks be taxed as capital gains for all shareholders, rather than as income. This aligns the tax treatment of buybacks with regular share sales and is a significant positive for cash-rich IT majors like TCS, Infosys, and Wipro, which frequently use buybacks to return capital to shareholders. Kranthi Bathini of WealthMills Securities called it a "big positive" that brings back a tax-efficient way to reward investors.

Key Budget Proposals for Technology Sector

IT Stocks Defy Market Trend

The positive announcements translated directly into stock performance. The BSE IT index closed 243 points higher at 36,858, while the Nifty IT index gained 217 points to finish at 38,252. Large-cap stocks led the rally, with TCS closing 1.92% higher and Infosys gaining 1.17%, making them the top Sensex gainers for the day. Other firms like Wipro, Coforge, and Persistent Systems also saw gains of over 2%.

The rally extended to mid-cap and small-cap IT firms as well. Allied Digital Services surged nearly 15%, while Onward Technologies (7.16%), Orient Technologies (6.38%), and Infobeans Technologies (6%) also posted strong gains.

Conclusion and Outlook

The Union Budget 2026 delivered a mixed verdict for the stock market. While the STT hike created short-term pain and volatility for the broader indices, the targeted, long-term incentives for the IT and digital infrastructure sectors were widely welcomed. The policy measures are set to reinforce India's position as a global IT powerhouse and a preferred destination for GCCs and data centres. For investors, the budget highlights the importance of focusing on sectors with strong policy support and structural growth drivers, even amid general market turbulence. The implementation of these proposals will be watched closely as they are expected to shape the industry's trajectory for years to come.