Union Budget 2026: Direct Tax Expectations for the Financial Services Sector

As India’s financial services sector continues to deepen and globalise, tax certainty, timing of taxation, and compliance simplicity have become critical policy priorities. Union Budget 2026 presents an opportunity to address long-standing issues that impact cross-border investments, capital markets transactions, and fund structures, while maintaining revenue certainty for the exchequer.

The following proposals outline key direct tax expectations for the financial services sector.

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Enhancing Tax Certainty for Treaty Benefits

Recent rulings by the Apex Court in relation to tax treaty benefits applicable to non-residents and foreign companies have heightened uncertainty around eligibility conditions.

Industry expects Union Budget 2026 to:

• Clarify or elaborate statutory requirements for availing tax treaty benefits.
• Provide guidance on whether documentation beyond a Tax Residency Certificate (TRC) is required.
• Reduce ambiguity that could lead to inconsistent interpretations and increased litigation.

Clear legislative guidance will provide predictability for cross-border investors and strengthen India’s attractiveness as an investment destination.

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Removing Withholding Tax on Off-Market Securities Transactions

Under current income tax provisions, transactions in securities outside Indian stock exchanges are subject to withholding tax provisions applicable to sale of goods.

Budget 2026 is expected to:

• Extend the existing exemption from withholding tax, currently available for listed securities traded on stock exchanges, to all transactions in securities, including off-market transfers.
• Ease compliance burden for investors, intermediaries, and counterparties.
• Reduce operational complexity and unintended tax exposures.

Such a move would align tax treatment with the nature of securities transactions and improve ease of doing business in capital markets.

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Rationalising Timing of Taxability for Deferred Contingent Consideration

In mergers, acquisitions, and structured investments, consideration is often deferred or contingent on future events.

Industry expects Budget 2026 to:

• Amend capital gains computation provisions to allow contingent deferred consideration to be taxed in the year in which the money or asset is actually received.
• Prevent upfront taxation on uncertain or contingent amounts that may never materialise.

This reform would align taxation with cash flows and reduce disputes in complex transactions.

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Deferring Taxation of Investment Fund Income Until Actual Receipt

Alternative Investment Funds (AIFs), particularly those investing in debt securities, face timing mismatches between income accrual and receipt.

Union Budget 2026 should consider:

• Inserting a specific provision to defer taxation of accrued but not due income in the hands of unitholders until it becomes due.
• Providing that where income is past due but not received by the AIF, interest income should be taxed in the year of actual receipt.

Such alignment between taxability and realisation will:

• Reduce cash flow strain on investors.
• Improve neutrality between direct and fund-based investments.
• Lower litigation around accrual versus receipt disputes.

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Conclusion: Strengthening Financial Services Through Tax Clarity

Direct tax expectations from Union Budget 2026 for the financial services sector are centred on certainty, neutrality, and alignment with commercial reality.

By:

• Clarifying treaty benefit eligibility,
• Simplifying withholding norms for securities,
• Rationalising timing of capital gains taxation,
• And aligning fund taxation with actual receipts,

the budget can materially enhance investor confidence, deepen capital markets, and reinforce India’s position as a competitive global financial hub.