In a major reform push under Union Budget 2026, Finance Minister Nirmala Sitharaman announced targeted tax exemptions, rationalisation of penalties, customs duty relief for strategic sectors, and compliance-friendly measures for individuals, investors, and businesses.

Author: Aditya Pareek | EQMint | Budget 2026

Presenting further proposals under Union Budget 2026, Nirmala Sitharaman laid out a detailed roadmap covering direct tax reliefs, indirect tax rationalisation, customs duty exemptions, and compliance simplification, aimed at improving fairness, transparency, and ease of compliance while supporting strategic sectors of the economy.

Full Tax Exemption for Disability Pension of Armed Forces

In a significant welfare-focused announcement, the Finance Minister proposed a specific income tax exemption for disability pension granted to members of the Armed Forces and paramilitary personnel.

The exemption will:

• Cover both service and disability elements of the pension
• Apply where personnel are invalided out of service due to bodily disability attributable to or aggravated by military, naval, or air force service
• Exclude cases of retirement on superannuation or other non-disability grounds

The proposal recognises the sacrifices made by defence personnel and ensures dignified financial treatment for those injured in service.

Interest Deduction on Dividend and Mutual Fund Income Withdrawn

To streamline taxation of investment income, Sitharaman proposed the removal of interest deduction against:

• Dividend income
• Income from mutual fund units

The existing provision that allowed such deductions subject to a ceiling will be omitted, ensuring clearer and more uniform tax treatment of investment-related expenses.

Capital Gains Exemption for Sovereign Gold Bonds Rationalised

The Budget proposed a targeted rationalisation of capital gains tax exemption on Sovereign Gold Bonds (SGBs).

Key conditions include:

• Exemption available only if bonds are subscribed by an individual at the time of original issue
• Bonds must be held continuously until redemption on maturity
• The exemption will apply uniformly to all SGB issuances by the Reserve Bank of India

This move aims to encourage long-term retail investment in SGBs while preventing misuse of tax benefits.

Rationalisation of Share Buyback Taxation

The Finance Minister proposed a major shift in the taxation of share buybacks:

• Buyback proceeds will be taxed as Capital Gains, instead of dividend income

A differential tax rate for promoters has been proposed:

• 22% effective rate for promoters that are domestic companies
• 30% effective rate for promoters that are non-domestic companies

The change aligns buyback taxation with global norms and improves transparency.

Tax Holiday Till 2047 for Cloud Service Providers

In a forward-looking technology push, Sitharaman announced a tax holiday till 2047 for:

• Foreign companies providing cloud services globally using data centres located in India

Conditions include:

• Services to Indian customers must be provided through an Indian reseller entity

The proposal aims to position India as a global cloud and data centre hub, boosting digital infrastructure and employment.

Rationalisation of Penalty and Prosecution

To reduce litigation and improve taxpayer experience, the Finance Minister announced major reforms in penalty and prosecution procedures:

Key measures include:

• Integrated assessment and penalty proceedings through a common order
• No interest liability on penalty amounts during appeal before the first Appellate Authority
• Reduction of pre-payment requirement from 20% to 10%
• Allowing taxpayers to update returns even after re-assessment proceedings have begun

These steps are designed to make tax administration more humane and efficient.

One-Time Six-Month Foreign Asset Disclosure Scheme

To address genuine compliance issues faced by students, young professionals, and NRIs, Sitharaman proposed a one-time six-month foreign asset disclosure scheme.

The scheme will cover:

• Taxpayers who failed to disclose overseas assets or income
• Taxpayers who paid tax on overseas income but failed to declare the asset acquired

The scheme applies to assets or income below a specified threshold, encouraging voluntary compliance.

Staggered Timelines for Filing Income Tax Returns

To reduce compliance pressure, the Finance Minister announced a staggered return filing timeline:

• ITR-1 and ITR-2 filers: deadline remains July 31
• Non-audit business cases and trusts: deadline extended to August 31

The move ensures smoother filing processes and better system efficiency.

Customs Duty Exemptions for Strategic Sectors

Civil and Defence Aviation

The Budget proposes:

• Exemption from basic customs duty on components and parts used in manufacturing civilian and training aircraft
• Exemption on raw materials imported for aircraft parts used in maintenance, repair, and overhaul (MRO) by defence sector units

Critical Minerals

• Basic customs duty exemption on capital goods required for processing critical minerals in India, supporting supply chain security.

Nuclear Power

• Extension of customs duty exemption till 2035 for imports required for nuclear power projects
• Expansion of the benefit to all nuclear plants, irrespective of capacity

Boosting Exports of Marine, Leather and Textile Products

To enhance export competitiveness, Sitharaman announced:

• Increase in duty-free import limit for seafood processing inputs from 1% to 3% of FOB export value
• Extension of duty-free import benefits to shoe uppers, beyond leather and synthetic footwear

These measures support value-added exports and domestic manufacturing.

Indirect Tax Reforms: Simplification and Duty Rationalisation

Under indirect taxes, the Finance Minister proposed:

• Simplification of customs and excise tariff structures
• Removal of exemptions on items manufactured domestically or with negligible imports
• Incorporation of effective rates directly into the tariff schedule, reducing ambiguity and disputes
• Correction of inverted duty structures to support domestic industry

Conclusion

Union Budget 2026 introduces a comprehensive set of tax reforms, customs duty rationalisation, compliance relief, and strategic incentives. From disability pension exemptions and investor taxation changes to customs relief for aviation, nuclear power, and critical minerals, Finance Minister Nirmala Sitharaman’s proposals aim to balance equity, growth, and global competitiveness while simplifying India’s tax framework.

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Disclaimer: This article is for informational and educational purposes only. Budget proposals and tax changes are subject to legislative approval, rules, and notifications. Readers are advised to consult qualified tax, legal, or financial professionals before making any decisions.