Union Budget 2026: Strengthening the Base, Unlocking the Next Phase

The Union Budget 2026–27 prioritises policy predictability, capital formation, and long-horizon infrastructure, enabling founders and operators to plan with greater confidence. The signal is consistency on taxes, velocity for MSME cash flows, and depth in strategic technologies. 

This year's Union Budget reflects notable shifts across key areas

Buyback Tax Relief for employees and Small Shareholders  

• Buybacks reaffirmed as a capital gains event for all shareholders, correcting the 2024 misclassification that treated buybacks as dividend income. This restores a critical liquidity pathway after listed buybacks fell from ₹51,143 crore (FY24) to ₹8,130 crore (FY25).
• A bifurcated tax regime introduced for promoters and large holders, with shareholders above 10% taxed at 22% (domestic) and 30% (others), despite no corresponding shift in control.

As Siddarth Pai has articulated, this creates a “success tax” that disproportionately penalises founders and concentrated long-term investors.

While buybacks are once again treated as capital gains, tax outcomes remain contingent on shareholding thresholds rather than control.

₹10,000 Cr Equity Push for SMEs and Early-Stage Innovation

• The ₹10,000 crore SME Growth Fund marks a shift from credit-led support to equity-driven scaling, recognising that equity capital is essential for enterprises transitioning from early execution to institutional scale.
• An additional ₹2,000 crore allocation to the Self-Reliant India Fund strengthens early-stage rupee capital and supports long-tenure financing for MSMEs with growth potential.
• TReDS positioned as a settlement backbone for CPSEs, with credit guarantees and an emerging secondary market for receivables, improving cash-flow velocity for small enterprises.

Collectively, these measures reflect the practical convergence of startups and MSMEs, even as regulatory and tax frameworks continue to treat them as distinct categories.

IT Services and Digital Infrastructure: Competing on Certainty

• A step-function reform of IT services taxation, unifying software development, IT-enabled services, KPO, and contract R&D under a single safe-harbour margin of 15.5%. The eligibility threshold rises to ₹2,000 crore, approvals are automated, and continuity extends up to five years.
• Tax holidays through 2047 for global cloud service providers using Indian data-centre infrastructure, alongside a 15% safe harbour for related-party data-centre services, deliver long-term fiscal certainty for capital-intensive investments.

As Pranav Pai has noted, this directly addresses the cost arbitrage that previously kept India off the global cloud delivery map. The next opportunity is to extend similar certainty to Indian companies building global infrastructure and services from India.

Strategic Manufacturing and Capability Building

• ISM 2.0 expands the India Semiconductor Mission to include equipment, materials, full-stack IP design, and supply-chain fortification, reinforcing India’s ambition to build end-to-end capability in strategic technologies.
• Electronics Components Manufacturing Scheme funding increased to ₹40,000 crore, following investment momentum that exceeded initial targets.
• PLI-led manufacturing continues to act as a force multiplier, demonstrating that well-designed incentives can unlock private capital, scale production, and generate employment.

Areas for Further Policy Development

ESOP taxation, founder equity treatment, and the "punitive status quo" on buybacks remain critical friction points. 

Siddarth Pai notes that "none of the longstanding issues affecting Indian startups, such as ESOP tax reform, clearer rules for flipping back, or flexibility in issuance of securities were addressed." He argues that the new buyback regime "creates a bifurcated system that effectively punishes the 'builders'," concluding that "the toll for those who built the house remains disproportionately high."

Furthermore, fiscal support for indigenous deep-tech IP creation and "patient, risk-tolerant capital" is absent. 

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Pranav Pai highlights that "this budget reinforces a familiar pattern in Indian policymaking: comfort in backing 'infrastructure for innovation', but hesitation in underwriting 'innovation itself'." This disparity is evident where "indigenous deep tech innovators, particularly in space, quantum, cybersecurity, materials, advanced manufacturing, and semiconductors, receive no equivalent fiscal support." 

He concludes that "a structured procurement policy, combined with safe harbour incentives for indigenous deep tech IP development and capex, could immediately support dozens of Indian companies with global potential."

At a Glance

The budget positions India as a destination for global capital and services excellence. With tax clarity restored for non‑promoter buybacks, deeper domestic equity for MSMEs, and sustained investment in strategic technologies, India's ecosystem has the policy runway to scale. 

In the 10th year of Startup India, this represents a defining moment where clear tax architecture empowers the broader ecosystem, though the differential tax on promoters remains a point of friction for founders. The focus now shifts to completing the ecosystem through clearer ESOP tax reform, streamlined rules for founder mobility, and unified MSME and startup policy. India is building an ecosystem where value creation is enabled by policy, even as the dialogue on equitable taxation for risk-takers continues.

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