From stability to scale: Decoding Union Budget 2026 for the BFSI sector

The article was first published in The Economic Times Edge Insights.com on 06 February 2026. Please click here to read the article.

The Union Budget 2026 was unveiled at a time when the global landscape remains highly unsettled. Rising geopolitical frictions, disrupted supply chains, and steep tariff actions by major economies, especially the United States, have contributed to a turbulent international environment. Amid this strong headwinds, India stands out in the world due to strong macroeconomic fundamentals such as GDP is estimated to expand at 7.4 per cent in FY 26 and projected to grow at 6.8-7.2 per cent in FY 27 (making India as fastest-growing major economy in the world), headline inflation fell sharply from 4.6 per cent in FY 25 to 1.7 per cent for nine-months ending 31 December 2025 (driven by steep decline in food prices), India’s fiscal deficit estimated to be 4.4 per cent for FY 26, fiscal deficit targeted at 4.3 per cent for FY 27, India’s forex reserves stand at USD 701.4 bn as on 16 January 2026, covering 94 per cent of external debt and providing 11 months of import cover.

With this backdrop, Union Budget, 2026 has focused on providing predictable and stable tax environment, compliance rationalisation and incentives for foreign players to attract investments in India.

The key policy announcements and tax proposals relevant from BFSI sector perspective include the following

Policy announcements

One of the standout announcements is the establishment of a High-Level Committee on Banking for Viksit Bharat, intended to holistically review the sector and align it with India’s next phase of economic expansion. The FM highlighted significant improvements in banking system with strong balance sheets, historic highs in profitability, improved asset quality and coverage exceeding 98 per cent of villages in the country thereby creating the confidence to undertake forward‑looking reforms.

The Budget assigns a strategic growth role to NBFCs, particularly in MSME, infrastructure, and priority‑sector credit delivery.

Key proposals include

Restructuring of public‑sector NBFCs such as Power Finance Corporation and Rural Electrification Corporation to improve scale and efficiency

Clear technology‑adoption targets for NBFCs under the Viksit Bharat vision

These measures signal a shift towards a more diversified credit ecosystem, where NBFCs complement the role of banks in addressing India’s growing credit demands.

The Budget also announces a comprehensive review of FEMA (Non‑Debt Instruments) Rules to create a more contemporary framework for foreign investment, while deepening capital markets through a new market‑making framework, derivatives on corporate bond indices and total return swaps.

Ease of doing business is enhanced by allowing Persons Resident Outside India (PROI) to invest in listed equities under the Portfolio Investment Scheme, with individual limits doubled from 5 per cent to 10 per cent and aggregate limits raised to 24 per cent.

Tax proposals

The Budget has significantly strengthened the incentive framework for the GIFT International Financial Services Centre (IFSC). The tax holiday for IFSC units is now being extended to 20 consecutive years out of 25 years, providing long‑term certainty and making India far more competitive among global financial hubs. Importantly, this benefit will apply to existing IFSC Unit and Units commencing operations on or after 1 April 2026. It is important to note that for IFSC Units commencing operations on or after 1 April 2016 the said benefit will not be available if unit is formed by splitting, restructuring, reorganisation or transfer of an existing operation from India. Here, it is important to note that tax on book profits (MAT) is applicable to branches of foreign companies in GIFT IFSC. The credit of taxes paid under MAT is available to be carried forward for 15 years. Hence, branches of foreign companies claiming tax holiday in IFSC for 20 out of 25 years would not be able to claim MAT credit, which could become tax cost for them. Accordingly, there is need to amend MAT credit provisions to allow carry forward of MAT credit to 25 or 30 years so that it can be utilised by branches of foreign companies in IFSC.

Non-tax holiday period tax rate fixed at 15 per cent, significantly below prevailing corporate tax rates, enhancing the IFSC’s global competitiveness. Further, the deemed dividend exemption for treasury centers in IFSC has been tightened so that loans and advances extended by such entities qualify for exemption only when transacted with group entities located outside India.

Capital gains treatment for buybacks has been restored, replacing the dividend‑based regime introduced in 2024. The earlier change had sharply reduced buyback activity, with only 8 offers in 2025, compared with 48 in 2024. It is proposed that buyback proceeds should be taxed as capital gains for promoter and non-promoter shareholders at their applicable rates for short-term capital gains (STCG) and long-term capital gains (LTCG). Promoter shareholder which is domestic company to pay additional tax of 2 per cent in case of STCG and 9.5 per cent in case of LTCG whereas other promoter shareholders to pay additional tax of 10 per cent in case of STCG and 17.5 per cent in case of LTCG.

The recent transfer pricing announcements introduce significant relaxations to the safe harbour regime, particularly in relation to the rates applicable for software development and IT/ITeS services, now consolidated under the category of technology services. While the fine print is awaited, this development marks a positive step for Global Capability Centers (GCCs) of foreign enterprises operating in India, especially those in the financial services sector.

Further, measures aimed at modernising tax administration and reducing litigation, including decriminalising minor tax offences, and introducing a one‑time foreign asset disclosure scheme for small taxpayers, aligned with the government’s intent to make the system more taxpayer friendly.

In term of negatives, STT increase on derivatives came as a surprise. To put things in context, STT on futures is proposed to be increased from 0.02 per cent to 0.05 per cent (overall 400 per cent increase from in last 3 years starting from 2023) and STT on options proposed to be increased raised from 0.10 per cent to 0.15 per cent (overall 200 per cent increase in last 3 years from 2023). Proposed increase in STT rate may compress arbitrage spreads, reduce F&O volumes, and negatively impact brokers, exchanges, and high‑frequency traders.

Capital market players widely expected some relief in LTCG/STCG or STT reduction in cash segment given the sell off trend of Foreign Portfolio Investors in last couple of years, but the Union Budget did not offer any relief. Investors continue to face the cumulative burden of capital gains as well as STT.

Union Budget 2026 positions the BFSI sector as a catalyst for India’s next stage of economic transformation. By focusing on strengthening banking governance, advancing digital financial infrastructure, and promoting investment‑oriented capital market reforms, the Budget lays out a comprehensive framework for BFSI sector. These measures collectively aim to foster sustainable and broad‑based economic growth.