The Finance Act, 2026 introduces three major changes to income tax deductions and exemptions starting April 1, 2026. Non-residents get tax relief on foreign income for five years. Disability pensions now have stricter rules, while income from compulsory land acquisition is finally tax-exempt. These updates clarify rules for many taxpayers.
Synopsis
The Finance Act, 2026 outlines significant changes in income tax deductions and exemptions for Tax Year 2026-27. Non-resident individuals will benefit from tax exemptions on foreign-source income for five tax years. Disability pensions are only exempted if individuals are invalided out due to service-related disabilities. Compulsory land acquisition income will also be tax-exempt, clarifying previous ambiguities in the law.
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From April 1, 2026, the Income Tax Act, 2025 is applicable and this means all the changes announced in Budget 2026 are going to be applicable. This year there are some changes in income tax deductions and exemptions under the Income Tax Act, 2025. According to Taxmann research, the Finance Act, 2026 introduces several important proposals regarding deduction and exemption provisions.
Here is a summary of the key changes announced in Budget 2026:
NRIs: Non-resident individuals visiting India to provide services under a notified Government scheme will get a tax exemption on foreign-source income. The exemption lasts for five consecutive tax years, provided they were non-residents for the previous five years and meet certain conditions.
Disability pension: Disability pension will be exempt from income tax only if the individual is invalided out of service due to a service-related disability. Pensions received on superannuation or retirement will not qualify for exemption, and the clarified exemption will apply equally to Armed Forces and paramilitary personnel.
Land acquisition: The Income Tax Act 2025 will expressly exempt any income arising from compulsory acquisition of land under the RFCTLARR Act, 2013, except for cases covered by Section 46 of that Act. This removes ambiguity and aligns the tax law with Section 96 of the RFCTLARR Act, which provides that such compensation is not taxable.
Some more changes relating to companies and co-operative societies:
Foreign companies will get a tax holiday on income earned from procuring data centre services from specified data centres in India. The exemption applies up to March 31, 2047, subject to the condition that services to Indian customers are routed through an Indian reseller.
From Tax Year 2026-27, foreign companies will get tax exemption on income from supplying capital goods, equipment, or tooling to Indian contract manufacturers of electronic goods operating in customs bonded warehouses. The exemption will apply to income earned up to Tax Year 2030-31.
Co-operative societies opting for the new tax regime can claim a deduction for dividends received from another co-operative society, to the extent that such dividends are further distributed to their members.
From Tax Year 2026-27, federal co-operative societies that are notified can claim a deduction for dividends received from companies for three years (up to Tax Year 2028-29) under both old and new tax regimes. The benefit applies only to investments made up to January 31, 2026, and where the dividends are distributed to members at least one month before the return filing due date.
The deduction under Section 149(2)(b) of Income Tax Act, 2025 (Section 80P(2)(b) of Income Tax Act, 1961) is expanded to cover ancillary activities of primary co-operative societies. Accordingly, profits from supplying cattle feed and cotton seeds grown or produced by members will also qualify for full deduction, along with existing eligible products.
The definition of "specified fund" under the Income Tax Act, 2025 will be aligned with Section 10(4D) of the Income Tax Act, 1961.
The tax holiday for IFSC units and Offshore Banking Units (OBUs) is extended to 20 consecutive years (out of 25 years for IFSC units). After the holiday period ends, business income from IFSC operations will be taxed at a concessional rate of 15%.