The FY25-26 Union Budget presented by the Indian Finance Minister continues the Government's efforts to catalyse economic expansion, provide inclusive development, stimulate private sector participation, boost consumer confidence, and augment the purchasing capacity of India's burgeoning middle class.
The following are the key changes/ initiatives proposed to the Financial sector:
- FDI limits for insurance sector to be raised from 74% to 100% subject to companies investing entire premium in India; current FDI guardrails and conditionalities to be reviewed and simplified
- KYC process to be simplified; revamped Central KYC Registry to be rolled out in 2025
- Forum for regulatory co-ordination and development of pension products to be instituted
From a direct taxes standpoint, the proposals seek to reform the personal income-tax especially for the middle class, rationalising TDS/ TCS provisions for easing difficulties, reducing compliance burden and taking further measures to enable ease of doing business. Further, the Budget aims to carry forward the spirit of 'Bharatiya Nyaya Sanhita' in the new Income-Tax Bill, proposed to be introduced next week in Parliament, to provide tax certainty and reduce litigation.
The indirect tax budget proposals aim to rationalise customs tariff structure to support 'Make in India' initiative, promote exports and introduce several enabling provisions in law for implementation of Input Service Distributor mechanism and Invoice Management System facility for GST compliances.
How does the budget impact Financial Services sector?
Key Policy Proposals
- FDI limits for insurance sector to be raised from 74% to 100% subject to companies investing entire premium in India. The current guardrails and conditionalities associated with foreign investment will be reviewed and simplified.
- To implement the earlier announcement on simplifying the KYC process, revamped Central KYC Registry to be rolled out in 2025.
- Forum for regulatory co-ordination and development of pension products to be instituted.
- Under the Financial Stability and Development Council, mechanism for evaluating the impact of current financial regulations and formulating a framework to enhance their responsiveness to be set up.
- Bilateral Investment Treaties to be revamped and made more investment friendly.
- High-Level Committee for Regulatory Reforms to be set up for review of all non-financial sector regulations, certifications, licenses and permissions.
- Government to contribute INR10,000 crore to a new Fund of Fund aimed at enhancing AIFs for startups.
Key tax proposals
- Exemption to Non-residents entering into derivative transaction with FPI being a unit in IFSC
- Currently, IT Act provides an exemption to non-residents in the case of transfer of NDF or ODI or OTC, or distribution of income on ODI. This exemption is limited to transactions entered into with an offshore banking unit in IFSC.
- IFSCA vide Circular dated 3 May 2024 has permitted IFSC registered non-bank entities, registered with SEBI as FPIs, to issue derivative instruments with Indian securities as underlying, in IFSC. However, no tax exemption was granted to the counterparty i.e. non-resident entering into a derivative transaction with non-banking entities.
- It is now proposed to exempt the income earned by non-residents entering into a derivative instruments issued by a FPI being an IFSC unit (subject to certain conditions to be prescribed).
- This amendment is proposed to take effect from 1 April 2026.
- Inclusion of Retail Schemes and ETFs in case of relocation to IFSC
- The IT Act provides for a tax neutral relocation of an offshore fund to the resultant fund set-up in IFSC, inter alia, exemption from capital gains to the offshore fund as well as the shareholder/unitholder.
- The 'resultant fund' in IFSC is currently defined to only cover Category I or Category II or Category III Alternative Investment Fund located in IFSC.
- The aforesaid definition of 'resultant fund' is expanded to also include 'Retail Schemes' and 'ETFs' in IFSC, allowing the tax neutral relocation of funds to IFSC.
- This amendment is proposed to take effect from 1 April 2026
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