Union Budget 2026-27: What it means for payroll and businesses

No change in income tax slabs or major employee deductions

For salaried individuals, there are no changes to income tax slabs, standard deductions, or rebates for Financial Year 2026 - 27. This means take-home salary, TDS calculations, and payroll configurations remain unchanged for the upcoming financial year.

New Income Tax Act, 2025 - Effective April 1, 2026

A major structural change announced in the budget is the rollout of the New Income Tax Act, 2025, replacing the existing Income Tax Act of 1961 from 1 April 2026. The Act promises simplified rules and redesigned tax return forms, aiming to reduce compliance complexity for HR and payroll departments.

Simplified withholding tax (TDS) on manpower services

The Budget clarifies that payments to manpower supply services fall under TDS provisions, but at a capped rate of 1% or 2%. This benefits companies engaging outsourced staffing and contract labour by reducing unpredictable TDS burdens.

Extended window for revised returns filing

For individual and business taxpayers, the timeframe to revise tax returns has been extended to 31 March (with a nominal fee), instead of the earlier deadline of 31 December.

Tax deduction claim timing for PF, ESI, and superannuation

The government has proposed a relaxation in the rules around claiming tax deductions on employee contributions such as PF,ESI, and superannuation by employers. Earlier, employers could claim these amounts as a deduction only if they were deposited within the monthly statutory due dates. Even a small delay meant the deduction was disallowed, despite the payment being made later.

Under the proposed change, employers can now claim the deduction as long as the employee contribution is deposited before the due date for filing the income tax return. While late payments may still attract interest or penalties under PF or ESI laws, this move prevents the loss of income tax deductions due to minor delays and makes payroll tax compliance more practical for businesses.

Tax reforms and compliance simplification

The budget focuses heavily on simplification, reducing procedural disputes and expanding automated compliance processes for TDS certificates and filing. It aims to make tax compliance less adversarial and more rule-based.

Onboarding of CPSEs on the Trade Receivables Discounting System

All Central Public Sector Enterprises (CPSEs) will now be required to onboard the Trade Receivables Discounting System (TReDS). This will benefit businesses through faster invoice settlements and reduced dependency on short-term borrowing.

Support for MSMEs and job-intensive sectors

A ₹10,000 crore SME Growth Fund has been proposed to help small and medium enterprises scale up into “future champions”. This move aims to help smaller businesses expand operations, invest in people, and grow sustainably without being held back by a lack of funding.

Alongside this, professional bodies like ICAI and ICSI will help train regional compliance professionals called Corporate Mitras, who can assist MSMEs with tax and regulatory requirements.

Attracting global investments into India

Foreign companies that offer cloud services worldwide using data centres located in India will now get a tax holiday until 2047, encouraging them to invest in India’s digital infrastructure. To ensure Indian customers are also served locally, these companies must sell their services in India through an Indian reseller.

The budget also aims to boost advanced manufacturing and bring global talent into India. Non-resident companies that supply machinery, equipment, or tools to manufacturers operating in bonded zones will get a five-year income tax exemption. Additionally, non-resident businesses paying tax under presumptive schemes will be exempt from Minimum Alternate Tax (MAT), further simplifying compliance and encouraging long-term investment in India.