OPINION | Union Budget 2026 brings changes to M&A, tax rules and deal financing

The tax proposals in the Union Budget 2026 present a mixed scenario for the M&A ecosystem.

Seen from the prism of mergers and acquisitions (M&A), the Union Budget 2026 presents several interesting proposals with the potential to impact deal structuring, acquisition financing, risk management, and exit strategies.

Overhaul of Taxation of Share Buybacks

One of the significant proposals relates to the taxation of share buybacks. The present regime of dividend taxation, which is usually higher than the capital gains tax, is to be changed, and capital gains treatment has been restored, albeit with a cautionary twist for promoter shareholders.

Buyback consideration is to be excluded from the definition of “dividend”, meaning amounts received by shareholders will be taxed under the head “Capital Gains”.

For non-promoter shareholders, this change broadly aligns the tax treatment of buybacks with that of an open-market sale of shares. However, a distinct and more onerous regime has been introduced for promoters. In addition to capital gains tax, promoters will be subject to an “additional income tax” on gains arising from buybacks, designed to bring the overall tax incidence closer to dividend taxation. In certain cases, the effective tax rate on long-term capital gains could rise to 30% for a non-corporate promoter. As a result, buybacks become a comparatively expensive exit route for promoters but a tax-beneficial route for other shareholders.

Disallowance of Interest Deduction

In a significant move affecting acquisition financing, the Budget proposes a complete disallowance of interest expenditure incurred to earn dividend income or income from mutual fund units. This replaces the earlier provision that permitted a deduction of up to 20% of such income.

This change will affect leveraged buyout (LBO) structures, in which acquisition debt is serviced by dividend flows from the target entity. The inability to offset interest costs against dividend income increases the effective tax burden and may render traditional leveraged structures less viable. Acquirers may therefore need to explore alternative post-acquisition structures, such as mergers or operational integration.

Greater Certainty Through a Revised Transfer Pricing Regime

On a positive note, the Budget introduces a streamlined and more attractive transfer pricing safe harbour regime. Services such as KPO, software development, and IT-enabled services have been consolidated into a single “Information Technology Services” category, with a uniform safe harbour margin of 15.5%. Further, the turnover threshold for eligibility has been significantly increased from ₹300 crore to ₹2,000 crore.

M&A transactions involving large technology-driven groups with cross-border intra-group operations, including Global Capability Centres (GCCs), have been prevalent, and this reform is expected to enhance tax certainty, reduce compliance complexity, and mitigate litigation risk.

Rationalisation of Minimum Alternate Tax (MAT)

The Budget proposes to reform the MAT framework to ease the transition to the new tax regime. The MAT rate has been reduced from 15% to 14%. While MAT will now operate as a final tax with no fresh credit accumulation, companies will be permitted to utilise brought-forward MAT credit, subject to a cap of 25% of their annual tax liability.

For acquirers assessing targets with significant MAT credit balances, the restricted utilisation mechanism becomes an important consideration in valuation and deal modelling.

Indirect Tax Proposals

From an indirect tax perspective, alignment of the place of supply rule for intermediary services addresses a long-standing concern for GCCs and MNCs exporting services from India to foreign parent or affiliated entities, which were frequently denied export benefits. This provides much-needed certainty to service exporters and enhances India’s attractiveness as a global services hub.

Further, the proposal to extend the validity of customs advance rulings from three to five years, together with the recently introduced mandatory timelines for the finalisation of provisional assessments, marks a significant shift towards a more predictable and time-bound regime. By reducing the risk of classification disputes or valuation shocks mid-cycle and avoiding open-ended provisional assessments, these reforms will act as a facilitative tool for foreign investors and large, long-horizon projects, and are expected to materially support capital-intensive investments in India.

Conclusion

The tax proposals in the Union Budget 2026 present a mixed scenario for the M&A ecosystem. While reforms such as the expanded safe harbour regime, buyback taxation for shareholders other than promoters, and GST and Customs reforms enhance certainty and reduce litigation risk, changes to buyback taxation of promoters and restrictions on interest deductibility introduce additional costs.

Dealmakers will need to reassess acquisition, financing, and exit strategies to effectively navigate the proposed changes to the tax landscape under the new regime.

(Himanshu Sinha (Partner), Rohit Kumar S (Counsel), and Samyak Jain (Sr. Associate), in the Tax Practice at Trilegal.)

Views are personal, and do not represent the stand of this publication.