India’s Income Tax Act 2025: what European companies must prepare for in 2026

In a historic move, India has replaced its 60-year-old Income Tax Act with the new Income Tax Act 2025, effective 1 April 2026. For European companies with a subsidiary in India, a branch office, or a supply chain that includes India, this means a major adjustment.

On 1 April 2026, the Income Tax Act 2025 replaced India’s 60-year-old Income Tax Act from 1961 cutting the number of tax rules from 511 to 333 and tax forms from 399 to 190. The rewrite is not just a relabelling exercise: MAT and share buybacks are taxed differently now, fresh incentives target the tech and manufacturing sectors, and the simpler rulebook comes backed by AI-driven compliance monitoring – starting with a basic shift in how the tax calendar itself is defined.

For European companies with a subsidiary or branch office, or a supply chain in India, that combination of fewer rules and sharper enforcement means the details are worth getting right early on.

India’s 2025 tax reform: what’s actually changed

No more confusion between previous and assessment year

For decades, anyone running a business in India had to juggle a confusing dual system: a Previous Year, the year you earned the money, and an Assessment Year, the year you filed and paid taxes on it. The new framework scraps this division entirely. India has shifted to a single, clean Tax Year concept. While this is primarily a change in terminology, it alters how your local accounting teams reference filing deadlines, advance tax installments, and withholding certificates.

MAT and Buybacks

India has overhauled two major corporate tax mechanisms, and both affect how you manage cash and repatriate profits from your Indian subsidiary:

1. Minimum Alternate Tax (MAT) becomes a final tax

MAT ensures that companies reporting high accounting profits in India still pay a baseline tax, even if deductions drop their standard taxable income to zero.

• The MAT rate drops slightly from 15% to 14%.
• MAT will no longer accumulate as a rolling credit for companies opting for concessional corporate tax regimes. It is now effectively a final tax. While existing credit balances accumulated up to 31 March 2026 can still be used, their set-off is now capped at 25% of your annual tax liability.

2. Share buybacks or standard dividend

Repatriating cash via share buybacks has seen rapid policy changes in India.

• From April 2026, buybacks are no longer treated as “deemed dividends” at standard dividend tax rates. Instead, they now get a capital gains treatment, taxed at 12.5% for long-term and 20% for short-term gains, with the cost of acquisition now deductible.
• The government has also introduced a Special Additional Tax. If a European parent company holds a majority stake and uses a buyback to pull capital out of India, the effective tax sits around 22%. You will need to recalculate whether a buyback or a standard dividend payout is more tax-efficient for your group.

Incentives for tech sector and machinery makers

It is not all tightening rules and structural overhauls: the Indian government has introduced highly targeted fiscal incentives to draw foreign technology companies and machinery and equipment manufacturers into the country.

• In a bid to become a global digital hub, foreign companies providing global cloud services through Indian data centres are eligible for a tax holiday extending until 2047. The only condition is that services to local Indian customers must be routed through a local reseller entity.
• If your company sources components globally and warehouses them in Indian customs-bonded facilities to sell to local electronics contract manufacturers, you benefit as well. Non-resident entities are taxed on just 2% of the invoice value, bringing the effective tax rate down to roughly 0.7%.
• Sourcing operations get a strong shield: transactions limited strictly to purchasing goods in India for export are now explicitly excluded from constituting a Significant Economic Presence (SEP), keeping your purchasing offices safe from unexpected domestic tax liabilities.

Compliance gets slimmer, but sharper

The Indian government has reduced the total number of tax rules from 511 down to 333, and cut tax forms from 399 to 190. To bridge the gap, the Central Board of Direct Taxes (CBDT) has launched a digital “Navigator” tool to map provisions between the old 1961 Act and the new 2025 framework.

However, simpler does not mean lax. The corporate tax office is deploying heavy-duty, AI-driven risk monitoring systems. These tools automatically cross-reference international related-party transactions, transfer pricing filings, and Country-by-Country Reporting (CbCR) data to immediately flag low-profit subsidiaries or oversized intra-group service payments.

What should European companies do now?

At IndiaConnected, we know that tax changes in India cannot be dealt with retroactively. They require immediate, proactive adjustments at the parent-company level.

If you operate an entity or manage a supply chain in India, add these items to your executive agenda:

• Audit inter-company agreements: With the new Income Tax Act active and AI auditing systems live, ensure your transfer pricing documentation, management fees, and royalty agreements match the updated framework.
• Recalculate your repatriation strategy: Run the numbers on dividends versus the new 22% effective buyback route to see which method works best for your global business.
• Leverage the Safe Harbour rule: The eligibility threshold for Safe Harbour Rules has been raised significantly from INR 300 crore to INR 2,000 crore. If your subsidiary falls into this bracket, you can now benefit from simplified compliance and avoid lengthy transfer pricing disputes.

Income Tax Act 2025: What it means for your India strategy

The 2026 tax reset is a clear signal: India wants cleaner, smoother compliance for transparent businesses, while shutting down tax ambiguity. With the EU-India Free Trade Agreement negotiations also reshaping trade lanes, a clear, legally compliant financial structure in India has become essential.

Unsure how the new Income Tax Act affects your Indian entity or cross-border operation? Contact the team at IndiaConnected for practical, straightforward guidance on navigating India’s updated legal and financial landscape.