Budget 2026: IT Industry Seeks Higher Tax Breaks for Hiring, Clarity on Foreign Tax Treaties

Ahead of the Union Budget 2026, India’s technology industry has urged the government to recalibrate key tax provisions to support hiring, ease cross-border taxation issues, and improve regulatory clarity. In a detailed memorandum submitted by industry body NASSCOM, the sector has sought higher tax deductions for new employment, changes to foreign tax rules and greater certainty on data centre and treaty-related taxation.

"The proposals in this memorandum do not seek new incentives. They modernise the administration and interpretation of existing provisions, remain revenue neutral over time, and reduce avoidable friction without weakening the tax base," the industry body said.

Increase Threshold for Deduction under 80JJAA

Section 80JJAA of the Income Tax Act allows businesses to claim a tax deduction when they hire additional employees earning up to ₹25,000 per month. This salary limit was set in 2016. It was introduced to encourage companies to create more jobs in India.

However, the rule has become less effective over time, according to NASSCOM, especially for fast-growing sectors such as IT and BPM. Since the provision was last updated, salaries, particularly in technology and services, have increased steadily due to economic growth and inflation. As a result, the existing salary cap no longer reflects current market realities.

"The threshold fixed almost a decade ago is now far below typical entry-level compensation in the IT-BPM and startup ecosystem, where formal employment generation is most dynamic. As a result, the incentive no longer serves its intended purpose of promoting new job creation in the formal economy," the industry body noted.

It has asked the government to raise the threshold of “total emoluments” for an “additional employee” from ₹25,000 to ₹100,000 per month for the purpose of claiming the deduction under S. 80JJAA (Section 146 of the new Act).

The demand comes as IT companies including Infosys and HCLTech, among others, have announced plans to hire specialised workforce for their Gen AI, cloud services, and other deep-tech offerings. The companies are offering as much as ₹22 lakh per annum salaries to these fresh graduates.

The industry body has also asked the government to allow companies opting for the lower corporate tax rates under Sections 115BAA and 115BAB to once again claim tax deductions for charitable donations under Section 80G, by amending Sections 115BAA(2) and 115BAB(2) of the Income Tax Act.

It has also sought changes to allow Indian companies, especially in the IT and IT-enabled services sector, to claim excess foreign tax paid as a business expense under Section 37 or to carry it forward without any limit when it cannot be fully adjusted as Foreign Tax Credit under Sections 90, 90A, and 91.

These proposals are aimed at encouraging corporate donations, reducing double taxation on overseas income, and improving the global competitiveness of Indian companies.

Clarity on Taxing Data Centres

NASSCOM has also sought a clarification in the Income Tax Act that using hosting or colocation services from an Indian data centre does not create a business connection or permanent establishment for foreign cloud companies, as the Indian operator is already taxed on an arm’s length basis.

Tax authorities have increasingly taken the view that the use of Indian data centres by foreign cloud companies creates a “permanent establishment” in India, which could lead to additional tax demands on the foreign firms.

They claim it goes against court rulings and OECD guidance, which clearly state that routine hosting or colocation services provided by an independent data centre operator do not create a permanent establishment. Treating such arrangements as a taxable presence would result in double taxation, create uncertainty, and hurt future investment by global cloud providers.

To address this, the tech industry body has asked the government to issue simple, practical examples, in line with Supreme Court guidance, clearly separating normal hosting services, which should not attract tax, from cases where infrastructure is actually controlled by a foreign company. In addition, a safe-harbour regime has been suggested for Indian data centres exporting hosting services, to provide certainty on margins and reduce tax disputes.

The demand comes as investments in data centres in India have been surging. A long list of big tech companies, including Google, Microsoft, and others, have announced plans to set up data centres in India. Indian corporate giants like Reliance Industries, Adani Group, and Tata Consultancy Services have also forayed into the segment.

NASSCOM has also warned against a Supreme Court ruling which might lead to tax disputes. The Supreme Court, in the Nestlé SA case, ruled that benefits under the Most Favoured Nation (MFN) clause in tax treaties can be applied only after the CBDT issues a separate notification.

This is a change from earlier High Court rulings, which held that MFN benefits applied automatically and were widely relied upon by foreign investors and businesses operating in India.

The ruling may now allow tax authorities to challenge past tax positions, leading to disputes, higher tax demands, and increased costs for foreign companies, potentially affecting India’s investment climate, according to the industry body.

To reduce uncertainty, the industry has asked the CBDT to introduce a clear and time-bound process for issuing MFN notifications under Section 90 and to publish an updated list of treaties where MFN benefits have been notified or are pending.

Taxing of IT Professionals

When a foreign professional or consultant provides services to an Indian IT or IT-enabled services company, the payment is usually treated as fees for technical services (FTS) under Section 9 of the Income Tax Act. However, under the Significant Economic Presence (SEP) rules, even the provision of services can trigger tax liability in India. This creates confusion and overlap, as the same income may be covered under both FTS and SEP provisions.

A similar issue arises in the case of foreign sellers supplying goods to India from countries with which India does not have a tax treaty, or where treaty benefits are not available. In such cases, income taxed under SEP is subject to a high tax rate of 38.22%, and Indian buyers must deduct tax at the same rate under Section 195. This is in sharp contrast to transactions with Indian sellers, where tax deducted at source (TDS) is only 0.1% under Section 194Q, creating a large and uneven tax burden.

To address these issues, the industry has sought clear rules under Section 9 to explain how profits should be attributed when SEP applies, using objective factors such as revenue linked to India or the user base. It has also asked for a clear exclusion of royalty and FTS payments from the scope of SEP, including from the calculation of revenue and user thresholds, to avoid double taxation. In addition, it has recommended introducing a nominal TDS rate of 0.1% under Section 195 for non-resident sellers whose income becomes taxable only because of SEP, to align it with the treatment of resident sellers.

Separately, there is concern over the broad definition of “permanent establishment” (PE) under the Income Tax Act, which mainly refers to a fixed place of business and does not reflect the detailed and modern PE definitions found in tax treaties. This mismatch creates uncertainty for both taxpayers and tax authorities, especially in cases involving services, agents, or digital businesses.

To bring clarity, it has been recommended that Section 92F be amended to clearly state that where a tax treaty applies, the definition of PE should be taken from that treaty. For cases where no treaty applies, the CBDT has been asked to issue clear rules or guidance to ensure consistent interpretation and reduce disputes.

Under Section 90(4) of the Income Tax Act, non-resident taxpayers need a Tax Residency Certificate (TRC) from their home country to claim benefits under a tax treaty, such as reduced withholding tax. However, many countries issue TRCs only after the financial year ends, making it difficult to provide them in real time and creating compliance challenges for both Indian payers and foreign payees.

Similarly, Indian companies must obtain TRCs from the Income Tax Department to claim treaty benefits, but the current manual process is slow and cumbersome, according to NASSCOM. To simplify this, the industry body has recommended allowing taxpayers to use TRCs from the previous year with a declaration if their residency has not changed and introducing a digital system to issue TRCs online, linked to tax return filings.

These are some of the key pre-budget recommendations NASSCOM has made to the government ahead of February. The industry body says the sector contributes materially to national income and drives a major share of services exports.

"A tax framework that further improves clarity, predictability, and timely dispute resolution could help sustain investment and help strengthen India’s strong position in the global technology economy," NASSCOM said.