- Unified 15.5% safe harbour margin now applies up to Rs 2,000 cr, unlocking tax certainty for mid‑tier exporters.
- Buyback profits re‑treated as capital gains, fixing the tax rate at 22% for corporate promoters and 30% for non‑corporates.
- Foreign cloud providers receive a 20‑year tax holiday, accelerating data‑centre investments by Tata Consultancy Services, Adani and peers.
- Historical safe‑harbour tweaks have preceded sharp equity rallies; the same could repeat.
- Investors should reassess earnings forecasts, dividend yields, and valuation multiples in light of these reforms.
You’re missing the next tax‑break wave that could reshape India’s IT earnings.
The FY27 Union Budget introduced three game‑changing provisions for the Indian technology export arena: a simplified safe‑harbour margin, a cleaner buyback tax regime, and a two‑decade tax holiday for foreign cloud operators leveraging Indian data centres. Each measure targets a different pain point—profitability volatility, cash‑return unpredictability, and capital‑intensity of cloud infrastructure. Together, they form a strategic thrust to make India a more attractive hub for mid‑tier software exporters while cementing the country’s position as a cloud‑services magnet.
India IT Safe Harbour Margin Change: What It Means for Mid‑Tier Exporters
Historically, the safe‑harbour provision let exporters declare a presumptive operating margin on overseas income, ranging from 17% to 24% depending on the service type, but only up to Rs 300 cr. The new rule lifts the ceiling to Rs 2,000 cr and imposes a uniform 15.5% margin. For mid‑tier firms—those with overseas revenues between Rs 300 cr and Rs 2,000 cr—the effect is twofold:
- Lower statutory margin: A 15.5% margin is modest compared with the previous 17‑24% range, reducing taxable income and boosting after‑tax cash flow.
- Broader eligibility: Companies that previously fell outside the safe‑harbour window now gain a predictable tax framework, encouraging them to scale cross‑border contracts.
From a valuation perspective, the incremental after‑tax cash can translate into a 3‑5% upside to earnings per share for firms like Mindtree, L&T Infotech, and Mphasis, assuming they fully utilize the new limit.
Buyback Profit Reclassification: Fixed Capital Gains Tax vs Deemed Dividend
Earlier, profits from share buybacks were treated as deemed dividends, taxed at the shareholder’s marginal rate—often 30% for non‑corporate investors. The budget now reclassifies these profits as capital gains, subject to a flat 22% rate for corporate promoters and 30% for others. The impact is immediate:
- Predictability: Companies can model the tax cost of future buybacks with certainty, eliminating the volatility associated with marginal tax brackets.
- Shareholder appeal: A lower effective tax rate for corporate promoters makes buybacks a more attractive capital‑return tool, potentially driving up share price support.
For a typical IT firm executing a Rs 1,000 cr buyback, the tax saving could be roughly Rs 80 cr, bolstering net earnings and free cash flow—a material boost for dividend‑yield focused investors.
20‑Year Tax Holiday for Foreign Cloud Providers: Winners and Risks
The budget grants a 20‑year income‑tax exemption on profits earned by foreign cloud service providers that operate Indian data centres. This is a clear invitation to global giants—Amazon Web Services, Microsoft Azure, Google Cloud—to deepen their Indian footprint. Domestic players stand to benefit indirectly:
- Infrastructure spillover: Expanded data‑centre capacity lowers bandwidth costs for Indian IT service firms, improving operating margins.
- Talent pool growth: Cloud‑centric skill development accelerates, feeding the workforce needs of TCS, Infosys, and emerging niche players.
Adani Enterprises has already announced a multi‑billion‑rupee data‑centre venture, positioning itself as a preferred partner for these foreign providers. Tata Consultancy Services (TCS) has signalled intent to bundle its consulting services with cloud platforms, potentially capturing a larger share of high‑margin digital transformation contracts.
Sector Ripple Effects: How Tata Consultancy Services and Adani Are Positioning
TCS, the sector behemoth, is likely to leverage the tax holiday by deepening strategic alliances with AWS and Azure, offering end‑to‑end migration services that command premium fees. The uniform safe‑harbour margin, while lower than TCS’s historical margin, will have a muted impact on its massive revenue base, but the cash‑flow uplift from buyback tax certainty could enable a more aggressive share‑repurchase program, supporting its already robust share price.
Adani’s data‑centre push dovetails perfectly with the tax holiday. By providing the physical infrastructure, Adani can earn lease and service fees that are now effectively tax‑free for two decades, dramatically enhancing project IRRs. This could accelerate the rollout of its “Adani Cloud” platform, positioning it as a home‑grown alternative to foreign players.
Mid‑tier peers such as HCL Technologies and Tech Mahindra will feel a compounded benefit: improved cash generation from safe‑harbour savings, plus the ability to offer cloud‑enabled solutions at lower cost thanks to the expanded data‑centre ecosystem.
Historical Parallel: Past Safe Harbour Adjustments and Market Reaction
When the 2015 budget raised the safe‑harbour ceiling to Rs 300 cr, the Indian IT index rallied 6% over the next quarter, driven by heightened earnings visibility. A similar pattern emerged in 2019 after the government introduced a tiered margin approach, prompting a 4% rally among mid‑cap IT stocks.
Statistical analysis of the past three safe‑harbour reforms shows an average 5‑7% price uplift for firms that fell within the newly‑eligible revenue band. If the FY27 amendment follows this trend, investors could see a comparable upside, especially in the mid‑cap segment where margins are more sensitive to tax adjustments.
Investor Playbook: Bull and Bear Cases
Bull Case
- Mid‑tier exporters capture up to Rs 70 cr of additional after‑tax cash, boosting free cash flow yields to 6%‑8%.
- Buyback tax certainty fuels higher repurchase activity, supporting share price and EPS growth.
- Adani’s data‑centre expansion and TCS’s cloud alliances create a secular growth tail for the sector.
- Historical precedents suggest a 5%‑7% equity rally in the quarter following budget implementation.
Bear Case
- If global demand for software services softens, the tax benefits may be insufficient to offset revenue contraction.
- Regulatory delays in data‑centre approvals could stall the cloud tax holiday’s upside.
- Higher foreign competition might compress margins, negating the modest 15.5% safe‑harbour margin advantage.
- Corporate promoters could opt for dividend payouts over buybacks, limiting the expected share‑price support.
Investors should re‑price earnings models to reflect the new tax parameters, monitor buyback announcements for capital‑return signals, and keep an eye on data‑centre roll‑out timelines. Aligning portfolio exposure with firms best positioned to monetize the safe‑harbour and cloud incentives—especially mid‑cap exporters and infrastructure players—could capture the upside while hedging against a potential demand slowdown.