Union budget 2026: Nasscom pushes for ESOP tax relief and data centre clarity for tech firms
Ahead of Budget 2026, Nasscom has urged the government to extend ESOP tax deferment to more startups and clarify tax rules for foreign cloud providers using Indian data centres, citing working-capital and growth concerns.
Industry body Nasscom has said it hopes the upcoming Union Budget will extend Employee Stock Option Plan (ESOP) tax deferment to more startups and provide much-needed clarity on the tax treatment of foreign cloud providers using Indian data centres.
The association, whose members include IT companies and technology firms of varying sizes and scales, has also sought clarifications to ensure that foreign cloud service providers do not face unintended tax liabilities in India.
Clarity on foreign cloud use of Indian data centres
Nasscom has urged the government to clarify that procuring hosting or co-location services from an Indian data centre operator should not create a business connection or permanent establishment for foreign cloud service providers.
According to the association, arm’s-length payments made to Indian data centre operators fully cover India-based functions. The data centre operator alone performs infrastructure-related activities and employs local staff, while the foreign cloud provider neither controls the premises nor conducts business from the facility. Instead, it interacts remotely with servers as part of a global cloud system.
Nasscom is seeking an explicit clarification in the Income Tax Act to this effect.
Push to extend ESOP tax deferment to more startups
Another key proposal highlighted by Nasscom is the extension of ESOP tax deferment to all DPIIT-recognised startups. The association has also recommended allowing ESOP cost deduction under Section 37 of the Income Tax Act.
India currently has more than 1.59 lakh startups recognised by the Department for Promotion of Industry and Internal Trade (DPIIT). However, fewer than 4,000 of these have Inter-Ministerial Board certification, which is a prerequisite for availing the ESOP tax deferment introduced in 2020.
Nasscom said enabling all DPIIT-recognised startups to benefit from the ESOP relaxation would make the regime more meaningful and help startups compete with larger firms in attracting talent.
Industry growth context and emerging opportunities
Nasscom Vice President of Public Policy Ashish Aggarwal said the Union Budget comes at an “interesting” and “challenging” time for the industry.
He noted that the IT industry closed last year at USD 280 billion and is approaching the USD 300 billion mark this year, though growth has remained slow over the past few years amid global challenges in key markets.
At the same time, Aggarwal said new opportunities are emerging with the advent of artificial intelligence, along with a strong pickup in the domestic market, which is growing faster than exports despite being smaller in size.
GST and income tax relief sought for working capital
On GST-related issues, Nasscom has suggested specific measures to reduce financial strain on tech companies. For IT, ITeS, and e-commerce firms where cash flows are critical, the association said the requirement to deposit 20 per cent of a disputed tax demand to obtain a stay during appeals causes severe working capital stress.
Nasscom has recommended reducing the pre-deposit requirement to 10 per cent at the CIT(A) or ITAT level, along with introducing a cap on the maximum pre-deposit amount, in line with GST laws.
Aggarwal pointed out that under GST, the pre-deposit requirement has already been reduced from 20 per cent to 10 per cent, and a similar move under income tax would help unclog working capital.
Call to prevent adjustment of refunds against stayed demands
The association has also sought clarification to prevent tax refunds from being adjusted against demands that have already been stayed during appeals.
While adjustment of refunds against tax demands is permitted under the law, Nasscom said refunds are currently being adjusted even when the tax demand is stayed, leading to unnecessary liquidity pressure on companies.
Carry-forward of losses in mergers and amalgamations
Nasscom has also pushed for extending the benefit of carry-forward and set-off of accumulated losses and unabsorbed depreciation to all companies, irrespective of their business nature.
Currently, the Income Tax Act allows these benefits only for certain categories of entities, such as those owning industrial undertakings or banking companies. Services sector companies are excluded, despite a rise in mergers and acquisitions in the tech industry.
Given current industry trends, Nasscom said allowing services companies to carry forward losses during mergers would be a relatively simple reform that could significantly support the sector.