India's 2026 Budget Boosts Chips With Tax and ISM Reforms

Budget 2026-27 Puts Semiconductors at the Centre of India's Industrial Strategy

India's Union Budget for the fiscal year 2026-27 placed semiconductors firmly at the heart of the country's industrial policy, introducing a package of tax, duty and funding measures designed to accelerate the development of a complete domestic chip ecosystem. Finance Minister Nirmala Sitharaman presented the budget in February 2026 against a backdrop of three semiconductor facilities already operational or near-operational under the India Semiconductor Mission, and used the budget to lay the groundwork for the next phase of investment under ISM 2.0.

Key Semiconductor Measures in the Budget

The budget included customs duty reductions on a range of semiconductor manufacturing equipment and specialty chemical inputs, lowering the cost of importing wafer fabrication and packaging tools for ISM-backed projects. An ₹1,000 crore allocation was made for ISM 2.0 for the 2026-27 fiscal year, with an emphasis on funding industry-led research and training centers, foundry access support for chip design startups, and grants for indigenous IP development. The budget also announced a new Electronics Component Manufacturing Scheme to address component supply chain gaps in passive components, PCB substrates and connector hardware that currently constrain India's electronics manufacturing competitiveness.

R&D and Design Incentives

The budget enhanced the weighted deduction for R&D expenditure in the semiconductor design sector, raising it to 150 percent of eligible expenses for companies registered under the Design Linked Incentive scheme, and introduced a new deduction category for tapeout costs at qualified foundries. These measures respond to feedback from fabless startups that the upfront cost of chip tapeouts at advanced nodes has been a key barrier to commercialisation for DLI-supported companies.

Fast-Track Environmental Clearances

A new framework for granting fast-track environmental clearances for semiconductor manufacturing projects was announced in the budget, building on the ISM's existing single-window clearance commitment. Projects with approved capital expenditure above a threshold will be eligible for deemed clearance in specified categories within 30 days, significantly reducing pre-construction regulatory timelines that have historically added 6-18 months to industrial project schedules in India.

ISM 2.0 Outlay and Policy Direction

The budget announcement of ISM 2.0 with a total approved outlay of ₹1.25 lakh crore signals that the semiconductor mission has secured long-term institutional backing at the finance ministry level, not just at the ministry of electronics. This political economy shift is viewed by industry analysts as important for the mission's credibility with international investors who want to see sustained government commitment through electoral cycles and economic fluctuations.

Industry Response

The India Electronics and Semiconductor Association welcomed the budget measures as among the most comprehensive semiconductor policy actions India has taken in a single budget cycle. Companies already operating under ISM noted that the duty reductions on equipment will improve the economics of maintenance capital expenditure, while the DLI enhancements are expected to attract a new cohort of chip design startups to apply for government support in the next application cycle opening later in 2026.