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Explained - Two factors that contributed to the recovery in IT stocks on SundayUnder Safe Harbour rules, if a company declares profit margins within a prescribed range, tax authorities must accept the pricing without further scrutiny or audits.By CNBCTV18.com February 1, 2026, 3:01:57 PM IST (Published)2 Min ReadIT stocks found their footing on Sunday, with investor sentiment improving after Budget 2026 quietly delivered long-awaited relief to the sector.

At the heart of the rebound were changes to India's Safe Harbour Rules, a technical tax issue, but one with big implications for IT companies operating global delivery models.

First, what is Safe Harbour?

For IT companies with foreign subsidiaries or global capability centres (GCCs) in India, profits are often repatriated from overseas entities.

Under Safe Harbour rules, if a company declares profit margins within a prescribed range, tax authorities must accept the pricing without further scrutiny or audits.

Until now, those margins were steep.

1) Lower safe harbour margins: Budget 2026 reduced the Safe Harbour Margin to 15.5%, from the earlier 17-18% range. This is a clear positive for IT firms, which prefer to show lower margins to reduce tax outgo.

As long as margins are at or above 15.5%, companies can avoid prolonged transfer pricing disputes, bringing immediate clarity and cost savings.

2) A sharp jump in eligibility limits: The second, and arguably more important, change is the expansion of the eligibility threshold. Earlier, only companies with transactions up to ₹300 crore could qualify, meaning benefits were limited to smaller players.

The new threshold of ₹2,000 crore dramatically widens the net. Modern GCCs often bill over ₹1,000 crore annually, making many mid-sized IT firms newly eligible for Safe Harbour protection.

While the very largest IT companies—with transactions well above ₹2,000 crore—may still miss out, a significant chunk of the sector now gains certainty.

Why markets liked it

India has one of the highest rates of transfer pricing litigation globally, and the IT industry has been pushing for reform for over a decade. Budget 2026 directly addresses that pain point, reducing legal risk and improving ease of doing business.

Beyond taxes, the move also signals policy intent. As the US and China race ahead in AI and advanced tech, India is positioning itself as a global hub for IT and AI services, backed by simpler rules and greater predictability.Continue ReadingTagsIT stocks