India's Lok Sabha has passed the Taxation and Other Laws (Amendment) Bill, 2026, introducing tax exemptions for Foreign Institutional Investors (FIIs), extending incentives for selected sectors, revising investment fund rules and amending payment system provisions to simplify compliance and provide greater tax certainty.
India’s Lok Sabha passed the Taxation and Other Laws (Amendment) Bill (Bill No. 150 of 2026) 2026 on 6 August 2026, after it was introduced in Parliament on 4 August.
The Bill proposes a series of amendments to the Income-tax Act, 2025, the Payment and Settlement Systems Act, 2007, and the Finance Act, 2026 to provide tax certainty, support selected sectors and simplify compliance. Unless otherwise specified, the legislation is deemed to have come into force on 1 April 2026.
The Bill seeks to mitigate the impact of external economic shocks, support domestic economic stability and replace the Income-tax (Amendment) Ordinance, 2026, while introducing tax exemptions for Foreign Institutional Investors (FIIs), foreign companies engaged in specified activities, and easing conditions for investment funds managed from India.
Investment fund and fund management changes
The Bill replaces Schedule I of the Income-tax Act, 2025 with revised rules governing eligible investment funds and eligible fund managers so that qualifying fund management activities do not constitute a business connection in India.
To qualify, an eligible investment fund must be established or registered outside India, not be resident in India, and be resident in a country with which India has an agreement under Section 159(1) or (2), or in a jurisdiction notified by the Central Government. Aggregate investment by Indian residents must not exceed 5% of the fund’s corpus, although contributions of up to INR 25 crore by an eligible fund manager during the first three years are excluded from the calculation. Temporary breaches of the threshold must be corrected within four months.
Eligible fund managers must be registered with SEBI under the prescribed regulations, act in the ordinary course of business and must not be employees or connected persons of the fund. Their share, together with connected persons, of the fund’s profits is capped at 20%. Eligible funds will also be required to submit a compliance statement within 90 days after the end of the tax year.
Tax exemptions expanded
The Bill extends the tax exemption on income earned by foreign companies from providing capital goods, equipment or tooling to Indian contract manufacturers of specified electronic goods until the tax year 2040-2041, replacing the previous end date of 2030-2031. It also defines “specified electronic goods” to include mobile phones, laptops, tablets, servers, ultra-small form factor (USFF) devices, sub-assemblies, and hearables and wearables.
For data centre services, the Bill removes the requirement for Central Government notification of both the foreign company and the specified data centre. It also broadens the definition of a specified data centre to allow Indian companies to operate facilities under a leasing model as well as through direct ownership.
The legislation further introduces exemptions on interest income from Government securities and capital gains arising from their sale or transfer for Foreign Institutional Investors (FIIs) and the Bank for International Settlements (BIS), subject to prescribed information being furnished.
From 1 October 2026, the Bill also proposes a 15-year tax exemption, ending on 31 March 2041, for income from the sale of rough diamonds by eligible foreign mining companies, sightholders, brokers, aggregators and auction entities operating in notified special zones. A separate exemption of the same duration is proposed for foreign companies earning income from storing electronic components in customs-bonded warehouses for supply to Indian contract manufacturers producing specified electronic goods.
Business trusts and SPV taxation
The Bill removes Clause (b) of Sl. No. 5 in Schedule V, allowing unit holders of a business trust to continue receiving tax-exempt dividends even where the trust’s Special Purpose Vehicle (SPV) has opted for the new tax regime under Section 200 of the Income-tax Act, 2025.
To offset the revenue impact, the Bill amends Section 3 of the Finance Act, 2026 to impose an additional 15% surcharge on domestic companies that are SPVs under Schedule V when they transition to the new tax regime under Section 200 or Section 201. This increases the total surcharge from the standard 10% to 25%.
Payment systems and administration
The Bill also amends Section 10A of the Payment and Settlement Systems Act, 2007 by replacing references to electronic payment modes under the former tax law with “one or more electronic modes of payment as the Central Government may, by notification, specify”. Banks and system providers will be prohibited from levying direct or indirect charges on persons making or receiving payments through the notified electronic modes once the Act is published in the Official Gazette.
According to the Financial Memorandum, implementation of the Bill will not require any additional government expenditure. Administration of the income tax provisions will remain with the Department of Revenue through the Central Board of Direct Taxes (CBDT), while the Department of Financial Services will oversee amendments relating to the Payment and Settlement Systems Act, 2007. The CBDT will also be empowered to prescribe the forms and manner in which information must be maintained or furnished to claim exemptions under the relevant provisions of Schedule IV.
