Taxation and Other Laws (Amendment) Act 2026

The Taxation and Other Laws (Amendment) Act, 2026 received presidential assent on 17 August 2026 and is deemed to have come into force on 1 April 2026, except where a provision states its own effective date. The Act amends three laws: the Income Tax Act 2025, the Finance Act 2026, and the Payment and Settlement Systems Act 2007. It replaces the Income-tax (Amendment) Ordinance, 2026, which the government had issued on 5 June 2026, and it preserves everything done under that ordinance.

The Act makes five substantive changes. It exempts foreign institutional investors (FIIs) and the Bank for International Settlements (BIS) from tax on income from Indian government securities. It replaces the safe-harbour conditions for offshore investment funds that use fund managers based in India. It extends and widens tax exemptions for foreign companies in electronics manufacturing, the rough-diamond trade, and data-centre services. It raises the surcharge on special purpose vehicles of business trusts from 10 per cent to 25 per cent while exempting unit holders on the related dividend income. It also amends Section 10A of the Payment and Settlement Systems Act 2007, the provision that keeps UPI and RuPay debit payments free of charge.

The retrospective commencement date exists because of the ordinance. The exemption for FIIs and BIS applies to income arising on or after 1 April 2026, the same date on which the Income Tax Act 2025 replaced the Income Tax Act 1961, and the ordinance had already given that exemption legal effect from June. The Act ratifies the ordinance's exemption and adds the remaining changes.

FIIs and the BIS pay no income tax on interest from Indian government securities and no tax on capital gains from the sale, exchange or transfer of those securities, for income arising on or after 1 April 2026. The exemption is conditional on the investor furnishing prescribed information in the prescribed form and manner.

The Act replaces Schedule I of the Income Tax Act 2025, the safe harbour under which an eligible offshore fund that appoints a fund manager in India is not treated as having a business connection in India on that ground. The replacement deletes four of the most restrictive conditions:

The conditions that remain are directed at keeping the fund genuinely foreign. The fund must be established or registered outside India, must be a non-resident, and must be located in a jurisdiction notified or qualifying under Section 159 of the Income Tax Act 2025. Persons resident in India may hold no more than 5 per cent of the corpus, tested on 1 April and 1 October each tax year, with four months allowed to restore compliance after a breach. The Indian fund manager must be registered as a fund manager or investment adviser, must not be an employee or connected person of the fund, and, together with connected persons, may not be entitled to more than 20 per cent of the fund's profits from transactions it conducts. The fund must file a prescribed statement with the tax authority within 90 days of the end of the tax year.

Three sets of foreign-company exemptions under Schedule IV of the Income Tax Act 2025 are extended or created.

Electronics. The existing exemption for a foreign company's income from supplying capital goods, equipment and tooling to an Indian contract manufacturer of specified electronic goods, at serial number 13A, is extended from FY 2030-31 to FY 2040-41. A new entry, serial number 13G, exempts a foreign company's income from storing components in a customs-bonded warehouse under Section 65 of the Customs Act, 1962 and selling them to an Indian contract manufacturer, for income arising on or after 1 October 2026 and until 31 March 2041. The Act defines specified electronic goods to cover mobile phones, laptops, all-in-one personal computers, tablets, servers and ultra-small form factor devices, sub-assemblies of these products, and hearables, wearables and related accessories.

Diamonds. Foreign diamond-mining companies, their sightholders (bulk buyers authorised to purchase rough diamonds), and connected brokers, aggregators and tender or auction entities are exempt on income from the sale of rough diamonds in notified special zones, for income arising on or after 1 October 2026 and until 31 March 2041.

Data centres. The exemption for specified foreign companies procuring services from Indian data centres no longer requires the foreign company to be individually notified by the central government, or the data centre to be set up under an approved and notified scheme. The exemption now also covers data centres that an Indian company leases and operates, not only those it owns. Business Standard reported the government's stated objective for this change as "process certainty" for foreign cloud companies.

The Finance Act 2026 levies a 10 per cent surcharge on the income tax payable by domestic companies that opt for concessional tax rates. The Act raises that surcharge to 25 per cent for a special purpose vehicle (SPV) of a business trust, the company through which a REIT or an InvIT holds its assets. In parallel, unit holders of a business trust are exempt from tax on income representing dividends received from such an SPV.

Section 10A of the Payment and Settlement Systems Act 2007 bars banks and payment system providers from charging users for payments made through prescribed electronic modes. That rule has kept UPI and RuPay debit transactions free of the merchant discount rate (MDR), the fee a merchant's bank collects on a card payment. Until now, Section 10A identified those modes by reference to Section 269SU of the Income Tax Act 1961, a provision that ceased to exist when the 1961 Act was replaced.

The Act substitutes a new mechanism: the zero-charge rule applies to electronic payment modes that the central government notifies under Section 187 [Old: Section 269SU] of the Income Tax Act 2025. This amendment takes effect from the date of the Act's publication in the gazette, not retrospectively. A payment mode that is not notified falls outside the statutory bar and can lawfully be charged.