India's New Tax Act: Streamlining Investment and Bolstering Domestic Manufacturing

A Landmark Legislative Overhaul for India's Financial Landscape

In a significant move poised to reshape India’s economic trajectory and enhance its global appeal, the Taxation and Other Laws (Amendment) Act, 2026, received Presidential assent on August 17, 2026. This comprehensive legislation, replacing the earlier Income-tax (Amendment) Ordinance, 2026, introduces targeted amendments across the Income Tax Act, 2025, the Finance Act, 2026, and the Payment and Settlement Systems Act, 2007. Its core objectives are clear: to attract foreign capital, foster domestic electronics manufacturing, bolster process certainty for businesses, and refine the digital payments ecosystem.

Rationalising Safe Harbour for Foreign Investment Funds

A key provision in the new Act aims to simplify the tax framework for eligible foreign investment funds operating with Indian fund managers. The previous regime, outlined in the Income-tax Act, 2025, imposed a stringent set of conditions for such funds to avoid being deemed to have a ‘business connection’ in India, thereby insulating their global income from Indian taxation. The Amendment Act significantly relaxes these requirements. Conditions such as a minimum of 25 members, a maximum 10% participation interest for a single investor, a minimum monthly average corpus of Rs 100 crore, and a bar on investing more than 25% of the corpus in a single entity have now been removed. This rationalisation is expected to facilitate the relocation of more global fund management activities to India, offering greater tax certainty and operational ease for smaller, more concentrated offshore investment vehicles.

Boosting Foreign Investment in Government Securities

In a powerful signal to international investors, the Act introduces a full income tax exemption for Foreign Institutional Investors (FIIs) and the Bank for International Settlements (BIS) on income generated from Indian government securities (G-Secs). This exemption covers both interest earned and capital gains arising from the sale, exchange, or transfer of these securities, and is notably effective retrospectively from April 1, 2026. Previously, FIIs faced a 20% withholding tax on interest income, 30% on short-term capital gains, and 12.5% on long-term capital gains from G-Secs. The removal of these tax barriers is designed to deepen foreign participation in India's sovereign debt market, attract more stable, long-term capital flows, and align India's tax treatment with global benchmarks, thereby strengthening the rupee and managing external-sector risks.

Accelerating Electronics Manufacturing and Supply Chains

Recognising the strategic importance of domestic manufacturing, particularly in electronics, the Act extends crucial tax incentives. The income tax exemption for foreign companies supplying capital goods, equipment, or tooling to Indian contract manufacturers of specified electronic goods has been prolonged by another 10 years, now valid until March 31, 2041. The scope of 'specified electronic goods' has been clearly defined to include mobile phones, laptops, all-in-one personal computers, tablets, servers, ultra-small form factor devices, their sub-assemblies, and hearables, wearables, and related accessories. Additionally, a new exemption has been introduced for foreign companies that store components in customs-bonded warehouses in India for supply to contract manufacturers, further supporting the localisation of electronics supply chains.

Refining Taxation for Business Trust SPVs and Data Centres

The Act addresses specific tax aspects concerning Special Purpose Vehicles (SPVs) of business trusts (such as REITs and InvITs). While the Finance Act, 2026, previously levied a 10% surcharge on income-tax for domestic companies opting for concessional tax rates, the new Act increases this surcharge to 25% for specified SPVs of business trusts. Concurrently, it grants an exemption to unit holders of a business trust from tax on dividend income distributed by the trust, irrespective of whether the underlying SPV has opted for the concessional tax regime. This aims to provide uniformity and simplification in the taxation of business trust distributions. Furthermore, to boost India's position as a data centre and cloud hub, the Act broadens the existing tax exemption for foreign companies procuring services from specified data centres. It now explicitly extends this exemption to data centres leased and operated by an Indian company, removing prior notification requirements and easing foreign cloud companies' use of Indian data centres.

Evolving Digital Payment Regulations: The MDR Framework

A significant amendment to the Payment and Settlement Systems Act, 2007, gives the central government legal backing to modify the zero-Merchant Discount Rate (MDR) framework for UPI and RuPay card transactions. While Finance Minister Nirmala Sitharaman has clarified that UPI payments for consumers will remain free, the government now holds the discretionary power to decide, via notification, which electronic payment modes or transactions, particularly certain categories of merchant transactions above a prescribed threshold, may attract MDR charges in the future. This shift moves away from a statutorily fixed zero-MDR to a more flexible, policy-driven approach, aiming to support the long-term viability and infrastructure development of digital payment systems while maintaining consumer benefits.

Implications for the Indian Economy

Collectively, the Taxation and Other Laws (Amendment) Act, 2026, signals India's proactive stance in adapting its regulatory and tax framework to global economic dynamics. By streamlining compliance for foreign investment funds, incentivising capital markets, extending manufacturing tax breaks, and clarifying digital payment policies, the government aims to enhance India's attractiveness as a hub for both global capital and advanced manufacturing. These measures are expected to contribute significantly to increased foreign direct investment (FDI), greater liquidity in bond markets, and robust growth in the electronics sector, ultimately reinforcing India's broader economic resilience and growth narrative.

Balaji K

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