Read This as an Investment Bill, Not a Tax-Rate Bill
No income tax slabs change here, and no domestic compliance burden is added for ordinary taxpayers. What this Bill actually does is remove seven specific, named tax frictions that foreign capital had been raising with the government — the 13-condition test for offshore funds, notification bottlenecks for data centres, MAT-driven uncertainty for REIT/InvIT dividends, and more — alongside a separate amendment on digital payment charges that sits outside the tax framework entirely.
The Bill amends three statutes at once: the Income-tax Act, 2025, the Finance Act, 2026, and the Payment and Settlement Systems Act, 2007. On passage by both Houses and Presidential assent, it will formally replace the Income-tax (Amendment) Ordinance, 2026 (No. 2 of 2026) — though, as Section 02 below explains, that Ordinance covered only one of the seven tax measures in this Bill.
Why the Government Brought This Amendment
2.1 What the June Ordinance Actually Covered
The Income-tax (Amendment) Ordinance, 2026 was promulgated on 5 June 2026 — and its scope was narrow. It granted a tax exemption on interest income and capital gains earned by Foreign Institutional Investors (FIIs) and the Bank for International Settlements from investments in government securities (G-Secs). Per EY's alert on the Bill, the reforms announced alongside the Ordinance were aimed at deepening the Government Securities market and enhancing Foreign Portfolio Investor participation, in reaction to evolving geopolitical developments and disruptions in international trade and supply chains. Parliament was not in session, and the President promulgated the Ordinance under Article 123 of the Constitution.
Our reading: greater foreign participation in G-Secs would also tend to support capital inflows and, indirectly, currency stability — though the government's own framing centres on market depth and investor participation rather than the rupee specifically.
The Bill's own Statement of Objects and Reasons describes the Ordinance's objective as mitigating the impact of external economic shocks, ensuring domestic economic stability, and supporting sectors affected by prevailing global conditions.
2.2 Why the Bill Goes Further Than the Ordinance
Per the Statement of Objects and Reasons, subsequent policy assessment — based on representations received from stakeholders after the enactment of the Finance Act, 2026 — indicated that while the Ordinance's original objective remained relevant, additional taxation measures were necessary to comprehensively achieve it. Given continuing global developments and the need for a timely, coherent response, the government chose to incorporate these additional measures directly into this Bill rather than issue a fresh Ordinance.
Of the eight principal changes discussed in this article, the G-Sec exemption originated in the June Ordinance; the other measures form part of the additional amendments proposed by the Bill itself, rather than any Ordinance.
for global capital, manufacturing and business.
Old Position vs. New Position
| Area | Earlier Position | 2026 Change | Key Beneficiary |
|---|---|---|---|
| Offshore funds | 13 conditions to avoid a taxable business connection | 8 conditions deleted, leaving 5 core conditions | Global fund managers |
| Data centres | Government notification required for eligible foreign companies & data centres | Notification requirement removed; lease model permitted alongside ownership | Data centre operators |
| Electronics manufacturing | Capital-goods exemption available till tax year 2030-31 | Extended by 10 years, to tax year 2040-41; "specified electronic goods" defined | Foreign capital-goods suppliers |
| REIT/InvIT | Dividend exemption uncertain where SPV opts for new MAT regime | Uniform exemption for unit holders, but 25% surcharge on SPVs choosing the concessional regime | REIT/InvIT unit holders |
| Rough diamonds | No dedicated SNZ exemption for foreign diamond entities | New exemption on sale of rough diamonds via SNZs, till 31 Mar 2041 | Foreign diamond miners, sightholders, brokers |
| Electronic components | No exemption for bonded-warehouse storage by foreign suppliers | New exemption for components stored pre-supply, till 31 Mar 2041 | Foreign component suppliers |
| Government securities | Interest/capital gains on G-Secs taxable for FIIs | Exempted for eligible FIIs and the BIS (already in force since 5 Jun 2026) | Foreign institutional investors |
| Digital payments | No express bar on charges for specific payment modes | Government empowered to notify modes where charges cannot be levied | Digital payment users |
The 8 Key Changes, In Detail
Each provision below is labelled by status: whether it is already in force under the June Ordinance, or new to this Bill and pending enactment.
To encourage global fund management activity in India, the Bill deletes eight of the thirteen conditions an eligible offshore investment fund must currently satisfy to avoid creating a taxable "business connection" in India — per EY's confirmed reading of the Bill. The five that remain: non-resident status; residence in a DTAA/notified jurisdiction; a cap of 5% of the fund's corpus on aggregate Indian-resident investment; no business carried on or controlled in India; and no business connection created other than through an eligible fund manager. Some media reports also describe a harmonisation of conditions for IFSC-based and non-IFSC funds; we have not been able to independently verify that specific point against the Bill's clause language, so we would confirm it before relying on it for a specific IFSC fund structure.
Removes the requirement for government to specifically notify eligible foreign companies and specified data centres. Indian companies can now operate specified data centres under a lease model, in addition to ownership, while continuing prescribed reporting requirements.
The exemption for foreign companies supplying capital goods, equipment or tooling to Indian contract manufacturers of specified electronic goods — currently available till tax year 2030-31 — is extended by another 10 years, per EY's confirmed reading of the Bill. "Specified electronic goods" is now defined to include mobile phones, laptops, all-in-one PCs, tablets, servers, USFF devices, sub-assemblies, and hearables/wearables and accessories.
Dividend tax exemption for business-trust (REIT/InvIT) unit holders is proposed to apply uniformly, regardless of the tax regime adopted by the underlying SPV — resolving uncertainty created by the revised MAT framework under the Finance Act, 2026. This is not a one-sided concession, however: it is accompanied by a higher 25% surcharge for SPVs that opt for the concessional tax regime. The overall tax impact will depend on the SPV's tax profile and the distribution structure of the particular business trust.
New exemption for eligible foreign diamond mining companies, sightholders, brokers, aggregators and tender/auction entities on income from sale of rough diamonds through Special Notified Zones (SNZs) — available till 31 March 2041.
Tax exemption for foreign companies storing electronic components in customs-bonded warehouses before supplying them to Indian contract manufacturers of specified electronic goods — available till 31 March 2041, subject to prescribed conditions and reporting.
Interest income and capital gains from sale, exchange or transfer of government securities are exempted for eligible Foreign Institutional Investors (FIIs) and the Bank for International Settlements (BIS), subject to prescribed reporting requirements. This is the one measure already operative under the Ordinance; the Bill now seeks to replace the Ordinance through Parliamentary legislation.
Amends the Payment and Settlement Systems Act, 2007 to empower government to notify electronic payment modes on which banks/payment system providers cannot levy charges — applies prospectively to modes notified after the law takes effect.
Implications for Clients
- Manufacturing clients — foreign-invested Indian manufacturing groups (especially electronics/EMS) should reassess the extended capital-goods and component-supplier exemptions for long-term supply-chain and transfer-pricing planning.
- Data centre operators — entities in or considering data centre operations should evaluate the newly permitted lease-model route and revisit reporting obligations.
- REIT/InvIT stakeholders — sponsors and unit holders should confirm continuity of dividend exemption in light of the SPV's MAT regime election.
- Fund managers/investors — clients advising or investing through offshore funds should revisit structuring given the simplified 5-condition test, which may reduce reliance on structures built around the earlier 13-condition regime.
- Foreign portfolio investors — FIIs and similarly placed foreign investors in G-Sec are already covered by the exemption in force since 5 June 2026, and should confirm reporting compliance continues once the Bill is enacted.
Only the government securities exemption is currently in force, under the June 2026 Ordinance. The other six tax measures, plus the digital payments amendment, are proposals with no legal effect until the Bill is passed by both Houses and receives Presidential assent. Note also that enactment date and effective date are not the same thing here: once passed, the Act is proposed to be deemed to have come into force from 1 April 2026, except where a specific provision states otherwise. Provisions may also be revised during passage.
The Larger Signal May Matter More Than the Exemptions
Individually, each of these eight changes is a technical fix — a condition count reduced here, a notification requirement removed there. Taken together, they describe a shift in how India competes for capital. India appears to be moving from using tax incentives primarily to encourage domestic investment, toward using tax certainty, safe harbours and targeted exemptions to influence where global capital, fund management, data infrastructure and supply chains choose to locate.
That shift started with a narrow, urgent measure — the June Ordinance's G-Sec exemption, issued to deepen the G-Sec market and widen foreign portfolio investor participation amid global trade disruption. It has now broadened, through stakeholder consultation, into a structural package covering fund management, manufacturing, data infrastructure and diamond trading. The direction of travel is the story here, more than any single exemption.
As with any Bill just introduced, provisions may be revised during passage. We are tracking this Bill closely and will issue a follow-up note on enactment, along with clause-specific analysis for affected clients.
Primary Sources
- Taxation and Other Laws (Amendment) Bill, 2026 — as introduced in the Lok Sabha, 4 August 2026. Available via indiabudget.gov.in and sansad.in (Lok Sabha bills section).
- Statement of Objects and Reasons accompanying the Bill, laid on the Table of the House along with the Bill.
- Income-tax (Amendment) Ordinance, 2026 (No. 2 of 2026) — promulgated 5 June 2026, published in the Gazette of India.
- Explanatory statement on the Ordinance, laid in Hindi and English before the Lok Sabha on 4 August 2026, as required under Article 123 of the Constitution.
- Ministry of Finance press materials and FAQs accompanying the Bill's introduction.
This article summarises publicly available legislative material as of 5 August 2026. Readers relying on this for a specific transaction should verify against the final Bill text and, once enacted, the Act.
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