Lok Sabha Passes Taxation and Other Laws Amendment Bill to Boost Investment and Manufacturing

The Lok Sabha passed the Taxation and Other Laws (Amendment) Bill, 2026, introducing a package of targeted tax and regulatory changes intended to attract foreign capital, support domestic manufacturing and provide greater policy certainty to investors and businesses.

Passed on August 6, the legislation amends the Income-tax Act, 2025, the Finance Act, 2026, and the Payment and Settlement Systems Act, 2007. It also seeks to replace the Income-tax (Amendment) Ordinance, 2026, while protecting actions already taken under the ordinance.

The government has presented the Bill as a response to changing geopolitical conditions, disruptions in global trade and supply chains, and the need to strengthen India’s attractiveness as a destination for investment, manufacturing and international financial activity.

Focus on investment and economic stability

The legislation combines several measures affecting foreign investors, fund managers, electronics manufacturers, cloud-service providers, business trusts and participants in the international diamond trade.

According to the government, the changes are intended to mitigate external economic shocks, support sectors affected by global developments and improve the ease of doing business through a more predictable taxation framework.

The Bill was introduced in the Lok Sabha on August 4 and passed by the House two days later. It must also be approved by the Rajya Sabha and receive presidential assent before completing the legislative process.

Offshore fund-management rules simplified

One of the Bill’s major provisions seeks to make India more attractive as a base for managing offshore investment funds.

Under the existing framework, an offshore fund managed from India must satisfy several conditions to prevent its global income from becoming taxable in the country. These requirements have been viewed as a barrier to global fund managers locating substantial operations in India.

The Bill substantially eases these eligibility conditions while retaining safeguards intended to prevent misuse and round-tripping of funds.

Among the requirements proposed to be removed are conditions relating to a minimum number of investors, limits on the participation of individual investors, restrictions on investment concentration and the maintenance of a prescribed average monthly corpus.

The earlier framework required an eligible investment fund to have at least 25 investors, generally limited an individual investor’s participation to 10%, restricted investment of more than 25% of the fund’s corpus in a single entity and required a minimum average monthly corpus of ₹100 crore.

The changes are expected to lower compliance barriers and encourage international fund-management firms to establish or expand their presence in India.

The Bill also seeks to create a more uniform framework by removing separate eligibility conditions applicable to offshore funds operating through the International Financial Services Centre.

Relief for foreign investment in government securities

The legislation incorporates provisions of the Income-tax Amendment Ordinance issued in June 2026.

That ordinance provided tax exemptions on interest income and capital gains earned by eligible foreign investors from investments in specified government securities.

The measure was introduced as part of efforts to attract greater foreign capital, support financial-market stability and improve demand for Indian government debt during a period of international economic uncertainty.

Under the Bill, tax exemptions relating to government securities are extended to eligible Foreign Institutional Investors and the Bank for International Settlements, subject to prescribed reporting and compliance requirements.

By replacing the ordinance with parliamentary legislation, the government seeks to provide a more permanent statutory basis for the measure.

Electronics manufacturing receives extended tax support

The Bill introduces significant incentives for India’s electronics-manufacturing ecosystem.

It extends the income-tax exemption available to foreign companies supplying capital goods, machinery, equipment and tooling to Indian contract manufacturers producing specified electronic goods.

The earlier exemption was scheduled to end after the 2030–31 tax year. The Bill extends the benefit until the tax year ending March 31, 2041.

The list of eligible electronic goods has also been expanded. In addition to mobile phones and related products, it will cover laptops, personal computers, tablets, servers, hearable devices, wearable products and associated components and accessories.

The extension is intended to provide long-term certainty to global electronics companies that supply manufacturing equipment or engage Indian firms to manufacture products on their behalf.

Such certainty is important because electronics manufacturing requires large investments in factories, specialised machinery, testing systems, tooling and supply-chain development.

Customs-bonded warehousing incentive

The legislation also provides a 15-year income-tax exemption for eligible foreign companies storing electronic components in customs-bonded warehouses before supplying them to contract manufacturers in India.

The exemption will continue until the 2040–41 financial year.

Customs-bonded warehouses allow imported goods to be stored without the immediate payment of customs duties. Duties generally become payable when the goods are removed for domestic use.

The tax provision is expected to encourage international component manufacturers and suppliers to maintain inventories closer to Indian factories. This can shorten delivery times, reduce supply-chain uncertainty and help domestic manufacturers obtain components when required.

The measure is particularly relevant for electronics production, where factories depend on complex networks of component suppliers and where disruptions involving a small number of critical parts can affect entire production lines.

Greater certainty for foreign cloud companies

Another provision seeks to simplify the operating framework for foreign cloud-service companies using data centres located in India.

The Bill removes certain approval and notification requirements applicable to foreign cloud companies using Indian data-centre infrastructure. It also allows the required data-centre capacity to be leased rather than directly owned.

The change is intended to provide greater process certainty and make it easier for international cloud providers to use Indian computing and data-storage facilities.

This could benefit India’s expanding data-centre industry, which supports cloud computing, artificial intelligence, digital payments, e-commerce, entertainment and government platforms.

Allowing leased infrastructure can also reduce the initial capital requirement for foreign companies entering the Indian market while generating demand for data centres developed by Indian operators.

Tax incentive for rough-diamond trading

The Bill provides a long-term tax incentive aimed at establishing India as a major international centre for rough-diamond trading.

Eligible foreign diamond-mining companies, sightholders, brokers, aggregators and auction or tender entities will receive an income-tax exemption on income earned from the sale of rough diamonds through notified Special Notified Zones.

The exemption is scheduled to apply from October 1, 2026, until March 31, 2041.

Special Notified Zones allow international diamond companies to display and sell rough diamonds directly to Indian buyers under a controlled customs framework.

India is already one of the world’s largest centres for cutting and polishing diamonds. However, much of the international trade in unprocessed stones has traditionally taken place through overseas trading centres.

The 15-year exemption is intended to encourage global mining companies, auction houses and traders to conduct sales in India, allowing domestic manufacturers to purchase rough stones more directly.

The definition covered by the measure includes rough diamonds in unworked, sawn, cleaved and bruted forms, reducing uncertainty over the types of stones eligible for the exemption.

Tax treatment of REIT and InvIT dividends changed

The legislation also provides relief involving Real Estate Investment Trusts and Infrastructure Investment Trusts.

REITs and InvITs commonly hold infrastructure or property assets through special-purpose vehicles. Income generated by these vehicles can be distributed to investors who hold units in the trust.

Under the existing framework, unit holders could lose a dividend-tax exemption where the special-purpose vehicle had opted for the new corporate tax regime.

The Bill removes this restriction, allowing eligible dividends received by unit holders to remain exempt even when the underlying special-purpose vehicle has selected the new tax regime. A corresponding tax liability will apply at the special-purpose vehicle level to maintain revenue neutrality.

The change is expected to clarify the taxation of distributions and prevent the tax treatment selected by an underlying company from unintentionally reducing the returns available to REIT and InvIT investors.

Digital-payment law amended

Apart from income-tax provisions, the Bill amends the Payment and Settlement Systems Act, 2007.

Under the present legal arrangement, banks and payment-system providers are prohibited from directly or indirectly imposing charges on users for payments made through specified systems, including UPI and RuPay debit cards.

The amendment removes the existing link between this provision and the Income-tax Act. It empowers the Central government to notify the electronic payment modes or specified categories of transactions on which banks and payment providers will continue to be prohibited from imposing charges.

The amendment does not itself impose a Merchant Discount Rate on all UPI transactions. However, it creates a revised legal framework under which the government can determine through notification which payment modes or transactions must remain free of charges.

This gives the Centre greater flexibility to differentiate between payment instruments, transaction categories or possible thresholds while continuing to protect specified digital payments from user charges.

Any future change in the zero-charge framework would therefore depend on separate government notifications and the conditions specified in them.

Ordinance to be replaced by legislation

The Bill repeals the Income-tax Amendment Ordinance, 2026, while validating decisions and actions already taken under it.

The ordinance was promulgated on June 5 to introduce immediate tax measures relating to foreign investment in government securities amid external economic pressures.

Subsequent consultations and policy assessments indicated that additional reforms were required. The government therefore incorporated the ordinance provisions into a broader Bill covering investment funds, electronics manufacturing, cloud services, diamonds, business trusts and payment systems.

Replacing the ordinance with legislation passed by Parliament will provide a regular statutory foundation for the tax measures.

Wider economic significance

The Bill reflects an increasingly targeted approach to taxation policy.

Rather than announcing broad changes to personal income-tax rates, it focuses on sectors and investment structures considered important for India’s long-term economic strategy.

The electronics provisions seek to strengthen domestic manufacturing and deepen local supply chains. Changes involving foreign funds and government securities are intended to improve capital inflows. The cloud-computing provisions support digital infrastructure, while the diamond exemption aims to bring a larger share of international trading activity into India.

Relief for REITs and InvITs can support investment in commercial property, roads, power networks and other infrastructure assets by improving certainty over the taxation of distributions.

The amendments to digital-payment law also recognise that India’s payment ecosystem has evolved substantially since the introduction of the zero-charge framework.

Bill moves to next legislative stage

Passage by the Lok Sabha marks an important step, but the Bill has not yet become law.

It must be considered and passed by the Rajya Sabha before being sent to the President for assent. Some provisions may also require subsequent rules, notifications or reporting requirements before becoming operational.

Once enacted, the legislation is expected to provide long-term tax certainty to electronics manufacturers, overseas investors, cloud-service companies, diamond traders and infrastructure investment vehicles.

The overall objective is to use targeted tax relief and regulatory simplification to attract investment, expand domestic manufacturing and protect economic activity from disruptions in global markets.

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Reference

News on AIR / Akashvani News
“Lok Sabha passes taxation amendment legislation”
August 6, 2026

Parliament of India
The Taxation and Other Laws (Amendment) Bill, 2026
Introduced in the Lok Sabha on August 4, 2026 and passed by the House on August 6, 2026

Acts proposed to be amended:
Income-tax Act, 2025
Finance Act, 2026
Payment and Settlement Systems Act, 2007

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