Lok Sabha clears Taxation Amendment Bill to boost investment, manufacturing and digital economy

07/08/2026

NEW DELHI, Aug 6: The Lok Sabha on Thursday passed the Taxation and Other Laws (Amendment) Bill, 2026, paving the way for a series of tax and regulatory reforms aimed at improving the ease of doing business, attracting foreign direct investment (FDI), promoting manufacturing and reinforcing India's position as a global investment destination.
The legislation, introduced by Finance Minister Nirmala Sitharaman, was approved by a voice vote amid persistent Opposition protests.
The Bill, which was introduced in the House on August 4, replaces the Income-tax (Amendment) Ordinance, 2026, promulgated on June 5. It amends the Income-tax Act, 2025, the Finance Act, 2026, and the Payment and Settlement Systems Act, 2007, as part of the government's broader agenda to modernise India's taxation framework, simplify compliance requirements and create a more investor-friendly business environment.
A key feature of the legislation is the exemption granted to foreign institutional investors (FIIs) and the Bank for International Settlements (BIS) from income tax on interest earned from investments in government securities as well as capital gains arising from the sale, exchange or transfer of such securities. The exemption will apply retrospectively to income earned on or after April 1, 2026. Before the amendment, interest income from such investments was taxed at 20 per cent, while short-term and long-term capital gains attracted tax rates of 30 per cent and 12.5 per cent, respectively.
The Bill also widens tax incentives for foreign companies operating in strategic sectors, particularly electronics manufacturing and the diamond trade. It exempts eligible foreign companies from tax on income generated through the sale of rough diamonds in notified special zones. The benefit extends to diamond mining companies, their sightholders, brokers, aggregators and auction entities associated with the trade in rough diamonds.
In a significant boost to the electronics sector, the legislation provides tax exemptions for foreign companies storing electronic components in customs bonded warehouses for supply to Indian contract manufacturers producing specified electronic goods, including mobile phones, laptops, servers and sub-assemblies. These exemptions will apply to income earned between October 1, 2026, and March 31, 2041.
The measure also extends by ten years, up to the financial year 2040-41, the existing income-tax exemption available to foreign companies supplying capital goods, equipment and tooling to Indian contract manufacturers engaged in electronics production.
To strengthen India's ambition of becoming a global fund management hub, the Bill substantially relaxes several conditions applicable to offshore investment funds managed from India. It removes the minimum requirement of 25 investors, eliminates the restriction that no single investor can hold more than a 10 per cent participation interest, dispenses with the requirement of maintaining a minimum monthly average corpus of Rs 100 crore and removes the cap on investing more than 25 per cent of the fund's corpus in a single entity. The government believes these changes will make India a more competitive destination for global asset management operations.
The legislation also introduces changes affecting business trusts such as Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). While it raises the surcharge on special purpose vehicles (SPVs) opting for concessional corporate tax rates from 10 per cent to 25 per cent, it restores the tax exemption for dividend income distributed to unit holders through business trusts even when the SPV has opted for the lower corporate tax regime.
Another major amendment seeks to support India's expanding digital infrastructure by broadening tax benefits for foreign companies using Indian data centres. The Bill removes the requirement for both the foreign company and the data centre to be specifically notified by the Central government and extends the exemption to services procured from data centres leased and operated by Indian companies, in addition to those owned and operated by them.
The legislation also introduces an important reform in the digital payments ecosystem by amending the Payment and Settlement Systems Act, 2007. It removes the mandatory zero Merchant Discount Rate (MDR) framework, enabling market-based pricing of transaction processing fees. According to the government, the move is intended to ensure the long-term sustainability of digital payment infrastructure while encouraging continued innovation and investment in the sector.
The Centre has maintained that the amendments are designed to make India's tax regime more competitive, reduce regulatory complexity and provide greater certainty to investors. It has argued that the reforms will promote long-term investment, strengthen domestic manufacturing under the Make in India initiative, support the electronics industry, enhance India's attractiveness as an international financial services hub and accelerate the growth of the country's digital economy.
Following its passage in the Lok Sabha, the Taxation and Other Laws (Amendment) Bill, 2026, will now be taken up by the Rajya Sabha for consideration before it can become law.

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