Parliament has finalised the Taxation and Other Laws (Amendment) Act, 2026. To summarize, the Act was passed as a Bill by the Lok Sabha on August 6th and returned with recommendations by the Rajya Sabha on August 10th, in the truncated procedure applicable to a Finance Bill, and finally received the President’s Assent on August 18th, 2026. Most of its provisions will have a retrospective effect from April 1, 2026, the date on which the Income Tax Act, 2025, was enacted. Some provisions will have separate later commencement dates.
As per Article 123(2), the Act re-enacts the Income Tax (Amendment) Ordinance, 2026 (promulgated on 5th June). Apart from the obligatory re-enactment, the Act also introduces additional substantive amendments to six areas of tax and payments law subsequent to representations received post the Finance Act, 2026.
It is useful to distinguish the obligations of this Act from its discretionary actions. The required portion is narrow. The Statement of Objects and Reasons clearly states that the government had identified gaps that needed to be addressed in the representations received after the Finance Act, 2026. Rather than postponing the fixes until next year’s finance bill, the government has incorporated them in this one. On the surface, this Act, which looks like routine Ordinance housekeeping, is actually a substantive mid-year correction in six areas of tax and payments law.
First consider what it means for people who trade capital, not goods, internationally. Schedule I of the Income Tax Act, 2025, has been completely replaced and provides the conditions under which an offshore investment fund is not deemed to have a business connection in India. The 25-member minimum, 10% single investor concentration cap, Rs 100 crore monthly average corpus floor, 25% single entity investment limit and minimum fund manager remuneration test have been removed.
The remaining five conditions are more related to each other: these are non-residence of the fund, a treaty or notified jurisdiction, a ceiling of 5% on direct Indian participation, no business activity in India and no activity which would constitute a business connection. Anyone who has recently set up an offshore fund with a focus on India will immediately see the headaches this eliminates.
There are two other modifications to India’s manufacturing base, which expand and widen the existing exemptions for foreign suppliers. The tax exemption available to foreign companies supplying capital goods, equipment, or tooling to Indian electronics contract manufacturers, provided for in Schedule IV, Sl. 13A, has been extended for a full decade, from the assessment year 2030-31 to 2040-41. Also, effective October 1, 2026, two new entries, 13F and 13G, will be implemented. Income from the sale of rough diamonds by foreign miners, sight holders, brokers, and tender or auction entities operating through a notified special zone is also exempt. However, foreign companies storing components for electronics contract manufacturers in a customs-bonded warehouse are exempted. Both new entries are anchored to a newly defined term, specified electronic goods, which includes mobile phones, laptops, all-in-one PCs and tablets, servers, sub-assemblies, hearables, and wearables. Therefore, the exemption is intentionally scoped rather than open-ended, and it will apply to the tax year 2040-41.
Data centres get real liberalisation in two different areas. Under the earlier Sl. 13C, the Central Government was to notify the foreign company that was procuring data centre services. Also, the data centre was to be set up under an approved and notified scheme and owned and operated by Indian company. The Act now completely removes the foreign company notification requirement and redefines the term “specified data center” to include data centres that are leased and operated by an Indian company, rather than those that are owned by the company. Those who are structuring foreign investment into Indian data centers or cloud capacity should register both changes.
The Bank for International Settlements and Foreign Institutional Investors would get an express exemption on interest and capital gains earned on Indian government securities, effective April 1, 2026, subject to prescribed disclosure. This is a more direct measure benefiting them. This is not new work. The June Ordinance had already established it as law, and the Act merely ensures its permanence. Dividend exemption for REIT and InvIT structures is back, but with a cost that is worth understanding in some detail rather than in passing. This is the only matter that the following section deals with.
The sixth change is not about foreign investment, but it is the first change every payments client will ask about. Under Section 10A of the Payment and Settlement Systems Act, 2007, banks and payment providers could not charge any fee on modes notified under Section 269SU of the 1961 Act. This was how UPI could run free for merchants. The Act removes that connection and instead allows the Central Government to decide which modes will remain unrestricted on its own timeline. This change only takes effect from the date of Gazette publication, not the Act’s standard anchor of 1 April 2026.
Finance Minister Nirmala Sitharaman was clear in the Rajya Sabha that this provision is just an enabling measure, does not impose a fee, and the use of UPI for normal consumers and small merchants remains free. But the legal framework for a future MDR, which is supposed to cover higher-ticket merchant transactions above the reported Rs 2,000 threshold, is in place. The importance of the surcharge line and the evolution of REIT and InvIT Schedule V of the Income Tax Act, 2025, lists the items that can be excluded from the total income of a business trust unit holder. Up until now, distributed income was not taxed except for rental income directly earned by a REIT, dividends received from an SPV that had opted into the concessional regime under Section 200, and interest received from an SPV. Clause (b): the dividend carve-out is being omitted. In practice, a unit holder’s dividend income is now exempt regardless of whether the underlying SPV has elected into the Section 200 or 201 concessional regime.
Before this amendment, when an SPV moved to the concessional regime, the unit holders of the SPV were negatively impacted as the dividend stream became taxable in their hands. This is precisely the type of structural gap that prevents sponsors from making a rational election. This is why a large number of SPVs sat idle in the old regime, with MAT credit that the Finance Act 2026 reforms had already rendered unusable except after a regime switch. By removing clause (b), the disincentive is dealt with at the unit holder’s end. However, Section 6 of the Act further amends the surcharge tables of the Finance Act, 2026 to provide a 25% surcharge for an SPV of a business trust that is taxed under Section 200 or 201, instead of the 10% surcharge that every other domestic company that makes the same election is subject to. When the surcharge and cess are incorporated, the effective corporate rate for these SPVs rises from about 25.2% to about 28.6%, a significant increase of more than three percentage points. Do the math on the standard 22% concessional rate. Embassy REIT CEO Amit Shetty has already crunched the numbers on the upside. The economic value of about Rs 592 crore of MAT credit that was written off earlier can be recovered once its SPVs factor in the change.
The Act does not answer the question of whether the upside passes the higher surcharge test, as that is an SPV-by-SPV modelling question. The move to the new regime should be phased across the sector rather than done in one fell swoop, especially for SPVs still in a Section 80-IA holiday that have only modest credit at stake.It is pertinent to mention that this Act does not impact the MAT credit mechanism. The Finance Act, 2026, already in operation, provides for the reduced MAT rate of 14% for SPVs that continue in the old regime; its character as a final tax with no further credit accrual from April 1, 2026; and the cap on the accumulated credit an SPV can set off in a given year once it switches. The regime switch is only worth it if the unit holder side of the equation is changed by this Act.
The Implications Of This For Foreign Capital
It is hard to ignore a pattern in the case of the six changes being read together. Almost all material changes in this Act, serve to bring down the cost or risk of foreign capital remaining within an Indian structure, whether it arrives as a FII or the BIS buying government paper directly, or as an offshore fund whose manager wants to move to Mumbai or GIFT City without creating a question of a permanent establishment, or as a foreign supplier financing India’s electronics and diamond manufacturing base, or as an FPI holding units in a listed REIT or InvIT.
There are four items of particular interest to foreign institutional clients and their advisors:
a) Of the six changes, the most significant is the Schedule I relaxation for offshore fund managers. All conditions were removed, including the member count, single-investor concentration, the corpus floor, the single-entity limit, and manager remuneration. The structuring constraint that either required elaborate engineering to remain compliant while relocating decision-makers to India or kept investment management offshore was removed. Without those, a fund can bring its manager onshore against a much shorter checklist, and that is a genuine easing, not a cosmetic one.
b) The Schedule V fix is not expansionary but protective for FPIs that hold REIT and InvIT units. This puts the position back to the pre-regime election position, where the SPV could not affect the unit holder. Accordingly, foreign unit holders should not be required to reexamine their post-tax return assumptions simply because an SPV transfers to Section 200. So when a foreign client asks how this affects their yield, take into account that the surcharge cost is the SPV’s, not the client’s.
c) The message is duration and continuity for foreign suppliers in the electronics and diamond value chains, not anything novel. This policy line, import substitution financed through favourable tax treatment of foreign capital equipment and inventory, is designed to outlast the current government’s term, as evidenced by a 2030-31 sunset that has been extended to 2040-41 and two new fifteen-year exemptions. Foreign boards literally underwrite investment decisions on that level of certainty.
d) People who are engaged in the planning of hyperscale or colocation investments in India should consider the data centre change. The change from a requirement to own to a permission to lease does away with a constraint that had previously forced foreign cloud investment to take build-and-own models even where leasing was the more economically viable option.
The phrase “as may be prescribed” is present in nearly every new entry in this Act, beginning with the most immediate gap. The fund’s reporting requirements, the terms of the diamond zone, the FII disclosure format, and the other conditions of the data centre are all subject to rules that have not yet been set. The Act, even though it has been enacted, yet the Central Board of Direct Taxes notifications determining the ease with which a foreign investor can claim these exemptions are pending to be issued. Thus, each exemption in this Act is procedurally incomplete till these notifications are received.
The change in the REIT and InvIT surcharge itself has a wider gap. Section 6, which increases the surcharge on an electing SPV from 10% to 25%, does not specify a separate commencement date in the Bill. Accordingly, it is subject to the general rule and will come into effect on April 1, 2026, along with most other provisions. Any SPV that elected into Section 200 earlier in this financial year and calculated its advance tax instalments based on the assumption of a 10% surcharge may now find that assumption is incorrect from the start of the year rather than from the date of assent. Nowhere in the Act, is there any indication of whether the department considers this a simple shortfall that should be corrected with interest or whether some administrative relief is being considered for elections that already have been made in good faith. This is the first question to pose to any SPV client who entered the new regime before this Bill was introduced.
A third gap is textual, not practical, but it ought to be on the same list. This Act repeals Schedule I, which included a specific dispensation where the Central Government could waive the fund and fund manager conditions in their entirety in cases where the eligible fund manager operates out of an International Financial Services Center and commenced operations prior to 31 March 2030. That dispensation does not seem to have been taken on board by the substituted Schedule I. It could be that the Board considers it unnecessary due to the significantly improved general conditions or they may have chosen to handle it by way of notification. Either way, anyone who established a fund manager’s IFSC relocation around a particular carve-out should verify its status directly rather than presume it survived the substitution.
All in all it is necessitated that CBDT notifies the pending rules and formats, including FII disclosure format, conditions of the diamond zone, other conditions of data center and reporting obligations of funds. The department is expected to clarify the treatment of SPVs that elected into Section 200 on the assumption of a 10% surcharge, as Section 6 will be effective on April 1, 2026.
References
● Income-tax (Amendment) Ordinance, 2026, Gazette of India, Extraordinary, Part II, Section 1, Notification No. CG-DL-E-05062026-273164, 5 June 2026 – static.pib.gov.in
● PRS Legislative Research, “The Taxation and Other Laws (Amendment) Bill, 2026,” Bill summary – prsgindia.org
● Nirmala Sitharaman, Finance Minister, Reply to the Taxation and Other Laws (Amendment) Bill, 2026, Rajya Sabha, 10 August 2026 – newsonair.gov.in
● Embassy REIT’s CEO Amit Shetty on MAT credit provisions of the Bill – a2ztaxcorp.net
*Shweta Bharti, Managing Partner, H&S Partners
**Yashodhara Burmon Roy, Principal Associate, H&S Partners