India has rolled out a fresh round of targeted tax and regulatory changes through the Taxation and Other Laws (Amendment) Act 2026, which received presidential assent on August 17 and is deemed effective from April 1, 2026, unless a specific provision states otherwise. The amendments touch several existing laws, including the Payment and Settlement Systems Act 2007, the Income Tax Act 2025, and the Finance Act 2026, with the changes broadly centred on electronic payments, foreign investment funds, electronics manufacturing incentives, and how certain special purpose vehicles (SPVs) are taxed.
A Small But Meaningful Shift in Payment Provisions
The Act amends Section 10A of the Payment and Settlement Systems Act, 2007. Previously, this section referred specifically to electronic payment modes prescribed under Section 269SU of the old Income Tax Act, 1961. That reference has now been replaced with a provision allowing the central government to notify electronic payment modes directly under Section 187 of the Income Tax Act 2025, giving tax authorities more flexibility to update accepted payment methods without being tied to a now-outdated statutory reference. This particular change takes effect from the date of the Act's gazette publication.
A Revised Safe Harbour for Foreign Investment Funds
One of the more consequential changes replaces Schedule I of the Income Tax Act 2025 entirely, laying out fresh conditions under which certain activities of eligible foreign investment funds won't be treated as creating a "business connection" in India. This is particularly relevant for foreign funds that appoint or work through an eligible fund manager based in India.
To qualify, an eligible investment fund must be established or registered outside India, remain non-resident, and be based in a jurisdiction the central government has notified as qualifying. Indian resident participation in the fund's corpus can't exceed 5%, subject to certain exceptions, tested twice a year, on April 1 and October 1. Notably, the fund can exclude up to ₹25 crore contributed by the eligible fund manager during its first three years of operation when calculating that 5% limit. If Indian participation does exceed the threshold on either testing date, the fund gets four months to restore compliance.
The Indian fund manager involved also has to meet specific conditions: they can't be an employee or connected person of the fund, must be properly registered as a fund manager or investment adviser, and must operate within the ordinary course of their fund-management business. The manager and any connected persons also can't be entitled to more than 20% of the profits generated through transactions they conduct on the fund's behalf.
Funds relying on this safe harbour also carry an ongoing compliance obligation, submitting a prescribed statement and supporting information to tax authorities within 90 days of the tax year's end, covering investor composition, corpus details, Indian participation levels, fund-manager contributions, and activities conducted in India.
Extended Relief for Electronics Manufacturing
The Act also expands tax relief tied to electronics manufacturing by modifying Schedule IV of the Income Tax Act 2025. The updated definition of "specified electronic goods" now covers a much broader ecosystem than before, mobile phones, laptops, all-in-one PCs, tablets, servers, ultra-small form factor devices, sub-assemblies of these products, and even hearables, wearables, and related accessories. Benefits under this provision have also been extended significantly, running from tax year 2030-31 all the way through 2040-41, giving contract manufacturers working with foreign companies a much longer runway of tax certainty.
A related provision offers exemption for income earned by a foreign company storing components in a customs-bonded warehouse, provided those components are supplied to an Indian contract manufacturer producing specified electronic goods. This exemption remains available until the tax year ending March 31, 2041, and comes with its own information-furnishing requirements.
Fresh Exemptions on Government Securities
Two new exemptions have also been introduced for income earned from Indian government securities, specifically interest earned and capital gains arising from their sale, exchange, or transfer. These apply separately to Foreign Institutional Investors (FIIs) and the Bank for International Settlements (BIS), with both requiring the recipient to furnish prescribed information in the specified form.
A Clearer Definition for "Specified Data Centres"
The amendment also tightens the definition of a "specified data centre" under Schedule IV, now requiring that the facility be operated, whether owned or leased, by an Indian company, along with meeting any additional conditions to be prescribed separately under future rules.
A Notable Shift in SPV Taxation
Perhaps the change with the widest business impact: the Act now applies separate tax rates to domestic companies depending on whether they qualify as a "specified SPV." A domestic company that isn't a specified SPV continues to be taxed at 10%, while one that qualifies as a specified SPV will now be taxed at 25%, a meaningful jump that applies under both Section 3(4) and Section 3(12) of the Finance Act, 2026.
This distinction matters significantly for SPVs used in business-trust structures like REITs and InvITs, where the higher SPV-level tax rate could materially affect overall tax costs. Businesses and investors relying on these structures will likely need to reassess tax costs at the SPV level, review how dividend distributions and investor returns are affected, and update financial models to reflect both the new rates and the related treatment of dividend income at the unit-holder level. Given how consequential this shift is, businesses navigating these structures would do well to lean on proper tax optimization strategies to reassess exposure before the new rate structure takes full effect.
Continuity From the Earlier Ordinance
The Act also formally repeals the Income Tax (Amendment) Ordinance 2026, though any actions already taken under that ordinance remain valid, now treated as having been taken under the corresponding provisions of this new Act, ensuring there's no gap in continuity between the two.
What This Means Overall
Taken together, the amendments are clearly designed to support international investment, strengthen electronics manufacturing incentives, and refine how specific financial activities and structures are taxed, while also modernising India's payment framework. For businesses and investors, though, none of these benefits are automatic; each comes tied to specific eligibility conditions, reporting requirements, and documentation obligations that need to be carefully assessed before relying on any exemption or safe-harbour provision.
FAQs
Q1. When did the Taxation and Other Laws (Amendment) Act 2026 come into force?
It received presidential assent on August 17, 2026, and is deemed effective from April 1, 2026, unless a specific provision states a different date.
Q2. What is the new safe harbour condition for foreign investment funds?
Eligible funds using an Indian fund manager can avoid triggering a "business connection" in India if they meet conditions including a 5% cap on Indian resident participation, tested twice yearly, along with several other registration and non-resident requirements.
Q3. How has electronics manufacturing tax relief changed?
The definition of "specified electronic goods" has been broadened significantly, and the associated tax benefits have been extended from tax year 2030-31 through 2040-41.
Q4. What is the new tax rate for specified SPVs?
A domestic company qualifying as a specified SPV will now be taxed at 25%, compared to 10% for domestic companies that don't qualify as specified SPVs.