Taxation laws amendment bill tabled in Lok Sabha: What the new tax bill changes for foreign investors
The Taxation and Other Laws (Amendment) Bill, 2026 was introduced in the Lok Sabha on August 4, 2026
The Bill relaxes conditions under Section 9A of the Income Tax Act, 1961 (the "offshore fund manager regime"), under which offshore investment funds managed from India can avoid being treated as having a taxable presence ("business connection") in India merely because their fund manager operates from India
Reports indicate the Bill reduces the number of eligibility conditions an offshore fund must satisfy from thirteen to about five, removing requirements such as investor-count and corpus-size thresholds
The Bill separately proposes a 10-year extension (to a total of 15 years, up to FY 2040-41) of tax exemption for foreign companies supplying machinery/tooling to Indian electronics contract manufacturers (mobile phones, laptops, tablets, servers), and a similar exemption for foreign companies storing electronic components in bonded warehouses for supply to Indian manufacturers
It also proposes a 15-year tax exemption for foreign diamond miners and related entities selling rough diamonds through notified trading zones in Mumbai and Surat, aimed at positioning India as a global rough-diamond trading hub
Section 9A — Offshore Fund Manager (Safe Harbour) Regime
Section 9A of the Income Tax Act, 1961, inserted by the Finance Act, 2015 (effective April 1, 2015), provides that an "eligible investment fund" is not treated as a tax resident of India, or as having a "business connection" in India, merely because an "eligible fund manager" undertaking its fund-management activity is located in India. Without this safe harbour, ordinary source-based taxation rules would otherwise deem a foreign fund to have a taxable presence in India whenever its manager sits in India, discouraging fund managers from relocating here.
Key Details
- Eligibility conditions for the fund and the fund manager are laid out in sub-sections (3), (4), and (5) of Section 9A, operationalised through Rules 10V, 10VA, 10VB (notified 2016) of the Income Tax Rules, 1962
- Historically the regime required, among other things, minimum corpus size, limits on the share of Indian-resident investors' contribution (capped around 5%), restrictions on the fund's control/management from India, and a monitoring fee/remuneration floor for the Indian fund manager — together making compliance onerous
- The 2026 Bill is reported to cut these conditions sharply (from roughly 13 to about 5), retaining core safeguards — non-residence of the fund, location in a DTAA/notified jurisdiction, a cap on Indian-resident participation, and no control of business in India
The Bill directly amends Section 9A's conditions to make it commercially viable for global fund managers to relocate fund-management operations to India (including GIFT City) without inadvertently creating Indian tax exposure for the underlying offshore fund.
Distinguishing Offshore Funds, FPIs, and AIFs
Offshore funds availing the Section 9A regime are pooled investment vehicles domiciled outside India whose fund manager operates from India — a distinct category from Foreign Portfolio Investors (FPIs), who invest directly into Indian securities from abroad under SEBI's FPI Regulations, 2019, and from Alternative Investment Funds (AIFs), which are India-domiciled pooled vehicles (Category I/II/III) regulated under SEBI (AIF) Regulations, 2012.
Key Details
- FPIs are registered with SEBI via Designated Depository Participants and taxed under a separate capital-gains framework (Section 115AD of the I-T Act)
- AIFs are domestic funds; Category I (venture capital, SME, social/infrastructure funds) and Category II (private equity, debt funds without leverage) enjoy pass-through taxation under Section 115UB, while Category III (hedge-fund-like, using leverage) does not get full pass-through status
- Offshore funds under Section 9A remain foreign-domiciled entities — the tax question is whether their India-based manager creates a taxable "business connection," not how the fund itself is taxed on Indian securities income
By easing Section 9A conditions, the government aims to make India (particularly its GIFT City International Financial Services Centre) an attractive base for fund managers servicing genuinely offshore funds, without conflating this with the separate FPI/AIF regulatory-tax tracks.
Money Bill Procedure (Article 110) and this Bill's Classification
Bills dealing "only" with matters listed in Article 110(1) — imposition/abolition/alteration of taxes, borrowing, custody of the Consolidated Fund, etc. — are classified as Money Bills, which can be introduced only in the Lok Sabha (with prior Presidential recommendation), and which the Rajya Sabha can only recommend changes to (not amend or reject) within 14 days, failing which the Bill is deemed passed in its original form.
Key Details
- The Speaker of the Lok Sabha has final authority to certify whether a Bill is a Money Bill, and that certification is not open to challenge in the ordinary legislative process (though its judicial reviewability has been examined by the Supreme Court, e.g., in the Aadhaar Act Money Bill case, 2018/2021)
- A Bill that also amends "Other Laws" beyond pure tax provisions (as this Bill's title itself signals — "Taxation and Other Laws") may raise classification questions if it touches provisions outside Article 110(1)'s narrow list, though taxation-dominant amendment Bills have typically been certified as Money Bills in practice
- Ordinary Financial Bills (Article 117), by contrast, still require prior Presidential recommendation but can be amended and rejected by the Rajya Sabha like an ordinary Bill
How this Bill is classified (Money Bill vs. ordinary Financial Bill) determines the Rajya Sabha's power over it — a recurring point of constitutional debate whenever "Taxation and Other Laws (Amendment)" Bills bundle tax changes with amendments to non-tax statutes.
- Section 9A inserted by: Finance Act, 2015, effective April 1, 2015
- Eligibility conditions for offshore funds: reduced from roughly 13 to about 5 under the 2026 Bill
- Electronics contract-manufacturing tax exemption: extended by 10 years, to a total of 15 years, up to FY 2040-41; covers mobile phones, laptops, PCs, tablets, servers
- Bonded-warehouse component storage: full tax exemption for 15 years for supplying foreign companies (replacing the earlier presumptive-taxation approach)
- Rough diamond trade: 15-year tax exemption for foreign miners/entities selling through notified trading zones in Mumbai and Surat
- Bill introduced: Lok Sabha, August 4, 2026
- Indian-resident investor cap under the pre-existing Section 9A safe harbour: around 5% of fund corpus