Taxation laws (Amendment) Bill to attract more foreign capital, provide policy certainty introduced in LS
The Taxation and Other Laws (Amendment) Bill, 2026 was introduced in the Lok Sabha, proposing amendments to the Income-tax Act, 2025, the Finance Act, 2026, and the Payment and Settlement Systems Act, 2007
The Bill rationalises conditions governing "eligible offshore investment funds" and "eligible fund managers" to ease relocation of fund management activity to India
A tax exemption up to March 31, 2041 is proposed for income earned by eligible foreign diamond mining companies, sight holders, brokers, aggregators, and auction entities from sale of rough diamonds conducted through notified Special Notified Zones
The Bill removes a restriction that denied tax exemption on dividends received by unit holders of business trusts where the underlying special purpose vehicle (SPV) had opted for the new corporate tax regime
Amendments to the Payment and Settlement Systems Act, 2007 remove cross-references to the Income-tax Act in provisions concerning electronic payment modes
The Income-tax Act, 2025
The Income-tax Act, 2025 is the new direct tax code that replaces the Income-tax Act, 1961, which had governed direct taxation in India for over six decades. It comes into force from April 1, 2026 and applies from Tax Year 2026-27 onward; income earned up to March 31, 2026 continues to be governed by the 1961 Act.
Key Details
- Reduces the statute from over 800 sections (after 60+ years of amendments) to 536 sections across 23 chapters
- Introduces the term "Tax Year" replacing "Previous Year" and "Assessment Year" terminology used earlier
- Retains the substantive tax policy of the 1961 Act while simplifying language, removing redundant provisos/explanations, and restructuring for readability
- An "amendment bill" introduced within months of the new Act's rollout shows the ongoing calibration typical of any major tax code transition
This Bill is itself an amendment to the freshly enacted Income-tax Act, 2025 — several of its provisions (offshore fund manager conditions, diamond trade exemption, business trust dividend exemption) modify sections of the new code before it even takes full effect.
Section 9A — Offshore Fund Managers and the "Business Connection" Safe Harbour
Under general principles of international taxation, a non-resident fund is deemed to have a taxable "business connection" in India if its fund manager operates from India. Section 9A (carried forward into the Income-tax Act, 2025 framework) creates a safe harbour: if an "eligible investment fund" and "eligible fund manager" satisfy prescribed conditions, the fund manager's presence in India does not, by itself, create a taxable business connection or make the fund a tax resident of India.
Key Details
- Designed to allow offshore fund managers to relocate to India (including to International Financial Services Centres such as GIFT City) without adverse tax consequences for the funds they manage
- One condition caps resident Indian participation in the fund at 5%; the 2026 amendment stream excludes indirect resident participation from this 5% computation, easing compliance
- The window for commencement of fund manager operations to qualify for the regime has been extended (from March 31, 2024 in earlier law to a later date such as March 31, 2030 under recent amendments)
- The Central Government retains the power to relax or modify the prescribed conditions by notification
The Bill's rationalisation of "eligible offshore investment fund" and "eligible fund manager" conditions is a continuation of this Section 9A safe-harbour framework, aimed at making India, especially its IFSC, more attractive for fund management relocation.
Special Notified Zones — Diamond Trade Facilitation
Special Notified Zones (SNZs) are customs-facilitated enclaves — set up under Customs law, notably near diamond trading hubs such as the Bharat Diamond Bourse (Mumbai) and Surat — where foreign mining companies and their trading arms can display and auction rough diamonds to Indian buyers without those diamonds being treated as formally "imported" for customs/tax purposes unless sold.
Key Details
- SNZs let global miners (e.g., diamond majors) hold viewings/auctions in India instead of buyers travelling abroad (Antwerp, Dubai), building India's position as a diamond trading and processing hub
- India accounts for a large majority of the world's diamond cutting and polishing (cut-and-polish hub), making the raw material supply chain strategically important
- The proposed tax exemption (until March 31, 2041) for income of foreign diamond mining companies, sight holders, brokers, aggregators, and auction entities earned through SNZ sales removes a tax disincentive for routing rough diamond sales through India
This is a direct, time-bound tax incentive layered onto the existing SNZ customs framework, intended to deepen India's role in the upstream (rough diamond sourcing) as well as downstream (cutting/polishing/export) diamond value chain.
Business Trusts (REITs/InvITs) — Pass-Through Taxation
Business trusts — Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) — are SEBI-regulated vehicles that pool investor money into income-generating real estate or infrastructure assets. Indian tax law generally follows a "pass-through" principle: income is taxed once (at the SPV or trust level, or in unit holders' hands) to avoid double taxation, subject to conditions.
Key Details
- Distributions from an SPV to a business trust, and from the trust to unit holders, can take the form of interest, dividend, or capital repayment, each taxed differently
- Dividend income was exempt in unit holders' hands only if the paying SPV had not opted for the concessional corporate tax regime (introduced via Section 115BAA/115BAB-type provisions); this created an anomaly where SPVs choosing the lower tax rate inadvertently caused unit holders to lose the dividend exemption
- The Bill removes this restriction, aligning tax treatment regardless of the SPV's chosen tax regime
This amendment closes a policy gap that had made REIT/InvIT distributions less tax-efficient for retail and institutional unit holders when the underlying SPV opted for a lower corporate tax rate, reinforcing continuity in the pass-through taxation intent.
Payment and Settlement Systems Act, 2007
The Payment and Settlement Systems Act, 2007 (PSS Act) is the principal statute regulating payment systems in India, empowering the Reserve Bank of India (RBI) to authorise, regulate, and supervise payment systems (e.g., NEFT, RTGS, UPI, card networks, prepaid instruments).
Key Details
- RBI is designated the regulator under the Act, with powers to issue directions, call for information, and inspect payment system operators
- The Act had provisions cross-referencing the Income-tax Act in the context of fees/charges on specified electronic payment modes; the 2026 Bill removes these cross-references
- This is distinct from the earlier zero-MDR (merchant discount rate) policy debates on RuPay/UPI transactions, which were handled through separate government notifications rather than the PSS Act itself
Decoupling the PSS Act's payment-mode provisions from Income-tax Act references gives the government flexibility to calibrate rules on electronic payment fees independent of changes in the income-tax code — a housekeeping amendment with practical significance for payment aggregators and merchants.
- Income-tax Act, 2025 comes into force: April 1, 2026 (applicable from Tax Year 2026-27)
- Statute size: reduced from 800+ sections (1961 Act, post-amendments) to 536 sections across 23 chapters
- Proposed diamond trade tax exemption window: up to March 31, 2041
- Laws amended by the 2026 Bill: Income-tax Act 2025, Finance Act 2026, Payment and Settlement Systems Act 2007
- Section 9A fund manager regime: 5% cap on resident Indian participation in eligible investment funds (indirect participation now excluded from this cap)
- Business trusts covered: REITs and InvITs, both SEBI-regulated