The Lok Sabha has passed the Taxation and Other Laws (Amendment) Bill, 2026, paving the way for a series of tax and regulatory reforms intended to strengthen India's manufacturing sector, attract foreign capital and simplify the business environment. The legislation replaces the ordinance issued in early June that had provided income tax exemption on interest income and capital gains earned by foreign portfolio investors (FPIs) from investments in government securities (G-Secs). 
The government stated that the objective of the Bill is to make India a more attractive and predictable destination for global investment, manufacturing and long-term business operations. The legislation amends the Payment and Settlement Systems Act, 2007, the Income Tax Act, 2025, and the Finance Act, 2026. 
One of the key provisions of the Bill separates the Payment and Settlement Systems Act from the Income Tax Act, creating a legal framework that allows the central government to modify the existing zero-Merchant Discount Rate (MDR) regime for UPI and RuPay debit card transactions through future notifications. 
At present, banks and payment service providers are not permitted to directly or indirectly levy charges on payments made through UPI and RuPay debit cards. The Bill does not introduce merchant charges immediately or specify any fee structure. Instead, it authorises the government to decide which electronic payment modes or transactions will continue to remain free, giving flexibility to revise the framework in the future if required. 
The zero-MDR policy was introduced to encourage digital payments across the country. However, banks and payment companies have repeatedly sought a sustainable compensation mechanism, arguing that maintaining digital payment infrastructure involves significant operational costs. 
The Bill also eases tax conditions for foreign fund managers looking to relocate their operations to India. By reducing the number of qualifying conditions, the government aims to ensure that global income earned by these funds is not taxed in India solely because fund management activities are carried out from the country. 
The proposal applies across India, including the International Financial Services Centre (IFSC), allowing fund managers greater flexibility in choosing their operating location. The government expects the move to encourage more global fund managers to establish operations in India, creating high-value employment and strengthening the country's financial services ecosystem. 
Another important change relates to business trusts, including Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). The Bill proposes to continue tax-free treatment of dividends received by investors even if the underlying operating company shifts to the new tax regime. 
Under the earlier framework, investors could receive tax-free dividends only if the operating company remained under the old tax regime. As more companies transition to the simplified tax structure, investors faced the possibility of losing this benefit. The proposed amendment removes that uncertainty and is expected to provide greater confidence to investors while supporting investment in real estate and infrastructure assets. 
Business trusts pool investments from retail and institutional investors and invest in income-generating real estate and infrastructure projects through operating companies. The earnings generated by these assets are distributed to investors in the form of dividends. 
The legislation also simplifies the regulatory framework governing data centres. The Union Budget for 2026-27 had announced tax exemptions until 2047 for foreign cloud service providers using Indian data centres, subject to multiple government approvals. 
The Bill removes several approval requirements and permits Indian data centres to operate on leased infrastructure rather than requiring direct ownership. The government believes these changes will support the expansion of India's data centre ecosystem, increase flexibility for operators and encourage higher investment from global cloud service providers. 
With demand for artificial intelligence infrastructure growing worldwide, the reforms are also expected to support the development of large AI-focused data centre hubs in India. 
To strengthen domestic electronics manufacturing, the Bill extends by another 10 years, until the financial year 2040-41, the tax exemption available to foreign companies supplying machinery and tools to Indian factories engaged in contract manufacturing. 
The benefit applies to the production of mobile phones, laptops, personal computers, tablets, servers and their major components and accessories. The government expects the extension to further strengthen India's contract manufacturing ecosystem and reinforce the country's position in global electronics supply chains. 
The Bill also provides a 15-year tax exemption for foreign companies supplying electronic components from customs-bonded warehouses to Indian contract manufacturers. This measure is aimed at improving component availability for domestic factories and supporting production of electronics such as smartphones, computers, laptops and servers. 
These proposals build on the government's broader production-linked incentive (PLI) programme and its ongoing efforts to position India as a major global electronics manufacturing destination. 
To encourage a larger share of global rough diamond trading to move to India, the Bill proposes a 15-year tax exemption on income earned by foreign diamond mining companies and associated participants, including sight holders, brokers, aggregators and auction houses, from the sale of rough diamonds in designated trading zones in Mumbai and Surat. 
Currently, foreign mining companies are permitted to display rough diamonds in these special zones without attracting tax, but actual trading is restricted. The proposed amendment is intended to convert these display centres into active trading hubs and strengthen India's diamond financing ecosystem. 
The government stated that the combined reforms are intended to simplify the tax system and reduce compliance requirements. Measures such as fewer approvals for data centres, simplified rules for foreign fund managers and full tax exemptions for component storage in customs-bonded warehouses are aimed at improving the ease of doing business and encouraging long-term investment. 
Rajesh Gandhi, Partner at Deloitte India, said the amendment relating to foreign fund managers could encourage private equity firms, master-feeder fund structures and offshore funds with relatively smaller India-focused portfolios to relocate their fund management activities to India without creating adverse tax consequences. 
Abheet Sachdeva, Partner – M&A Tax at Nangia Global, said the reforms are expected to improve the attractiveness of India's domestic fund management ecosystem and facilitate the relocation of offshore fund management operations into the country. 
Source PTI