India's Lok Sabha passed the Taxation and Other Laws (Amendment) Bill, 2026 on 6 August 2026. The Bill amends the Income-tax Act, 2025 across six distinct areas, all aimed at attracting foreign investment, reducing compliance burdens, and providing greater tax certainty. The Indian Income Tax Department has published a detailed FAQ document explaining each measure. What follows is a structured analysis of the six amendments.
1. Extension of the capital goods exemption for contract manufacturers
The Finance Act, 2026 introduced an exemption in Schedule IV (Serial No. 13A) of the Income-tax Act, 2025. That exemption covers income accruing to a foreign company from providing capital goods, equipment, or tooling to an Indian resident contract manufacturer located in a customs bonded area. Under the original provision, the exemption was to run until the tax year 2030–31.
The Bill extends that window by a further decade, to the tax year 2040–41. The core conditions remain: the foreign company must retain ownership of the goods; the contract manufacturer must remain in control and direction of them; and the manufacturer must produce electronic goods on behalf of the foreign company for a consideration.
The Bill also introduces a statutory definition of "specified electronic goods" to provide clarity and certainty. The definition covers:
- mobile phones;
- laptops, all-in-one personal computers and tablets;
- servers and ultra small form factor (USFF) devices;
- sub-assemblies of any of the above; and
- hearables, wearables, and accessories related to any of the above.
The extension is plainly designed to support India's ambitions as a global electronics manufacturing hub and to give foreign original equipment manufacturers the confidence to commit supply chains to Indian contract partners for the long term.
2. Simplified conditions for the data centre services exemption
Schedule IV (Serial No. 13C) of the Income-tax Act, 2025 exempts income accruing to a foreign company from procuring data centre services from a "specified data centre" in India. The exemption runs to the tax year ending 31 March 2047. The existing regime requires both the foreign company and the Indian data centre to be notified by the Central Government, and the data centre must be owned and operated by an Indian company.
The Bill makes three significant changes.
First, the requirement for the Central Government to notify the foreign company is removed. Second, the requirement for the Central Government (acting through the Ministry of Electronics and Information Technology) to notify the data centre is also removed. In both cases, the Government considers that a prescribed information-reporting obligation is sufficient control, and that removing the notification requirement will ease the process for investors.
Third, the Bill allows a leased model of operation for the Indian data centre. Previously, the "specified data centre" had to be owned and operated by an Indian company; that condition was thought to be unduly restrictive where an Indian company operated a data centre it had procured on a lease basis. The amendment accommodates that model and requires the data centre to satisfy such further conditions as may be prescribed by Rules.
The existing safe harbour of 15% on the arm's length price for remuneration paid by a foreign company to an associated Indian data centre entity is unaffected.
3. New exemption for foreign rough diamond mining companies
A new provision is to be inserted at Serial No. 13F of Schedule IV. It will exempt income on the sale of rough diamonds by a qualifying foreign company. The exemption runs for 15 years, until the tax year ending 31 March 2041.
Eligible entities are foreign companies engaged in diamond mining, and foreign companies acting as sightholders, brokers, aggregators, or tender and auction entities for such business.
Two conditions apply. The sale must be carried out in a Special Notified Zone (SNZ) as referred to in section 9(9)(c)(ii)(C) of the Income-tax Act, 2025 — covering SNZs in Mumbai and Surat. The foreign company must also maintain and furnish prescribed information.
"Rough diamonds" are defined by reference to Tariff Headings 7102 10, 7102 21, and 7102 31 of the First Schedule to the Customs Tariff Act, 1975, and must be accompanied by a Kimberley Process Certificate.
4. New exemption for foreign companies storing components for electronics manufacturing
A second new provision, at Serial No. 13G of Schedule IV, exempts income arising to a foreign company on the sale of components stored in a warehouse within a customs bonded area, where those components are provided to a contract manufacturer for use in producing specified electronic goods.
A "contract manufacturer" is defined as an Indian company producing specified electronic goods on behalf of any foreign company in a customs bonded area. A "customs bonded area" means a warehouse within the meaning of section 65 of the Customs Act, 1962.
The definition of "specified electronic goods" mirrors that introduced under the capital goods provision described in section 1 above: mobile phones; laptops, all-in-one PCs and tablets; servers and USFF devices; sub-assemblies of the above; and hearables, wearables, and related accessories.
The exemption lasts 15 years, to the tax year ending 31 March 2041. The same prescribed information-reporting condition applies.
This measure complements the capital goods exemption. While that provision concerns equipment lent to a contract manufacturer, this one covers the components that the foreign company sells to the contract manufacturer for incorporation into finished goods.
5. Dividend exemption extended to unit holders where a business trust's SPV opts into the new tax regime
Business trusts — real estate investment trusts and infrastructure investment trusts — operate as pass-through vehicles. They invest in underlying assets through special purpose vehicles (SPVs), which pay corporate tax on their profits and then distribute dividends up the chain to the trust and onward to unit holders. Under Schedule V (Table: Sl. No. 5.D) of the Income-tax Act, 2025, dividends received by unit holders are exempt only where the SPV is taxed under the old tax regime. Unit holders lose that exemption if the SPV elects the new tax regime.
The Finance Act, 2026 reformed the minimum alternate tax (MAT) rules so that MAT becomes a final tax in the old regime and accumulated MAT credit can only be claimed once a company shifts to the new regime. As a result, SPVs may have a strong incentive — or commercial necessity — to migrate to the new regime, which would inadvertently deprive unit holders of their dividend exemption.
The Bill removes this anomaly by omitting clause (b) of Schedule V (Table: Sl. No. 5.D), extending the dividend exemption to unit holders regardless of whether the SPV has opted for the new regime under section 200. To compensate for the resulting revenue cost, the Bill simultaneously introduces an additional surcharge of 15% on SPVs that are in the new tax regime.
6. Rationalisation of conditions for eligible investment funds and fund managers
Under section 9(12) of the Income-tax Act, 2025, fund management activity carried out by an eligible fund manager on behalf of an eligible investment fund does not constitute a business connection in India for that fund. Schedule I sets out the qualifying conditions: currently 13 for the fund and 4 for the fund manager.
Stakeholders have long argued that those conditions are too numerous and prescriptive, making it difficult for overseas fund managers to relocate to India without inadvertently triggering business connection issues for their funds.
The Bill reduces the Schedule I conditions for an eligible investment fund from 13 to 5. The surviving conditions are:
1. The fund is not resident in India.
2. The fund is resident in a country or specified territory with which India has a double tax agreement, or in a notified jurisdiction.
3. Aggregate investment by Indian residents does not exceed 5% of the fund's corpus.
4. The fund does not carry on or control and manage, directly or indirectly, any business in India.
5. No person acting on behalf of the fund engages in any activity constituting a business connection in India, other than the activities of the eligible fund manager.
The stated purpose is to promote fund management activity in India and to give fund managers — particularly those considering relocating from other financial centres — greater tax certainty.
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Taken together, the six amendments reflect a consistent legislative direction: extending existing incentives for electronics manufacturing, streamlining conditions around data centres and diamond trading, protecting the economics of business trust distributions, and removing administrative friction for the fund management industry.
Primary sources
- Taxation and Other Laws (Amendment) Bill, 2026 — as passed by the Lok Sabha, 6 August 2026
- FAQ document on the Bill — Indian Income Tax Department, August 2026