Taxation and Other Laws (Amendment) Bill 2026

Taxation and Other Laws (Amendment) Bill, 2026: Read here to learn about the Key Provisions, Significance and Concerns

The Taxation and Other Laws (Amendment) Bill, 2026, aims to amend India’s taxation and digital payment framework with the broader objectives of attracting foreign investment, strengthening domestic manufacturing, promoting ease of doing business, and creating a sustainable digital financial ecosystem.

Its provisions span several strategically important sectors, including electronics manufacturing, diamonds, financial markets, data centres, investment trusts and digital payments.

The bill was passed in the Lok Sabha on 6th August 2026.

Taxation and Other Laws (Amendment) Bill, 2026

The Bill replaces the Income-tax (Amendment) Ordinance, 2026 and makes amendments to the Income-tax Act, 2025, Finance Act, 2026, and Payment and Settlement Systems Act, 2007.

Push for Electronics Manufacturing

One of the most important provisions concerns the expansion of tax incentives for the electronics industry.

Under the Income-tax Act, 2025, foreign companies supplying capital goods or using Indian factories for contract manufacturing of electronics could receive an income-tax exemption for five years.

The 2026 amendment:

• explicitly identifies eligible electronic goods such as mobile phones, laptops, servers and wearables;
• extends the tax holiday by another 10 years, taking the incentive period up to 2040-41.

Significance

The measure is intended to strengthen India’s position in global electronics supply chains.

It can potentially:

• attract multinational electronics manufacturers;
• increase domestic value addition;
• promote contract manufacturing;
• generate employment;
• expand electronics exports;
• support the Make in India programme.

However, the effectiveness of such incentives ultimately depends on whether they translate into domestic component manufacturing, technology transfer and employment, rather than merely increasing assembly operations.

Tax Support for Electronics and Diamond Industries

The Bill also provides tax exemptions for specified activities involving:

• electronics manufacturers;
• foreign diamond companies;
• sale of rough diamonds;
• storage of electronic components in customs-bonded warehouses.

This is aimed at integrating India more deeply into global manufacturing and trading networks.

For the diamond industry, such provisions can strengthen India’s role in international diamond processing and trading.

For electronics, bonded warehousing provisions can facilitate the movement and storage of imported components while supporting manufacturing operations within India.

Tax Exemption for FIIs and BIS

The Bill proposes income-tax exemptions for Foreign Institutional Investors (FIIs) and the Bank for International Settlements (BIS) on specified:

• interest income; and
• capital gains

arising from government securities.

Why is this important?

Government securities require a broad and liquid investor base.

Tax certainty for foreign institutional investors can:

• make Indian government securities more attractive;
• encourage foreign portfolio investment;
• deepen India’s bond market;
• improve liquidity;
• potentially reduce the cost of government borrowing.

However, policymakers must balance investment attractiveness against potential revenue losses.

Easier Relocation of Foreign Fund Managers

Another major provision concerns foreign fund managers.

The Bill seeks to make it easier for foreign fund managers to relocate their operations to India without making their foreign investment funds taxable merely because of the relocation.

At the same time, safeguards are retained against:

• tax avoidance;
• round-tripping;
• artificial structures designed to shift profits.

What is round-tripping?

Round-tripping occurs when money originating in India is routed abroad and subsequently brought back into India disguised as foreign investment.

For example: Indian capital – foreign jurisdiction – India as purported FDI/FPI

Such arrangements can obscure the true ownership and source of funds.

Therefore, relaxing taxation rules for fund managers needs to be accompanied by effective anti-abuse mechanisms.

Making India a Data-Centre and Cloud Hub

• The Bill proposes to simplify the taxation rules applicable to foreign cloud companies using Indian data centres.
• Previously, multiple layers of government approvals could create difficulties for foreign cloud companies seeking tax exemptions.
• The amendments seek to reduce these regulatory hurdles.
• Another important change is the ability of Indian data centres to operate on a leased basis, rather than requiring direct ownership.

Potential benefits

This could:

• reduce entry barriers;
• attract global cloud providers;
• encourage investment in data-centre infrastructure;
• support India’s rapidly expanding digital economy;
• create demand for electricity, cooling, networking and semiconductor infrastructure;
• strengthen India’s position as a regional digital infrastructure hub.

However, greater foreign participation also makes data protection, cybersecurity and critical infrastructure resilience increasingly important.

Changes Affecting REITs and InvITs

The Bill also modifies the tax treatment of Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs).

REITs

A REIT enables investors to obtain exposure to income-generating real estate without directly purchasing and managing properties.

Typical assets include:

• office buildings;
• commercial complexes;
• warehouses;
• hotels and other income-generating properties.

InvITs

InvITs work on a similar collective-investment model but focus on infrastructure assets such as:

• highways;
• power transmission systems;
• power projects;
• pipelines and other infrastructure.

The Bill seeks to restore tax-free dividend income for unit holders while increasing the surcharge on Special Purpose Vehicles (SPVs) of business trusts from 10% to 25%.

Significance

The objective is to encourage greater investment in:

• real estate;
• infrastructure;
• long-term productive assets.

A deeper REIT and InvIT market can also provide infrastructure developers with an alternative source of long-term capital.

Major Change Proposed for UPI

Perhaps the most consequential provision for ordinary users concerns digital payments.

The Bill amends the Payment and Settlement Systems Act, 2007, to empower the Central Government to permit banks and payment service providers to levy charges on UPI and other notified electronic payment modes.

This potentially changes the existing zero-MDR framework.

What is MDR?

• Merchant Discount Rate (MDR) is the fee associated with accepting a digital payment. It is generally expressed as a percentage of the transaction value.
• For UPI and RuPay debit-card transactions, MDR has been maintained at zero since 2020 to encourage digital-payment adoption.
• The proposed framework would allow the government to potentially enable charges in the future.

Why is this being considered?

The UPI ecosystem has expanded enormously.

Banks, payment-service providers and payment infrastructure companies incur substantial costs in:

• maintaining payment infrastructure;
• cybersecurity;
• fraud prevention;
• transaction processing;
• authentication;
• network capacity.

The central question is therefore whether the zero-MDR model remains financially sustainable as transaction volumes continue to expand.

Why UPI Charges Could Be Controversial

While allowing charges could create a more sustainable revenue model, it also carries risks.

Small merchants

Even a small transaction fee could disproportionately affect:

• street vendors;
• small retailers;
• micro-enterprises;
• self-employed workers.

Consumers

• If payment providers pass charges to consumers, digital-payment adoption could be affected.

Financial inclusion

• UPI has played an important role in bringing digital payments to users who may not have access to sophisticated banking infrastructure.
• Therefore, introducing charges without appropriate safeguards could undermine some of the benefits of India’s digital-payment revolution.
• A possible policy approach would be differential or capped pricing, particularly protecting low-value transactions.

Significance of the Bill

The legislation represents a broader attempt to use taxation policy as an instrument of economic transformation.

• Foreign investment: Tax certainty and incentives can make India more attractive to international investors.
• Manufacturing: Long-term incentives for electronics can support India’s ambition to become a major global manufacturing centre.
• Digital infrastructure: Simplified rules for data centres and cloud companies could strengthen India’s digital economy.
• Financial markets: Tax changes affecting FIIs, government securities, REITs and InvITs can deepen India’s financial markets.
• Ease of doing business: Reducing approval requirements and clarifying taxation can lower compliance costs.

Concerns

Despite these potential benefits, several concerns require attention.

Limited Parliamentary Scrutiny

• The Bill’s passage amid parliamentary disruptions and limited debate raises concerns about the quality of legislative scrutiny.
• Tax legislation can have significant long-term economic consequences; therefore, detailed parliamentary examination is important.

Risk to Zero-Cost Digital Payments

• Allowing UPI charges could undermine the perception of UPI as a simple, low-cost payment mechanism.
• This is particularly relevant for small merchants and low-income users.
• The challenge is to ensure that any revenue model does not undermine the network effects that made UPI successful.

Fiscal Cost of Tax Incentives

• Long-term exemptions for foreign companies and financial investors could reduce government tax revenues.
• Therefore, policymakers need to assess whether the additional investment + employment + exports + technology transfer generated by the incentives will compensate for the associated revenue foregone.

Risk of Round-Tripping

Relaxing taxation rules for foreign fund managers could create opportunities for aggressive tax planning.

Strong enforcement of:

• GAAR;
• beneficial-ownership rules;
• transfer-pricing rules;
• financial-sector supervision

Domestic MSME Competitiveness

Preferential tax treatment for large foreign companies could potentially create an uneven playing field for domestic MSMEs.

India therefore needs complementary policies that help domestic firms:

• access capital;
• invest in R&D;
• upgrade technology;
• enter global supply chains;
• achieve economies of scale.

Way Forward

1. Make tax incentives performance-linked

Long-term incentives should ideally be connected with measurable outcomes such as:

• employment generation;
• exports;
• domestic value addition;
• technology transfer;
• R&D investment.

Periodic reviews and sunset clauses can prevent incentives from becoming permanent subsidies.

2. Protect low-value UPI transactions

If MDR is eventually permitted, policymakers should consider:

• transaction-value thresholds;
• caps on charges;
• protection for small merchants;
• differentiated pricing;
• continued incentives for low-value digital transactions.

3. Strengthen domestic manufacturing

Foreign investment should be accompanied by stronger support for domestic firms through:

• PLI schemes;
• MSME technology upgrading;
• R&D incentives;
• semiconductor ecosystem development;
• domestic component manufacturing.

4. Strengthen data governance

The expansion of foreign cloud and data-centre investment must operate alongside strong:

• data-protection standards;
• cybersecurity requirements;
• critical-infrastructure safeguards;
• data-governance mechanisms.

5. Prevent tax abuse

• Greater flexibility for international investors should be accompanied by stronger monitoring by CBDT and SEBI, including technology-assisted detection of suspicious transactions and round-tripping.

Conclusion

The Taxation and Other Laws (Amendment) Bill, 2026, represents a significant attempt to align India’s tax architecture with emerging priorities in manufacturing, foreign investment, financial markets and digital infrastructure.

Its most important strategic provisions are the longer electronics-manufacturing tax incentives, facilitation of foreign fund management, incentives for data-centre investment, changes to REIT/InvIT taxation and the proposed framework enabling charges on UPI and other digital payment systems.

The central policy challenge is to ensure that tax concessions generate real economic value rather than merely tax arbitrage. Similarly, any modification of UPI’s zero-MDR model must preserve India’s remarkable gains in digital financial inclusion.

Ultimately, the success of the legislation will depend on whether India can convert tax incentives into investment, investment into productive capacity, and productive capacity into employment, exports and technological capability, while maintaining fiscal prudence and protecting consumers.