Reconfigured tax laws to help activate investments, boost manufacturing & foreign capital
The government introduced the Taxation and Other Laws (Amendment) Bill, 2026, proposing amendments to the Payment and Settlement Systems Act, 2007, the Income-tax Act, 2025, and the Finance Act, 2026
The Bill replaces an earlier ordinance (dated 5 June) that exempted Foreign Institutional Investors (FIIs) from withholding tax on investments in government securities
Proposed changes include tax exemptions for foreign companies storing electronic components in customs-bonded warehouses for supply to contract manufacturers, tax relief for data centres leased and operated by Indian companies, and eased conditions for tax exemption on dividends received by REIT/InvIT unit holders
A separate provision bars banks and payment system providers from levying charges on notified digital payment modes
The Bill also proposes a 15-year tax exemption (up to 31 March 2041) on income from the sale of rough diamonds in the hands of foreign companies operating through notified special zones
The Income-tax Act, 2025 — Replacing the 1961 Act
The Income-tax Act, 2025 replaces the Income-tax Act, 1961 with effect from 1 April 2026. The new Act was framed to simplify a law that had grown, over 65 years, into more than 800 sections across 23 chapters with layered amendments, provisos and explanations. The core scheme of taxation is retained, but drafting is simplified and terminology streamlined.
Key Details
- Sections reduced from 819 (in the 1961 Act) to 536 in the new Act, retaining 23 chapters
- The dual concept of "Assessment Year" and "Previous Year" is replaced with a single unified "Tax Year"
- Income earned up to 31 March 2026 continues to be taxed under the 1961 Act; income from 1 April 2026 onward is governed by the 2025 Act
The 2026 Amendment Bill directly amends the newly operative Income-tax Act, 2025 — an early instance of the new code being fine-tuned within months of taking effect, underscoring that a "simplified" law still requires periodic sector-specific carve-outs (electronics manufacturing, data centres, REITs/InvITs).
Fully Accessible Route (FAR) and Foreign Investment in Government Securities
The Fully Accessible Route, introduced by the RBI in April 2020, allows non-resident investors — including Foreign Portfolio Investors (FPIs) and NRIs — to invest in specified Government of India dated securities without the quantitative caps that otherwise apply to FPI investment in Indian debt. FAR-eligible securities were subsequently included in global bond indices, expanding foreign ownership of Indian sovereign debt.
Key Details
- Introduced by RBI: April 2020, via specified series of dated G-Secs
- No quantitative investment ceiling for eligible non-resident investors in FAR-designated securities (unlike the general FPI debt limits)
- JP Morgan included 29 FAR-designated Indian G-Secs in its Emerging Market Bond Index (index inclusion effective from 2024)
The Bill's replacement of the June ordinance — which exempted FIIs from withholding tax on government securities investment — builds on the FAR framework by removing a tax friction that could otherwise offset the benefit of index-driven foreign inflows into Indian sovereign debt.
REITs and InvITs — Pass-Through Taxation
Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) are registered with SEBI under the SEBI (REIT) Regulations, 2014 and the SEBI (InvIT) Regulations, 2014 respectively, and are treated as "business trusts" under income tax law. Income earned by these trusts is generally not taxed at the trust level; instead, it is taxed in the hands of unit holders, a structure known as pass-through taxation, applied separately to each income component (interest, dividend, rental income, and capital gains).
Key Details
- Regulatory basis: SEBI (Real Estate Investment Trusts) Regulations, 2014 and SEBI (Infrastructure Investment Trusts) Regulations, 2014
- Distribution components taxed differently: interest (slab rate to unit holder), dividend (exempt if the SPV has not opted for the concessional Section 115BAA regime), rental income (exempt at trust level, taxed at investor's slab rate), and capital gains (treated as return of capital)
- Dividend received by the business trust from an SPV in which it holds a controlling interest is exempt at the trust level
The Bill proposes to ease the conditions under which dividend income distributed to REIT/InvIT unit holders remains tax-exempt, aimed at making these instruments more attractive for both domestic and foreign infrastructure and real estate investors.
- Acts amended by the 2026 Bill: Payment and Settlement Systems Act, 2007; Income-tax Act, 2025; Finance Act, 2026
- Income-tax Act, 2025 takes effect: 1 April 2026 (replacing the 1961 Act)
- Sections in the new Income-tax Act: 536 (down from 819 in the 1961 Act), across 23 chapters
- FAR route for foreign investment in G-Secs introduced: April 2020
- Rough diamond sale income tax exemption for eligible foreign companies: valid up to 31 March 2041 (15-year window)
- Ordinance being replaced by this Bill: dated 5 June (exempted FIIs from withholding tax on G-Sec investments)
- SEBI regulatory basis for REITs and InvITs: 2014 (separate regulations for each instrument)