How New Tax Bill Offers Relief To Offshore Funds, Electronics Makers & Data Centres

The finance ministry introduced the Taxation and Other Laws (Amendment) Bill, 2026 in Parliament on Tuesday, August 4. The Bill proposes changes aimed at attracting foreign investors and boosting domestic manufacturing in sectors such as data centres and electronics.

The proposed legislation seeks to amend the Payment and Settlement Systems Act, 2007, the Income-tax Act, 2025, and the Finance Act, 2026. It also replaces the Income-tax (Amendment) Ordinance, 2026, which was promulgated on June 5 this year.

Why The Bill Was Needed

Industry stakeholders had flagged that certain provisions under the Income-tax Act placed restrictive conditions on offshore investment funds and created uncertainty for multinational companies in sectors such as electronics manufacturing and data centres. Following representations from industry, the government has proposed amendments to simplify the tax framework and improve ease of doing business.

Kunal Savani, Partner at Cyril Amarchand Mangaldas, said the proposed changes mark "a move away from a rigid, checklist-driven regime toward one built on underlying principles." He said several existing eligibility tests, including minimum investor numbers and caps on investment concentration, "functioned in practice more as administrative tripwires than as genuine markers of tax risk."

Easier Rules For Offshore Funds

The Bill proposes major changes to the taxation framework governing Eligible Investment Funds, or offshore funds managed from India. At present, such funds must satisfy 13 conditions to ensure their fund management activities in India do not count as a taxable business presence. The Bill proposes to remove eight of these conditions.

Among the conditions proposed to be dropped are the requirement of a minimum of 25 investors in a fund, a cap of 10% participation by a single investor, and a restriction on investing more than 25% of the corpus in a single entity. Restrictions on investments in associate entities and a minimum monthly average corpus requirement of ₹100 crore are also proposed to be removed.

After the amendments, offshore funds will primarily need to meet five conditions. These include that the fund should not be a resident of India, it should not control or manage any business in India, and investment by Indian residents should not exceed 5% of the corpus as on April 1 and October 1 of the relevant financial year.

Savani said the change addresses a persistent industry concern that a fund genuinely managed from India could lose its exempt status "over a purely technical slip." He added that the reform is calculated to improve India's standing as a base for fund management activity, "while keeping guardrails against abuse in place."

Longer Tax Breaks For Electronics Manufacturing

The Bill proposes to extend the tax exemption available to foreign companies supplying capital goods, machinery, equipment, or tooling to Indian electronics contract manufacturers. This exemption, earlier available until 2030-31, is proposed to be extended by ten years, up to 2040-41.

Ankit Jain, Partner at Ved Jain and Associates, said the original five-year window "fell short of the long payback cycles typical in high-tech electronics." He said extending the exemption to 2040-41 gives companies "an unprecedented 15-year horizon of tax predictability."

The Bill also introduces a new tax exemption for foreign companies storing electronic components in customs-bonded warehouses and selling them to Indian contract electronics manufacturers. Jain said foreign suppliers had earlier hesitated to hold local buffer stock over fears of creating a taxable business presence in India. He said the new measures, paired with a defined list of specified electronics such as servers, laptops and mobiles, would "eliminate litigation friction" and "slash logistics lead times."

Relief For Data Centres And Diamond Trade

The Bill proposes to expand the definition of an eligible data centre to include facilities that are leased, not just owned. It also proposes removing the requirement for a separate Central Government notification for foreign companies procuring data centre services from specified facilities in India.

Jain said global investors had earlier flagged friction points, including the requirement that Indian operators own the physical facility and the need for case-by-case government approvals. He said the proposed changes would replace "ad-hoc administrative approvals with objective, rule-based criteria."

Separately, the Bill proposes a 15-year tax holiday, extending up to March 31, 2041, for specified foreign companies operating in notified special zones for diamond trading. The exemption covers mining companies, sightholders, brokers, aggregators, and tender or auction entities earning income from the sale of rough diamonds within these zones.

Replacing The FPI Ordinance

The Bill also seeks to replace the June 5 ordinance that exempted Foreign Portfolio Investors from capital gains tax and withholding tax on investments in government securities. According to the government, the ordinance was introduced to mitigate the impact of external economic shocks, support domestic economic stability, and encourage foreign capital inflows.

Pallav Pradyumn Narang, Partner at CNK, said the larger objective of the government is to encourage domestic manufacturing. He said the specified goods list for the electronics exemptions now includes mobile phones, laptops, servers and their sub-assemblies, which should "encourage component manufacturers to also set up in India for the long term."

Narang added that the proposals on data centre services reflect the direction policymakers are heading in, given that "India's compute costs are going to escalate, and establishment of local compute is also a strategic imperative."