Lok Sabha Passes Taxation Bill: What It Means for Foreign Investment, Electronics Manufacturing and UPI

The Lok Sabha on Thursday passed the Taxation and Other Laws (Amendment) Bill, 2026, paving the way for a series of tax and regulatory changes aimed at encouraging foreign investment, strengthening domestic electronics manufacturing and providing greater certainty for businesses operating in India.

The legislation was approved by a voice vote without a debate amid continued disruptions in the House and replaces the Income-tax (Amendment) Ordinance issued on June 5.

The Bill amends the Income-tax Act, 2025, the Finance Act, 2026 and the Payment and Settlement Systems Act, 2007. Besides extending tax incentives for select industries, it introduces changes covering offshore investment funds, data centres, digital payments and business trusts.

Key Tax Proposals In Offshore Investments

One of the major changes is the rationalisation of conditions governing offshore investment funds and fund managers, with the objective of making India a more attractive base for global fund management while retaining safeguards against misuse.

It also continues the tax exemption on interest income and capital gains earned by Foreign Institutional Investors (FIIs) from government securities, which was first introduced through the June ordinance.

The legislation also repeals the ordinance while validating all actions taken under it, ensuring continuity in tax treatment.

Kumarmanglam Vijay, Partner at JSA Advocates & Solicitors termed the Bill as "pro-investment" that improves the tax certainty, especially for offshore funds and specified sectors.

"It proposes to rationalise the conditions under which a fund manager can operate from India without the fund being treated as having a business connection in India," Vijay said.

"The number of conditions have been reduced from thirteen to essentially five core conditions, viz., non-residence, treaty/notified-jurisdiction residence, the 5% resident-participation cap, no control/management of an Indian business, and no business connection other than through the fund manager," he added.

Over the years, compliance with "certain requirements under the regime has proven somewhat restrictive" for offshore funds, particularly conditions relating to a minimum corpus of ₹100 crore, prescribed remuneration for onshore fund managers, and limitations on investments in associate entities, said Nehal Sampat, Partner at PwC.

"The proposed Income-tax Amendment Bill is set to ease several conditions under the Fund Management Safe Harbour framework, a move that could encourage offshore funds to engage onshore fund managers and benefit from the available safe harbour provisions," Sampat added.

Electronics Manufacturing, Data Centre Changes

A significant focus of the Bill is on expanding India's electronics manufacturing ecosystem. It extends until the tax year ending March 31, 2041, the income-tax exemption available to foreign companies engaging Indian contract manufacturers to produce specified electronic goods.

The measure is reportedly intended to provide long-term policy certainty for manufacturers. The Bill also grants a 15-year tax exemption to foreign companies storing electronic components in customs-bonded warehouses for supply to Indian contract manufacturers.

The present set of changes carried out to Income tax legislation underlines the government’s commitment to continually shape India’s progressive tax policy, said Sumit Singhania, Partner at Deloitte India.

The legislation also seeks to support India's digital infrastructure by relaxing conditions for foreign companies using Indian data centres. The Bill removes approval and notification requirements and allows data centres to operate on a leased model rather than requiring direct ownership. The amendments are intended to provide greater process certainty for foreign cloud companies looking to establish operations in India.

"Extended tax holiday period for electronic goods manufacturers and relaxed eligibility conditions for data centres ought to enable investors to commit long term capital into these sectors," Singhania said.

Digital Payments And Business Trusts

The Bill also amends the Payment and Settlement Systems Act, 2007, by removing its linkage with the Income-tax Act. Under the revised framework, the Central government will be empowered to notify electronic payment modes on which banks or payment system providers cannot levy charges.

The move gives statutory backing to the government to modify the zero-MDR framework governing UPI and RuPay transactions through future notifications.

The Bill also introduces changes for business trusts by preserving the tax exemption on dividends received by REIT and InvIT unitholders even where the underlying special purpose vehicle (SPV) adopts the new corporate tax regime, while imposing a corresponding levy at the SPV level to keep the measure revenue neutral.

Amit Shetty, CEO of Embassy REIT said that by enabling REIT SPVs to opt for the Concessional Tax Regime (CTR) and utilise accumulated MAT credits, while preserving the tax-exempt treatment of dividends distributed to unitholders, the Bill upholds the principle of tax neutrality that is fundamental to the REIT model.

"REIT SPVs opting for this regime will also benefit from a lower tax rate and will not be required to pay Minimum Alternate Tax (MAT) going forward. For Embassy REIT, subject to the final enacted provisions, this will restore the economic value of approximately ₹592 crore of accumulated MAT credits that had previously been written off in books of accounts," Shetty said.

The benefit can accrue progressively through lower cash taxes, strengthening distributable cash flows and creating additional value for our unitholders, he added.

The Bill also extends tax benefits for eligible foreign entities involved in the rough diamond trade through notified special zones until March 31, 2041.