Income tax amendment: India drew a record $94.5 billion in gross foreign direct investment in 2025-26. Net FDI was only $7.7 billion after repatriation, disinvestment and overseas investment by Indian companies. This was above the previous year’s $1 billion, but well below the $28 billion recorded in 2022-23. Foreign investors continue to put large sums into India, but much of the money does not remain here.
The Taxation and Other Laws (Amendment) Bill, 2026, introduced in the Lok Sabha on August 4, addresses some of the tax provisions that influence these decisions. It replaces the Income-tax (Amendment) Ordinance, 2026, promulgated on June 5. The Ordinance exempted specified foreign institutional investors and the Bank for International Settlements from tax on interest and capital gains from government securities. The Bill retains that relief and extends its reach to offshore funds, electronics manufacturing, data centres, rough-diamond trading and business trusts.
READ | Easier FDI rules will not solve India’s investment problem
The RBI’s draft Foreign Exchange Management (Foreign Investment) Rules, 2026, forms part of the same policy effort under a different law. The draft would replace the 2019 framework for non-debt investment. India is trying to fit its tax and investment rules to the ownership and production arrangements used by international firms. Lower tax rates and production incentives have limited value when those arrangements create avoidable tax exposure.
Income-tax Ordinance gives way to a broader Bill
The provisions for offshore investment funds rewrite India’s safe-harbour regime. An overseas fund can appoint an Indian manager without creating a taxable business presence here, but eligibility has depended on conditions governing investor numbers, ownership concentration, investment in associated entities and the fund’s minimum corpus. The restrictions deterred abuse and also excluded legitimate funds whose structures did not fit the Indian template.
The Bill removes several conditions while retaining limits on resident participation and a fund’s involvement in managing Indian businesses. Tax officers can still investigate round-tripping and artificial offshore structures. The eligibility test will no longer depend mainly on whether the fund’s investor base and portfolio conform to a detailed statutory design.
The change may persuade more overseas funds to employ managers in India and bring additional work to domestic financial services. GIFT City may gain, although tax treatment is only one part of a fund’s location decision. Fund managers also weigh treaty access and dispute settlement, while restrictions on moving capital can outweigh the benefit of an exemption.
The relaxation places more responsibility on the Income Tax Department. Its officers must establish whether a fund is managed abroad, whether Indian investors exercise control and whether the structure recycles domestic capital. This requires skilled assessment supported by ownership information, with similar cases treated alike. A shorter checklist cannot provide that judgment.
READ | India FDI recovery masks a manufacturing gap
Electronics tax relief follows production arrangements
The electronics provisions address a recurring problem in contract manufacturing. A foreign company may own equipment, tooling or components while an Indian firm manufactures the final product. Indian tax law can treat that ownership or inventory as evidence of a taxable presence even when the foreign company has no operating business in the country.
The exemption for foreign companies providing equipment and tooling to Indian contract manufacturers will run until tax year 2040-41 instead of 2030-31. Components held in customs-bonded warehouses before supply to a manufacturer will also be covered. A foreign owner can retain title to the equipment and inventory without attracting an unintended tax liability.
READ | China FDI policy shifts from blanket curbs to safeguards
The provision reflects the contracts used in global supply chains. It may support assembly and component production, though its effect will depend on logistics costs, power reliability, skills and the depth of the domestic supplier base.
Eligible foreign entities selling rough diamonds in India will receive relief until March 2041. India cuts and polishes much of the world’s diamonds but imports nearly all its rough stones. Allowing foreign sellers, including mining companies and auction platforms, to trade in India without avoidable tax exposure could move more of the market to the country.
Notified foreign companies procuring services from specified Indian data centres can claim an exemption until March 2047. Related-party services will be covered by a 15 per cent safe-harbour margin. The provisions seek to prevent ordinary hosting and processing contracts from turning into prolonged transfer-pricing disputes.
The Bill also restores the dividend exemption for REIT and InvIT unit holders when the underlying special-purpose vehicle has chosen the concessional corporate tax regime. A proposed 25 per cent surcharge on such vehicles shifts part of the tax cost to the operating entity. Investors receive clearer treatment, while infrastructure companies within the trust structure face a higher levy.
India spent much of the past decade lowering corporate tax rates and offering production incentives. The new Bill corrects defects in the tax treatment of investment structures and supply contracts. Those gains will be lost if the Income Tax Department applies the provisions inconsistently or leaves disputes in litigation for a decade.