Source: BS
Context:
Parliament passed the Taxation and Other Laws (Amendment) Bill, 2026, replacing the Income-tax (Amendment) Ordinance, 2026 and amending the Income-tax Act, 2025, the Finance Act, 2026, and the Payment and Settlement Systems Act, 2007. The Bill seeks to attract foreign investment, promote Make in India, enhance ease of doing business, and strengthen India’s digital and financial ecosystem.
What It Is
An omnibus amending Bill introduced by Finance Minister Nirmala Sitharaman, using targeted tax exemptions to onshore four value chains — electronics manufacturing, diamond trading, cloud computing and fund management — while creating enabling power over charges on digital payments. The Lok Sabha passed it; the Rajya Sabha returned it, the procedure applicable to a Money Bill under Article 109.
Key Provisions
| Area | Provision |
|---|---|
| Electronics manufacturing | Tax holiday for foreign companies supplying capital goods or using Indian factories for contract manufacturing extended from 5 years to 15 years (up to 2040-41); eligible goods explicitly defined as mobile phones, laptops, servers, wearables |
| Diamonds and electronics storage | Exemption for eligible foreign diamond companies on rough diamond sales in notified special zones, and for income from storage of electronic components in customs bonded warehouses |
| Government securities | FIIs and the Bank for International Settlements exempted from income tax on interest and capital gains from G-secs |
| Foreign fund managers | Rules simplified to allow relocation to India without the foreign fund becoming taxable here, with safeguards against tax avoidance and round-tripping retained |
| Data centres | Removes multi-layered government approval requirements for foreign cloud companies claiming exemptions; allows Indian data centres to operate on a leased basis, not only direct ownership |
| REITs and InvITs | Restores tax-free dividend income for unit holders; raises surcharge on SPVs of business trusts from 10% to 25% |
| UPI / MDR | Amends the PSS Act, 2007 to empower the Central Government to permit banks and PSPs to levy charges on UPI and other notified electronic payment modes, replacing the existing prohibition |
The Tax Rates Displaced
Before the exemption, income of FIIs from government securities was taxed at:
| Head | Earlier rate |
|---|---|
| Interest income | 20% |
| Short-term capital gains | 30% |
| Long-term capital gains | 12.5% |
The exemption applies to income arising on or after 1 April 2026.
The UPI / MDR Question
- What the Bill does: creates the legal power for the Centre to permit charges. It does not itself impose any charge.
- The existing bar: banks and payment system providers are currently prohibited from levying any charge, directly or indirectly, on notified electronic payment modes, operating through Section 269SU of the Income-tax Act read with the PSS Act.
Exam Relevance
RBI Grade B — Highest-value item for Phase II Paper III. Master the MDR debate end to end: what MDR is, why it was zeroed, the sustainability problem for acquirers and PSPs, budgetary incentives as the current substitute, and the tiered-MDR proposal. Also note the FII exemption on G-secs for bond market development and global index inclusion, the fund manager provision for GIFT City and onshoring financial services, and REITs/InvITs for infrastructure financing.
