Taxation and Other Laws (Amendment) Bill, 2026: Parliament Grants Tax Exemptions to FIIs, Diamond Traders, Data Centres and Investment Funds

Why in News

Parliament has passed the Taxation and Other Laws (Amendment) Bill, 2026 — cleared by the Lok Sabha on 6 August 2026 and the Rajya Sabha on 10 August 2026 during the Monsoon Session. The Bill was introduced by the Finance Ministry on 4 August 2026 to replace the Income-tax (Amendment) Ordinance, 2026, promulgated on 5 June 2026 when Parliament was not in session. Beyond replacing the Ordinance, the Bill expands the scope of exemptions to additional categories of investors, industries, and digital infrastructure operators, amending the Income-tax Act, 2025, the Finance Act, 2026, and the Payment and Settlement Systems Act, 2007.

Background

Why an Ordinance?

Under Article 123 of the Constitution, the President may promulgate an Ordinance when Parliament is not in session and "circumstances exist which render it necessary for him to take immediate action." Ordinances have the same force as an Act of Parliament but must be replaced by a Bill within six weeks of Parliament reassembling. The June 2026 Ordinance addressed urgent requests from foreign investors and multilateral financial institutions for clarity on tax treatment of government securities — a decision that needed implementation before the next Parliament session to prevent capital outflows.

India's New Income-Tax Framework

The Income-tax Act, 2025 — which replaced the six-decade-old Income-tax Act, 1961 effective 1 April 2026 — is India's new direct tax code, designed to simplify provisions, reduce compliance burden, and consolidate exemptions. The 2026 Amendment Bill makes several modifications to this recently enacted law.

Current Developments — Key Provisions of the Bill

1. Foreign Institutional Investors (FIIs) and Bank for International Settlements (BIS) — Government Securities Exemption

Foreign Institutional Investors (FIIs) — registered foreign entities investing in Indian capital markets — and the Bank for International Settlements (BIS), headquartered in Basel, Switzerland (the 'bank for central banks'), are now exempt from income tax on:

• Interest income earned on investments in Indian government securities (G-Secs); and
• Capital gains arising from the sale of such government securities.

This exemption is designed to deepen India's G-Sec market by increasing foreign investor participation, thereby lowering the cost of government borrowing (yield reduction). Higher foreign participation in G-Sec markets also supports India's potential inclusion in global bond indices, which can trigger large passive capital inflows.

2. Diamond and Electronics Manufacturing Exemptions

Foreign companies engaged in:

• Rough diamond sales within government-designated special zones (diamond trading hubs); and
• Electronics component storage in bonded warehouses (part of electronics manufacturing clusters);

receive income-tax exemptions effective 1 October 2026 through 31 March 2041. This is intended to establish India as a competitive alternative to established diamond-trading centres (Antwerp, Dubai) and to boost electronics component supply chains under the Production Linked Incentive (PLI) scheme framework.

3. Offshore Investment Funds — Liberalisation

The Bill removes restrictive conditions on offshore investment funds that are managed by India-based fund managers. Previously, such funds faced minimum member requirements and corpus (fund size) thresholds that made domestic management commercially unviable. Removing these conditions encourages global fund managers to establish or relocate their management operations to India, building Mumbai and GIFT City (Gujarat International Finance Tec-City) as global fund management hubs.

4. Business Trusts — Surcharge and Dividend Provisions

Business Trusts — Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) — face a revised tax structure:

• The surcharge rate applicable to Special Purpose Vehicles (SPVs) held by business trusts is raised to 25%.
• Simultaneously, unitholders (retail and institutional investors in REITs/InvITs) are exempted from income tax on certain dividend income received through these structures, maintaining investor attractiveness.

5. Data Centres — Expanded Exemptions

Tax exemptions for data centres — critical digital infrastructure — are expanded to include leased and operated facilities, not solely government-notified data centres. This broadens the incentive landscape as India's private data centre market grows rapidly, driven by artificial intelligence workloads, cloud computing demand, and the government's India AI Mission.

Key Facts

Constitutional Provisions

• Article 123: Presidential power to promulgate Ordinances when Parliament is not in session; Ordinances must be replaced by Bills within 6 weeks of Parliament reassembling — the constitutional basis for the June 2026 Ordinance and this Bill.
• Article 110: Defines a Money Bill; a Bill dealing exclusively with specified fiscal matters. This Bill is a Finance Bill (not a pure Money Bill) as it amends multiple laws beyond pure taxation — it is still introduced in Lok Sabha only.
• Article 117: Financial Bills may only be introduced in Lok Sabha with prior Presidential recommendation — applicable to this Bill as it involves government revenue implications.
• Article 265: No tax shall be levied or collected except by authority of law — the constitutional imperative for converting the Ordinance into a statutory Act through the Bill.
• Article 246 + List I, Entry 82: Taxes on income other than agricultural income — Union List subject; Parliament has exclusive power to legislate income tax.

Legal Framework

• Income-tax Act, 2025: The new direct tax code replacing the Income-tax Act, 1961; the primary statute being amended. Effective from 1 April 2026.
• Finance Act, 2026: The annual Finance Act operationalising Budget 2026–27 proposals; also amended by this Bill to ensure consistency.
• Payment and Settlement Systems Act, 2007: Governs payment and settlement systems in India; amendments in this Bill likely address the regulatory treatment of cross-border settlement mechanisms for government securities transactions involving FIIs and BIS.
• SEBI (Foreign Portfolio Investors) Regulations, 2019: FIIs (now called Foreign Portfolio Investors or FPIs) are regulated by SEBI under this framework; the tax exemption must be read alongside SEBI's investment limits and compliance requirements.
• FEMA (Foreign Exchange Management Act), 1999: Cross-border capital flows for FII/FPI G-Sec investments are governed by FEMA and RBI's External Commercial Borrowings (ECB) and Voluntary Retention Route (VRR) frameworks.

Institutional Framework

• Ministry of Finance (Revenue Department / Department of Economic Affairs): Drafts and introduces taxation Bills; the Budget Division negotiates FII and investor concerns.
• CBDT (Central Board of Direct Taxes): Apex body administering direct taxation in India; implements the Income-tax Act 2025 and processes FII tax exemptions.
• SEBI (Securities and Exchange Board of India): Regulates FPIs/FIIs; its FPI Regulations govern registration, investment limits, and compliance for foreign investors in G-Secs.
• RBI (Reserve Bank of India): Primary regulator of India's government securities market; administers the Fully Accessible Route (FAR) and Voluntary Retention Route (VRR) for foreign investment in G-Secs. The tax exemption complements these investment routes.
• Bank for International Settlements (BIS): International financial institution headquartered in Basel, Switzerland; owned by 63 central banks. Now specifically exempted under Indian tax law for its G-Sec investments.
• GIFT City (Gujarat International Finance Tec-City): India's International Financial Services Centre; the investment fund liberalisation provisions are intended to attract offshore fund managers to GIFT City's IFSC framework.

Economic Dimensions

The Bill's fiscal implications are multi-layered:

• Government borrowing cost: Exempting FIIs from taxes on G-Sec interest and capital gains increases foreign demand for Indian government bonds, exerting downward pressure on yields and reducing the cost of sovereign borrowing. This is particularly significant as India's gross fiscal deficit is financed partly through market borrowings.
• G-Sec index inclusion: India's J.P. Morgan Emerging Market Bond Index (EMBI) inclusion (effective June 2024) has already brought in billions of passive capital. Full Bloomberg and FTSE index inclusion — which the FII tax exemption supports — could bring an estimated USD 10–20 billion in additional inflows.
• Diamond industry: India's diamond polishing industry — centred in Surat, Gujarat — processes ~90% of the world's rough diamonds by volume. The special zone exemption targets the rough diamond import/trade segment to make India price-competitive with Dubai's DMCC and Antwerp's diamond district.
• Electronics manufacturing: The bonded warehouse exemption supports India's ambition to become a global electronics supply chain hub. India's electronics exports reached USD 29 billion in 2025–26, and the PLI scheme targets USD 300 billion by 2026.
• Data centres: India's data centre capacity additions are accelerating, driven by AI workloads and cloud computing. The expanded exemption reduces the tax cost of building and operating large-scale data centre campuses.

Banking & financial angle (for IBPS/SBI/NABARD candidates): RBI holds G-Secs as part of its foreign exchange management operations, and FII participation affects yield curves that determine bank lending rates (through the G-Sec yield–MCLR linkage). BIS's exemption facilitates its role in India's Foreign Exchange Reserves management and currency swap arrangements. Investment fund liberalisation at GIFT City's IFSC (regulated by IFSCA) is a banking sector growth driver.

Social Dimensions

The diamond exemption has direct social implications: India's diamond polishing industry employs an estimated 1 million workers, predominantly from artisan communities in Gujarat and Rajasthan. Enhancing India's competitiveness as a rough diamond trading hub protects these livelihoods from competition with Dubai-based merchants. The electronics manufacturing exemption similarly supports job creation in electronics assembly clusters, which employ significant numbers of women workers.

International Relations

The FII and BIS exemptions signal India's intent to deepen its integration with global capital markets and multilateral financial institutions. BIS's role in global financial stability — through its Basel framework for bank capital adequacy — makes its preferential treatment in Indian tax law a statement of alignment with international financial governance norms. The offshore investment fund liberalisation targets global fund managers in jurisdictions such as Singapore, Luxembourg, the Cayman Islands, and Mauritius, encouraging them to relocate management functions to India under the GIFT-IFSC framework.

Challenges

• Revenue cost: FII exemptions on G-Secs reduce tax revenue in the short term; the Finance Ministry must balance this against the long-term benefit of lower borrowing costs and capital inflows.
• Round-tripping risk: Offshore investment fund liberalisation without adequate anti-avoidance provisions could facilitate round-tripping of domestic capital through offshore structures. The General Anti-Avoidance Rules (GAAR) under the Income-tax Act remain applicable.
• Data centre concentration: Expanding tax exemptions to private leased data centres without conditions risks incentivising capacity concentration in a few large operators, potentially affecting competition and data security.
• Ordinance use critique: The Opposition has questioned the frequent use of Ordinances for fiscal measures that could have been presented in the annual Finance Bill, circumventing full parliamentary debate.

Government Initiatives (Context)

• Income-tax Act, 2025: New simplified direct tax code replacing the 1961 Act — the primary statute now amended by this Bill.
• GIFT-IFSC: India's International Financial Services Centre at GIFT City offering a zero-tax or low-tax environment for financial services — complemented by the investment fund liberalisation in this Bill.
• PLI Scheme for Electronics: Production Linked Incentive scheme driving electronics manufacturing growth; the bonded warehouse exemption is a complementary fiscal incentive.
• India's G-Sec Market Reforms: RBI's Fully Accessible Route (FAR), Voluntary Retention Route (VRR), and the ongoing J.P. Morgan / Bloomberg index inclusion — all aimed at deepening foreign participation in India's bond market.
• India AI Mission: Government's ₹10,000 crore AI infrastructure initiative, which drives data centre demand and makes the data centre exemption expansion particularly timely.

Way Forward

The Economic Survey 2025–26 and NITI Aayog's capital market strategy papers have consistently recommended deepening India's bond market through greater foreign participation. Key next steps:

• RBI and SEBI should streamline the FPI registration and G-Sec investment process to operationalise the tax exemption's benefits quickly, targeting Bloomberg and FTSE full index inclusion.
• MoF should publish clear anti-avoidance guidelines for the offshore investment fund liberalisation to prevent misuse while encouraging genuine fund management relocation.
• IFSCA (International Financial Services Centres Authority) at GIFT City should develop fast-track licensing for offshore funds seeking to relocate under the new framework.
• The Space Activities Bill and other pending legislation should be introduced through the regular parliamentary process rather than via Ordinance, to maintain the primacy of parliamentary debate.

Possible Mains Questions

1. "Tax exemptions for foreign investors in government securities are a double-edged sword: they reduce borrowing costs but also reduce tax revenue and may increase capital flow volatility. Critically analyse in the context of the Taxation and Other Laws (Amendment) Bill, 2026." (GS III — Economy, 250 words)
2. "India's increasing use of Ordinances for fiscal legislation raises constitutional and democratic concerns. Examine the constitutional provisions governing Ordinances and suggest safeguards against their misuse." (GS II — Polity, 250 words)

Possible Prelims MCQs

1. The Taxation and Other Laws (Amendment) Bill, 2026 replaces an Ordinance promulgated under: (A) Article 352 (B) Article 123 (C) Article 213 (D) Article 356 — Answer: B
2. Within how many weeks of Parliament reassembling must a Presidential Ordinance be replaced by a Bill, or it lapses? (A) 4 weeks (B) 6 weeks (C) 8 weeks (D) 12 weeks — Answer: B
3. The Bank for International Settlements (BIS) is headquartered in: (A) Washington D.C. (B) Geneva (C) Basel, Switzerland (D) New York — Answer: C
4. Which of these is NOT amended by the Taxation and Other Laws (Amendment) Bill, 2026? (A) Income-tax Act 2025 (B) Finance Act 2026 (C) Companies Act 2013 (D) Payment and Settlement Systems Act 2007 — Answer: C
5. India's GIFT City is designated as a/an: (A) Export Processing Zone (B) International Financial Services Centre (IFSC) (C) Special Economic Zone exclusively for IT (D) National Investment and Manufacturing Zone — Answer: B

Essay Dimensions

1. Tax competition and the global race for capital: can India win without compromising its fiscal base?
2. Bond market deepening as a national security imperative: why India must reduce its dependence on bank-financed public debt.
3. India's Ordinance Raj: is the executive bypassing Parliament's fiscal sovereignty?
4. GIFT City's promise: can an offshore financial centre embedded in a developing economy truly compete with Singapore and Dubai?
5. Making India the world's diamond trading hub: opportunity, challenge, and the social cost of artisan dependence.

Interview Questions

1. Why does India need to exempt foreign investors from taxes on government securities if the G-Sec market already has sufficient domestic demand from banks and insurance companies?
2. What is the constitutional difference between a Money Bill (Article 110) and a Finance Bill (Article 117)? Does this Bill qualify as a Money Bill?
3. India recently passed a new Income-tax Act (2025) replacing the 1961 Act. Was the Ordinance route for the June 2026 exemptions justified, or should these have been part of the 2025 Act?
4. How does the BIS exemption in Indian tax law reflect India's aspiration to be more deeply integrated into the global financial architecture?
5. GAAR (General Anti-Avoidance Rules) is meant to prevent tax abuse. Do you think GAAR provides sufficient protection against round-tripping through the liberalised offshore investment fund route?

FAQ

What is the difference between this Bill and the annual Finance Bill?

The annual Finance Bill is presented alongside the Union Budget in February and operationalises Budget proposals for the coming financial year. This Taxation and Other Laws (Amendment) Bill, 2026 is a mid-year amendment Bill replacing an emergency Ordinance; it amends multiple laws beyond the scope of the Budget and responds to specific investor and industry concerns that arose after the Budget.

What are Foreign Institutional Investors (FIIs)/Foreign Portfolio Investors (FPIs)?

FIIs — now formally called Foreign Portfolio Investors (FPIs) under SEBI regulations — are registered foreign entities (pension funds, hedge funds, sovereign wealth funds, insurance companies) that invest in Indian securities markets including equities, bonds, and G-Secs. India had over 10,000 registered FPIs as of 2026.

What is the Bank for International Settlements (BIS)?

The BIS, headquartered in Basel, Switzerland, is an international financial institution owned by 63 central banks. It serves as the 'bank for central banks', facilitating global financial cooperation, monetary research, and acting as a counterparty in central bank transactions. Its income-tax exemption on Indian G-Sec investments facilitates deeper engagement with India's bond market.

What is the Voluntary Retention Route (VRR) for FIIs in G-Secs?

The RBI's Voluntary Retention Route (VRR) allows FPIs to invest in Indian debt securities, including G-Secs and corporate bonds, with the condition that they retain a minimum proportion of their investments for a committed period (minimum 3 years). The 2026 tax exemption complements VRR by removing a tax barrier to FPI G-Sec participation.

Further Reading

• PRS Legislative Research — Taxation and Other Laws (Amendment) Bill, 2026: https://prsindia.org/billtrack/the-taxation-and-other-laws-amendment-bill-2026
• Ministry of Finance: https://www.finmin.nic.in
• SEBI FPI Regulations: https://www.sebi.gov.in
• RBI — Government Securities Market: https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx
• IFSCA — GIFT City: https://www.ifsca.gov.in