📌 Why in News?
The Lok Sabha has passed the Taxation and Other Laws (Amendment) Bill, 2026, which amends the Payment and Settlement Systems Act, 2007, the Income-tax Act, 2025, and the Finance Act, 2026. The Bill seeks to boost Ease of Doing Business, attract Foreign Direct Investment (FDI), and strengthen India as a global investment hub. Crucially, it introduces a Merchant Discount Rate (MDR) for UPI transactions over ‣2,000 to ensure digital payment platform sustainability, provides tax exemptions on government securities for foreign institutional investors, relaxes tax conditions for offshore investment funds managed from India, and grants tax relief to electronics manufacturing and rough diamond trades in notified special zones.
Syllabus & Relevance
Prelims: Indian Economy — financial institutions, taxation policies, government securities, digital payments, and FDI regulations.
Mains: GS-3 — Indian Economy and issues relating to planning, mobilization of resources, growth, development, and infrastructure.
Why it matters for India
The Bill directly impacts India's investment climate and manufacturing ecosystem.
By exempting Foreign Institutional Investors (FIIs) and the Bank for International Settlements (BIS) from tax on government securities, it encourages foreign capital inflows into sovereign debt.
Relaxing offshore fund management rules promotes onshoring of fund managers to India.
Furthermore, tax incentives for customs bonded electronics warehousing directly support local contract manufacturing of laptops, servers, and mobile phones, while introducing MDR on high-value UPI transactions ensures the long-term economic viability of India's digital payment ecosystem.
Static Foundation
Statutory Amendments: The Bill amends three key primary statutes: the Payment and Settlement Systems Act, 2007, the Income-tax Act, 2025, and the Finance Act, 2026.
Offshore Investment Funds Management: Under the Income-tax Act, specific safe-harbour rules ensure that an eligible foreign fund managed by an Indian-based fund manager is not deemed to have a business connection in India, preventing the fund's worldwide income from being taxed in India.
Customs Bonded Warehouses: Warehouses operating in Customs Bonded Areas allow imported goods and components to be stored without immediate payment of duty, facilitating contract manufacturing setups.
Business Trusts (REITs and InvITs): Real Estate Investment Trusts and Infrastructure Investment Trusts aggregate funds from investors to acquire underlying income-generating assets held via Special Purpose Vehicles (SPVs).
Data, Reports, Cases & Examples
Prior G-Sec Tax Structure: Interest income was previously taxed at 20%, Short-Term Capital Gains (STCG) at 30%, and Long-Term Capital Gains (LTCG) at 12.5% under the Income Tax Act.
Offshore Fund Conditions Removed: Eliminated the 25-member minimum, maximum 10% participation cap for a single investor, ‣100 crore minimum monthly average corpus requirement, and the 25% single-entity corpus investment limit.
Business Trust SPV Surcharge: Surcharge on income tax payable by domestic companies acting as SPVs of business trusts under concessional tax schemes raised from 10% to 25%.
UPI MDR Exemption Threshold: All UPI transactions under ‣2,000 remain completely fee-free.
Key Sectors Targeted: Mobile phones, laptops, servers, rough diamond sightholders/auctions, and sovereign debt markets.
Prelims Quick Facts
Amended Statutes: The Bill amends the Payment and Settlement Systems Act, 2007, Income-tax Act, 2025, and Finance Act, 2026.
Government Securities Exemption: FIIs and the Bank for International Settlements (BIS) are fully exempt from paying income tax on interest earned and capital gains (STCG/LTCG) from government securities.
UPI MDR Structure: Introduces Merchant Discount Rate (MDR) for UPI transactions, but mandates that transactions under ‣2,000 remain free of MDR charges.
Offshore Fund Relaxation: Removes rigid criteria (minimum 25 members, 10% single-investor limit, ‣100 crore corpus, 25% single-entity cap) for offshore funds managed from India to avoid business connection taxability.
Rough Diamond Sector Relief: Exempts income from the sale of rough diamonds in notified special zones for mining firms, sightholders, brokers, aggregators, and tender/auction entities.
Electronics Manufacturing Incentives: Exempts income from storing components in Customs Bonded Area warehouses for supply to contract manufacturers, as well as supplying capital goods, tooling, or machinery for manufacturing mobile phones, laptops, and servers.
SPV Surcharge Revision: Raises the surcharge on income tax payable by domestic companies acting as SPVs of business trusts (REITs/InvITs) opting for concessional tax rates from 10% to 25%.
G-Sec Exemption: Exemption applies specifically to FIIs and the BIS, not to domestic retail or corporate investors.
Mains-only layer✍️ Open Mains Perspective & Answer FrameworkClick to expand ↓
Mains Perspective
Background
Passed by the Lok Sabha, the Taxation and Other Laws (Amendment) Bill, 2026 introduces targeted legislative amendments across taxation, capital markets, digital payments, and industrial supply chains to promote Ease of Doing Business and attract global foreign direct investment.
Significance
- Deepening Government Debt Markets: Total income tax exemption on interest and capital gains for FIIs and BIS in government securities makes Indian sovereign debt significantly more attractive globally.
- Financial Viability for Digital Payments: Introducing MDR on UPI payments exceeding ‣2,000 ensures long-term sustainability and technological infrastructure investment for banks and fintech providers while protecting retail users.
- Encouraging Offshore Asset Managers: Eliminating cumbersome structural restrictions (such as the ‣100 crore corpus limit and investor caps) facilitates onshoring global asset management operations to India.
- Strengthening High-Tech Supply Chains: Tax exemptions on machinery, tooling, and bonded component warehousing directly assist domestic contract manufacturers in producing servers, laptops, and smartphones.
Challenges and Criticisms
- Impact on Infrastructure Trust Returns: Increasing the surcharge on domestic SPVs of REITs and InvITs from 10% to 25% under concessional tax schemes may marginally compress investor yields.
- Merchant Resistance to UPI MDR: Reintroducing MDR for transactions above ‣2,000 may encounter friction from mid-to-large merchants accustomed to zero charges.
Way Forward
- Operational Clarity: Formulate simple procedural guidelines for foreign investment funds and bonded warehouse operations to eliminate legal ambiguity.
- Monitoring Digital Payment Adoption: Regularly evaluate the impact of UPI MDR on merchant adoption to ensure seamless payment ecosystem growth without dampening digital transaction volumes.
Answer Framework
Introduction
The Taxation and Other Laws (Amendment) Bill, 2026 enacts vital reforms across India's taxation, digital payment, and capital market frameworks to boost foreign investment and ease of doing business.
Body
- Sovereign Capital Inflows: Full tax exemption for FIIs and BIS on **G-**Sec interest and capital gains, replacing historical tax rates (20% interest, 30% STCG, 12.5% LTCG).
- Digital Infrastructure Sustainability: Statutory introduction of MDR for UPI transactions over ‣2,000 while maintaining fee-free status for lower-value retail payments.
- Offshore Asset Management & Manufacturing: Removal of rigid caps (‣100 crore corpus, 25-member limit) for offshore funds managed from India; tax relief for electronics component warehousing and rough diamond trades.
- Key Concerns: Surcharge increase from 10% to 25% on REIT/InvIT SPVs and potential merchant resistance to UPI MDR.
Conclusion
By combining targeted fiscal incentives for strategic sectors with economic sustainability for digital payment systems, the Bill significantly strengthens India's global investment ecosystem.
Possible Mains Question
Examine the key features of the Taxation and Other Laws (Amendment) Bill, 2026. How do its provisions balance foreign investment promotion, manufacturing supply chain support, and the economic sustainability of digital payment infrastructure?