India to overhaul tax framework to boost manufacturing, foreign investment
What's the story
The Indian government is planning a major overhaul of its tax framework, with the aim of boosting manufacturing and attracting foreign investment. The proposed changes will be introduced through the Taxation and Other Laws (Amendment) Bill, 2026. The bill seeks to replace the Income Tax Ordinance issued in June and proposes several tax incentives for manufacturers, foreign investors, Real Estate Investment Trusts (REITs), Infrastructure Investment Trusts (InvITs), and data centers.
Manufacturing incentives
Tax exemptions for contract manufacturing
One of the major proposals in the bill is to extend tax exemptions for contract manufacturing of certain electronic goods until FY2040-41.
This list is likely to include mobile phones, laptops, tablets, servers, wearables, and other related components.
The move aims to provide long-term tax certainty to manufacturers and bolster India's position as a global hub for electronics manufacturing.
Investor benefits
Easing conditions for foreign portfolio investors
The bill also seeks to provide tax relief to foreign companies storing electronic components in customs bonded warehouses until FY2040-41. This could help strengthen electronics supply chains in India.
Further, it proposes easing several tax-related conditions seen as hurdles by foreign portfolio investors (FPIs) and global fund managers, including minimum number of investors, minimum fund corpus, investment diversification, and restrictions on investments in associate entities.
Debt investment
Exemption on government securities
The proposed legislation also seeks to exempt interest income and capital gains from government securities held by foreign institutional investors (FIIs) and the Bank for International Settlements.
This move is likely to improve the attractiveness of Indian sovereign debt among international investors.
The bill also proposes restoring tax exemption on dividend income received by REITs and InvITs, providing relief to investors in these vehicles.
Digital infrastructure
Relaxation in data center rules
The bill also proposes changes for India's growing digital infrastructure sector.
It seeks to relax tax rules for leased data centers run by Indian companies and remove the requirement of foreign companies procuring data center services being specifically notified by the Centre.
The definition of a "specified data center" would also be expanded to include facilities run by Indian companies, whether owned or leased, subject to prescribed conditions.
Diamond industry
Other key proposals in the bill
The bill also proposes a long-term tax exemption until FY2040-41 for foreign companies engaged in rough diamond sales through notified special zones.
The proposed benefit would apply to diamond mining companies, sightholders, brokers, aggregators, and auction entities.
Other proposals include a higher 25% surcharge for special purpose vehicles (SPVs) opting for the new corporate tax regime and delinking zero-charge electronic payment provisions from a specific section of the Income Tax Act.