Latest direct tax reforms in India 2026
India’s direct tax framework has undergone a major transformation with the introduction of the Income-tax Act, 2025, which came into force on April 1, 2026, replacing the Income-tax Act, 1961. This significant reform has been further supported by the measures announced in Budget 2026 and the Taxation and Other Laws (Amendment) Bill, 2026.
Major Legislative and Structural Changes
Introduction of a New Tax Framework: The Income-tax Act, 2025 became effective from April 1, 2026, replacing the earlier framework with simpler wording, more organized provisions, and a unified concept of the “Tax Year.” These changes are intended to make tax rules easier to understand and reduce the scope for prolonged legal disputes.
Simplification of Compliance and Forms: The tax compliance process has also been modernized through the introduction of common electronic forms. For instance, the earlier Forms 15G and 15H have been replaced by consolidated digital formats, including Form 121, making it easier for eligible taxpayers to declare income that is subject to little or no tax.
Changes in Minimum Alternate Tax (MAT): The MAT rate has been reduced from 15% to 14%. At the same time, the revised framework treats MAT as a final tax and introduces stricter provisions concerning the utilization and carry-forward of earlier MAT credits.
Revision in Securities Transaction Tax (STT): STT rates have also been increased for certain securities transactions. The rate on futures has been raised to 0.05%, while transactions involving options, including premiums and exercise, are subject to a rate of 0.15%. The objective is to discourage excessive speculative activity and promote a more balanced securities market.
Foreign Investment & Sectoral Incentives
Government Securities: Tax exemptions have been approved for Foreign Institutional Investors (FIIs) and the Bank for International Settlements (BIS) on interest income and capital gains earned from government securities.
Manufacturing & Electronics: Foreign companies that store electronic components in bonded warehouses for domestic contract manufacturers will continue to receive tax exemptions until 2040–41.
Global Technology & Offshore Funds: The government has eased safe-harbor requirements for certain foreign entities. Tax exemptions have also been provided for foreign companies using services from Indian data centers and for those trading in rough diamonds through specially notified zones.
The Taxation and Other Laws (Amendment) Bill, 2026 was introduced in the Lok Sabha on August 4, 2026. The Bill proposes to repeal the Income-tax (Amendment) Ordinance, 2026, which was issued on June 5, 2026, and incorporate its provisions into the law. The Ordinance had amended the Income-tax Act, 2025 to provide certain tax exemptions to foreign investors in government securities. The new Bill also proposes additional exemptions for specified entities. Along with these changes, it seeks to amend the Finance Act, 2026 and the Payment and Settlement Systems Act, 2007.
Exemption for FIIs and BIS on Government Securities
The Bill proposes to give Foreign Institutional Investors (FIIs) and the Bank for International Settlements (BIS) an income-tax exemption on earnings from government securities. This includes both interest received from such investments and capital gains earned through their sale, exchange, or transfer. The exemption would apply to income generated on or after April 1, 2026.
These provisions were initially introduced through the Income-tax (Amendment) Ordinance, 2026. Before this change, interest income from government securities was generally taxed at 20%, while short-term capital gains were subject to a 30% tax rate and long-term capital gains to 12.5%.
Tax Benefits for Foreign Companies in Diamond and Electronics Businesses
The Bill proposes additional tax benefits for certain foreign companies operating in the diamond and electronics manufacturing sectors. Income earned from the sale of rough diamonds in a notified special zone will be exempt from tax. This benefit will cover foreign companies involved in diamond mining, their authorised sightholders, as well as brokers, aggregators, and entities conducting tenders or auctions related to rough diamond sales.
A similar exemption is proposed for income earned from storing electronic components in warehouses located within customs-bonded areas. The provision will apply to foreign companies supplying these components to contract manufacturers producing specified electronic products, including mobile phones, laptops, servers, and sub-assemblies of finished products.
Both exemptions will apply to income generated on or after October 1, 2026, and the benefits will remain available until March 31, 2041.