Taxation Bill Key Changes : Electronics Push, UPI Fee Changes, Foreign Fund Rules

New Delhi: The Lok Sabha on Thursday passed the much-talked about Taxation and other Laws (Amendment) Bill 2026 without a debate due to persistent sloganeering by the Opposition over various issues. After introducing the bill by Union finance minister Nirmala Sitharaman, the bill was passed through voice vote. After the passage of the bill, through which the government also amended the Payment and Settlement Systems Act, 2007, the House was adjourned for the day. In the bill, the government drew public attention to the Payment and Settlement Systems Act, 2007, which authorises the government to permit banks and other service providers to levy charges on payments through unified payments interface (UPI) and other notified electronic payment modes.

Overall, the bill proposes a series of tax transformations, aiming at boosting the country’s investment, supporting manufacturing and providing tax certainty among others. The proposed changes in the bill include extending the tax holiday for foreign companies supplying capital goods, equipment and tooling to contract manufacturers of specified electronic goods. The Bill also relaxes eligibility conditions for foreign companies procuring services from Indian data centres.

As per the government, the series of amendments on taxation have been proposed against the backdrop of evolving geopolitical developments and disruptions in global trade and supply chains. The changes are aimed at mitigating external economic shocks, supporting sectors affected by global conditions, ensuring domestic economic stability and improving ease of doing business.

As far as the levy on UPI and other notified electronic payment modes are concerned, the amendment, however, seeks to remove the existing legal provision that prevents banks and payment service providers from charging merchant discount rate (MDR) on notified electronic payment modes. While real-time payments made through RTGS and NEFT are done by paying a service charge, the UPI transactions, however, have been exempted from such charges so far.

Currently, standard UPI transactions remain completely free or 0 levy for regular consumers, though Parliament cleared a legislative framework granting the government’s flexibility to introduce merchant fees in the future. The government’s approach aims to levy a small charge on digital payment services for consumers and small businesses while ensuring a sustainable revenue model for banks, payment service providers (PSPs), and payment infrastructure firms that drive the digital payments ecosystem.

“In the Payment and Settlement Systems Act, 2007, in Section 10A, for the words, figures and letters 'the electronic modes of payment prescribed under section 269SU of the Income-tax Act, 1961', the words 'one or more electronic modes of payment as the central government may, by notification, specify' shall be substituted with effect from the date of publication of this Act in the Official Gazette,” the Bill said.

As per the bill, Section 10A of the Payment and Settlement Systems Act, 2007, however, prohibits banks and system providers from imposing any charges on electronic payments while Section 269SU of the Income Tax Act requires large businesses with a turnover exceeding Rs 50 crore to accept payments through specific electronic modes, including RuPay debit cards and BHIM-UPI QR codes.

As on date, no bank or payment system provider could impose any charge upon anyone, either directly or indirectly, for using the electronic modes of payment prescribed under Section 269SU of the Income Tax Act, 1961. However RBI Governor Sanjay Malhotra on Wednesday had said it is “premature” to talk about MDR on payment through digital means. “Investment in public infrastructure like payments is necessary,” he had said, reiterating that someone will have to pay for it.

For the Taxation and other Laws (Amendment) Bill, 2026, it replaces the June 5 ordinance that provided I-T exemption to income from interest income and capital gains made by FPIs from investments in G-Secs. The Bill proposes to make it easier for fund managers to relocate to India but cutting down on the list of conditions that these funds will have to satisfy to ensure that their global income does not get taxed in India.

To encourage domestic manufacturing by giving policy certainty, the Bill extends till 2040-41 the income tax exemption currently available to foreign companies that engage a contract manufacturer in India for producing electronics goods here. Specified electronic items mentioned in the bill include mobile phones, laptops, personal computers, tablets, servers and their key parts and accessories.

To support component supply for electronics factories, the Bill also proposes I-T exemption for 15 years till 2040-41 to foreign companies that store components in customs warehouses to further supply them to a contract manufacturer in India. The Bill also removes the approval and notification requirements for foreign cloud companies that use Indian data centres. It also proposes that Indian data centres be run on a leased basis rather than only under direct ownership.

Here are the salient features of the Bill:

Merchant Charges For UPI, Rupay Card Payments

The Bill proposes to remove the linkage between the Payment and Settlement Systems Act and the Income Tax Act, and give a legal backing to the government to modify the zero-MDR framework on UPI and RuPay card transactions. The move could allow merchant charges on selected Unified Payments Interface (UPI) transactions, marking a possible shift from India's zero-charge digital-payment regime.

At present, banks and payment-system providers cannot directly or indirectly charge users for payment made through UPI and RuPay debit cards.

The Bill proposes allowing the central government to decide, through notification, which electronic payment modes or transactions would remain free.

While the Bill itself neither introduces a merchant discount rate (MDR) nor specifies a fee, it creates the legal backing for the government to modify the zero-MDR framework later.

Measures On Attracting Foreign Capital

The Bill proposes to make it easier for fund managers to relocate to India by cutting down on the list of conditions that these funds will have to satisfy to ensure that their global income does not get taxed in India.

The expectation is that many managers of global funds will move to India, bringing high value activity and jobs with them. This proposal will apply to the entire country, including International Financial Services Centre, so as to provide flexibility of location to fund managers.

In a relief for investors in business trusts (REITs and InvITs), the Bill proposes to keep dividends tax free even after the operating company shifts to a new and simpler tax regime. The move will protect small investors and give a further push to investment in real estate and infrastructure.

Business trusts pool money from ordinary investors and invest it in real estate and infrastructure through operating companies. The profits flow back to investors as dividends.

Under the present rules, these dividends were tax-free in investors' hands only if the operating company stayed in the old tax regime. As companies increasingly move to the new, simpler tax regime, investors risked losing this benefit.

The Bill proposes simpler rules for data centres. The 2026-27 Budget had given tax exemption till 2047 to foreign cloud companies that use Indian data centres, but with conditions of clearing several layers of government notification and approval.

The proposed Bill removes these approval requirements and, importantly, allows Indian data centres to be run on a leased basis rather than only under direct ownership.

The result is a much larger and more flexible ecosystem of Indian data centres serving global cloud players. This reform is expected to help India build large 'AI data cities' and attract significant investment into them.

The Bill replaces the June 5 ordinance that provided I-T exemption to interest income and capital gains made by FPIs from investments in G-Secs.

Make In India

The Bill extends tax exemption currently available on income of a foreign company which supplies machinery and tools to an Indian factory that makes electronics on its behalf by another 10 years to 2040-41.

The electronic goods covered under the provisions are mobile phones, laptops, personal computers, tablets, servers and their key parts and accessories. This provision is expected to expand the contract manufacturing ecosystem for these products in India.

To shift a meaningful share of the global rough diamond trade to India and to build a financing ecosystem around it, the Bill proposes tax exemption the income of foreign diamond miners and the traders connected with them (i.e.) sight holders, brokers, aggregators and auction houses, from selling rough diamonds in special zones in Mumbai and Surat, for a period of 15 years.

Currently, foreign diamond miners are allowed to only display rough diamonds in special zones in Mumbai and Surat without being taxed. The Bill provision will help turn display into actual trade.

To support component supply for electronics factories, the Bill fully exempts for 15 years the income earned by foreign companies from supplying components, stored in Indian customs-bonded warehouses, to local contract manufacturers. This is expected to strengthen the manufacturing ecosystem for phones, laptops, computers, and servers.

Ease Of Doing Business

The Bill proposals relating to fewer approvals for data centres, a shorter, simpler rulebook for fund managers, replacing a safe harbour with a full exemption for component storage at Customs warehouses are aimed at making the tax system simpler and less burdensome.

Expert's Take

Deloitte India, Partner, Rajesh Gandhi said the amendment with regard to foreign fund managers could encourage PE firms, funds with master-feeder structures, and offshore funds with a relatively small India corpus to consider shifting their fund management activities to India without creating an adverse tax impact for the fund.

Nangia Global, Partner- M&A Tax, Abheet Sachdeva said these changes are expected to significantly enhance the attractiveness of India's onshore fund management ecosystem for offshore funds and facilitate greater relocation of offshore fund management activities to India.

Taxation Bill Key Changes : Electronics Push, UPI Fee Changes, Foreign Fund Rules

Currently, UPI and RuPay debit card payments are free, but the Bill allows the government to decide which electronic transactions will remain free and which may attract charges.

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