President Droupadi Murmu granted assent on 17 August 2026 to the Taxation and Other Laws (Amendment) Act, 2026 and the Act further amending the Payment and Settlement Systems (PSS) Act, 2007, as notified in the gazette by the Ministry of Law. The two Bills had been passed by Parliament on 10 August 2026. Together they create a tax free window for select global investors in government debt and give the government legal flexibility to redesign the zero charge framework for UPI and RuPay transactions.
Two Laws Get Presidential Assent on 17 August 2026
President Droupadi Murmu gave assent to two separate amendment laws on 17 August 2026. The Ministry of Law and Justice issued gazette notifications confirming them. Both Bills had cleared Parliament on 10 August 2026, with the Lok Sabha passing them on 6 August 2026 without extended debate.
The first is the Taxation and Other Laws (Amendment) Act, 2026, which repeals and replaces the Income-tax (Amendment) Ordinance, 2026 promulgated on 5 June 2026 under Article 123 of the Constitution. An ordinance is a temporary law issued by the President when Parliament is not in session and immediate action is needed, and it must be replaced by an Act within six weeks of Parliament reassembling. The second is an Act to further amend the Payment and Settlement Systems Act, 2007 (PSS Act). That central law provides for regulation and supervision of payment systems in India and designates the Reserve Bank of India (RBI) as the authority for that purpose, and it came into force on 12 August 2008 after receiving assent on 20 December 2007.
Together the two Acts signal the government’s twin push to attract stable foreign capital into sovereign debt and to create a sustainable funding model for India’s digital payments backbone.
The Taxation and Other Laws (Amendment) Act, 2026: From Ordinance to Law
The Taxation and Other Laws (Amendment) Act, 2026 is an umbrella amendment Act. It amends the Income-tax Act, 2025, the Finance Act, 2026 and the Payment and Settlement Systems Act, 2007. The Income-tax Act, 2025 is the new direct tax code that replaced the six decade old Income-tax Act, 1961. It was passed by Parliament on 12 August 2025, received Presidential assent on 21 August 2025, and came into force on 1 April 2026. It contains 536 sections and 16 Schedules, compared to 819 sections in the 1961 Act, and introduces the term tax year in place of previous year and assessment year.
The government said the amendments were needed to mitigate the impact of external economic shocks, provide policy certainty to global investors, and support sectors affected by geopolitical disruptions and supply chain shifts. The earlier Income-tax (Amendment) Ordinance, 2026 had already amended Schedule IV of the 2025 Act to grant tax relief on government securities. The new Act ratifies those changes and adds several further exemptions and simplifications that had been sought by industry after the Finance Act, 2026.
Tax Exemption for FIIs and BIS on Government Securities
What the Act Provides
The core provision inserts two new entries, Entry 13D and Entry 13E, in Schedule IV of the Income-tax Act, 2025, with retrospective effect from 1 April 2026. Government security carries the meaning given in Section 2(f) of the Government Securities Act, 2006, a security issued by the Central or State Government for raising a public loan.
Under the new entries, Entry 13D covers a Foreign Institutional Investor (FII). The term is linked to Section 210(6)(a) of the Income-tax Act, 2025 and is notification based. In practice it means Foreign Portfolio Investors (FPIs) registered with the Securities and Exchange Board of India (SEBI). Entry 13E covers the Bank for International Settlements (BIS). The BIS was established at the Hague Conference in 1930, is headquartered in Basel, Switzerland, and is the world’s oldest international financial institution. It acts as a bank for central banks and manages a part of their foreign exchange reserves. The Reserve Bank of India has been a member since 1996.
For both categories, the Act exempts interest earned on government securities and capital gains arising from the sale, exchange or transfer of such securities from total income. The income must arise on or after 1 April 2026. The exemption is subject to furnishing prescribed information in the prescribed form and manner, which will be notified through rules.
How the Tax Position Changes
Before this reform, income of FIIs and FPIs from government securities was taxable under Section 210 of the Income-tax Act, 2025. Interest was taxed at 20 percent, short term capital gains at 30 percent, and long term capital gains at 12.5 percent, plus applicable surcharge and cess. For listed government securities, long term meant holding for more than 12 months, and for unlisted, more than 24 months. With the new entries, the exempt income is removed from Section 210 and also from the tax deducted at source requirement under Section 393(2) of the 2025 Act, so no withholding applies.
| Income from G-Secs | Tax Before 1 April 2026 | Tax After Amendment for FIIs and BIS |
|---|---|---|
| Interest | 20 percent | Fully exempt |
| Short term capital gains | 30 percent | Fully exempt |
| Long term capital gains | 12.5 percent | Fully exempt |
Why the Exemption Matters for India’s Debt Market
The reform targets the government securities market, the market for tradable debt issued by the Centre and States to fund public borrowing. Deeper foreign participation helps lower the government’s borrowing cost, deepens liquidity, strengthens financial market benchmarks, and improves transmission of RBI’s monetary policy. It also supports the stability of the rupee by encouraging stable, long term foreign flows.
At the same time India has widened the Fully Accessible Route (FAR). Announced in the Union Budget 2020-21 and operationalised by RBI from 1 April 2020, FAR allows any person resident outside India to invest in specified central government securities without quantitative ceilings, alongside the existing Medium Term Framework and Voluntary Retention Route. Recent changes expanded FAR eligible tenors to include new issuances of 15 year, 30 year and 40 year securities and Sovereign Green Bonds (SGrBs) in FAR eligible tenors, while removing short term, concentration and security wise limits under the General Route. Overall limits remain at 6 percent of outstanding Central Government Securities and 2 percent of State Government Securities. As on 12 May 2026, FPIs held ₹3.75 lakh crore of government securities, about 3.34 percent of the ₹112.42 lakh crore outstanding stock, with FAR holdings at ₹3.21 lakh crore, about 6.74 percent of the FAR eligible stock of ₹47.63 lakh crore.
The BIS currently holds nil investment in Indian government securities, and officials have estimated that the exemption could attract $7 to 11 billion from the BIS investment pool known as BISIP, a suite of fixed income products used by central banks to manage reserves.
Wider Reforms Packed Into the Taxation Act
The government described three themes of the Taxation Act as attracting foreign capital, Make in India, and ease of doing business. Beyond government securities, the Act makes four other major changes.
Electronics Manufacturing: Policy Certainty Till 2040-41
The Act extends a tax holiday for foreign companies that supply capital goods, equipment or tooling to an Indian contract manufacturer producing specified electronic goods in a customs bonded area. The exemption, earlier available till 2030-31, now runs till 31 March 2041, which is tax year 2040-41. The specified goods now clearly cover mobile phones, laptops, all in one personal computers, tablets, servers and ultra small form factor devices, plus sub assemblies, hearables, wearables and related accessories. A new entry, Entry 13G of Schedule IV, also exempts income from storing components in a customs bonded warehouse in India if those components are later supplied to such a contract manufacturer. This warehouse exemption applies from 1 October 2026 till 31 March 2041. The aim is to give long term certainty to global firms like Apple and to strengthen component supply chains.
Data Centres and Cloud Services
Foreign companies that earn income by procuring services from a specified data centre in India get an exemption till tax year 2046-47. Earlier the exemption required the foreign company to be notified by the Central Government, the data centre to be set up under an approved scheme and notified, and the data centre to be owned and operated by an Indian company. The Act removes the dual notification requirement and allows the Indian data centre to be either owned or leased and operated by an Indian company, with any other conditions to be prescribed. The government said this will help foreign cloud providers use Indian data centres and support the growth of large AI data cities without clearing multiple layers of approval.
Rough Diamond Trade in Notified Zones
Income from the sale of rough diamonds in a notified special zone will be exempt from 1 October 2026 till 31 March 2041 for foreign companies engaged in diamond mining, sightholders of such companies, and for brokers, aggregators or tender and auction entities connected with the sale. The move aims to make India a trading hub for rough diamonds.
Easier Fund Management From India
The Act rationalises the safe harbour for eligible investment funds managed by Indian fund managers. It reduces the conditions that an offshore fund must satisfy to ensure its global income is not taxed in India from 13 to 5. This makes it easier for fund managers to relocate operations to India. The Act also streamlines taxation of dividend distributions by Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs), providing a uniform exemption to unitholders irrespective of the tax regime of the underlying Special Purpose Vehicle (SPV), with a higher surcharge of 25 percent for SPVs opting for the concessional regime.
The Payment and Settlement Systems (Amendment) Act, 2007: Rethinking Zero MDR
What Section 10A Said Earlier
The Payment and Settlement Systems Act, 2007 regulates payment systems and mandates that no entity can operate a payment system without authorisation from the RBI. Section 10A, inserted with effect from 1 January 2020, prohibited any bank or system provider from imposing any charge, directly or indirectly, on a person making or receiving payment through electronic modes prescribed under Section 269SU of the Income-tax Act, 1961. That Income-tax provision required large businesses with turnover above ₹50 crore to offer prescribed modes, which included BHIM UPI and RuPay debit cards. In practice this created a zero MDR regime for UPI and RuPay.
Merchant Discount Rate (MDR) is the fee a merchant pays to its bank for a digital payment service. It is shared among the issuing bank, acquiring bank, payment service provider, payment aggregator and the National Payments Corporation of India (NPCI), which operates UPI, IMPS, AEPS, NFS and NETC as the retail payments organisation authorised by RBI. NPCI was set up as a Section 25 company in 2008 based on the recommendations of RBI’s Vision Document 2005-08 and the Advisory Group on Payment and Settlement Systems. Before zero MDR, MDR of about 0.30 percent on person to merchant QR transactions above ₹100 was shared equally between issuer and acquirer, capped at ₹100.
What the New Enabling Provision Allows
The 2026 amendment amends Section 10A to replace the fixed reference to Section 269SU with the words one or more electronic modes of payment as the Central Government may, by notification, specify. It also retains the prohibition that no bank or system provider shall impose any charge on a person making or receiving payment through the modes so notified. In effect Parliament has delinked the charge prohibition from a fixed statute and turned it into an executive power. The government can now, by gazette notification, decide which electronic modes or transactions remain free and which may attract a charge, without needing a fresh Act of Parliament. Legal experts describe this as an enabling framework, it does not itself impose MDR.
Will UPI Remain Free for Consumers?
Finance Minister Nirmala Sitharaman clarified in Parliament that UPI will remain free for consumers. The government said any future MDR, if introduced, would apply only to a limited set of merchant transactions above a specified threshold and at a nominal rate lower than debit and credit card MDRs. Person to person transfers would stay free, and the vast majority of merchant transactions would continue to carry no charge. The UPI and Services Steering Committee headed by NPCI would decide on any MDR after the Act, followed by notification and RBI guidelines. Reports had suggested a possible 0.25 to 0.50 percent fee on merchant transactions above ₹2,000, but the government said no rate or categories have been finalised. RBI Governor Sanjay Malhotra said it was premature to discuss MDR and that investment in public payment infrastructure needs a sustainable funding source.
The change responds to the fiscal strain of zero MDR. The Parliamentary Standing Committee on Finance in its reports tabled in March and August 2026 noted that government incentives cover only about 11 percent of the industry’s actual costs and about 14 percent of the MDR that would otherwise be collected. Between FY 2021-22 and FY 2024-25 the Centre provided about ₹8,730 crore in incentives, while the incentive allocation for the current year was ₹2,000 crore against an estimated annual operating cost of ₹20,700 crore for the digital payments industry. UPI processed 23.6 billion transactions worth ₹29.9 lakh crore in July 2026 alone, and recorded more than 24,000 crore transactions worth ₹314 lakh crore in FY 2025-26.
Why the Twin Amendments Matter
The two Acts address two pressure points of the economy together. The taxation changes seek to widen and stabilise funding for the government’s own borrowing by making sovereign debt more attractive to patient global capital, including the BIS which currently holds its reserves in other sovereign markets. By removing interest withholding and capital gains tax, the Acts put India’s FAR securities on a more competitive footing with other emerging market sovereigns and support the inclusion of Indian bonds in global indices.
For industry, the decade long extension till 2040-41 for electronics and warehoused components, the flexibility for leased data centres, and the rough diamond exemption give global firms a predictable horizon to invest in manufacturing and services in India. The simplified fund management rules strengthen India’s ambition to be a hub for global fund operations, with managers able to run offshore pools from India without triggering onerous tax exposure.
The payment systems change addresses sustainability of a critical public utility. Zero MDR helped UPI become the world’s largest real time interoperable payment system after its launch in 2016, but infrastructure, fraud prevention, and dispute handling carry high costs. An enabling law lets the government calibrate charges narrowly on large merchants while protecting consumers and small merchants, and to decide revenue sharing fairly among banks, fintech apps and NPCI.
The Way Forward
With Presidential assent secured, most provisions of the Taxation and Other Laws (Amendment) Act, 2026 are deemed to have come into force from 1 April 2026, except for the bonded warehouse and rough diamond provisions which start from 1 October 2026. Detailed rules will follow to prescribe the information furnishing form for FIIs and BIS, the conditions for leased data centres and bonded warehouses, and the notified special zones for diamond trade. Market attention will now be on the quantum of new FPI and BIS inflows into government securities, especially the longer tenor FAR bonds and Sovereign Green Bonds.
For the payment system amendment, the next steps are a government notification specifying which electronic modes remain under the charge prohibition, a framework by the NPCI led Steering Committee for any threshold based MDR, and guidelines from RBI. The government has to settle six practical design questions before any charge begins: which merchant categories are covered, what transaction threshold applies, whether the rate is percentage based or capped, how revenue is shared, whether merchants may pass the charge to customers, and how refunds and failed transactions are handled. How those choices balance consumer protection, merchant competitiveness, and viability of banks and fintechs will determine whether India can keep both scale and sustainability in digital payments.
Key Takeaways
- President Droupadi Murmu gave assent on 17 August 2026 to the Taxation and Other Laws (Amendment) Act, 2026 and the Act amending the Payment and Settlement Systems Act, 2007, notified by the Ministry of Law after Parliament passed them on 10 August 2026.
- The Taxation Act replaces the Income-tax (Amendment) Ordinance, 2026 of 5 June 2026 and inserts Entries 13D and 13E in Schedule IV of the Income-tax Act, 2025 to exempt FIIs and BIS on interest and capital gains from government securities with effect from 1 April 2026.
- Before the exemption, interest on G-Secs was taxed at 20 percent, short term capital gains at 30 percent and long term capital gains at 12.5 percent for FIIs, with Government security defined under the Government Securities Act, 2006.
- The Bank for International Settlements (BIS), established at the Hague Conference in 1930 and headquartered in Basel, Switzerland, is the world’s oldest international financial institution and has had the RBI as a member since 1996.
- The Taxation Act extends tax relief for foreign companies supplying capital goods or warehoused components to electronics contract manufacturers till 31 March 2041 and for rough diamond sales in notified special zones from 1 October 2026 till 31 March 2041.
- The PSS Amendment Act amends Section 10A to replace the fixed link to Section 269SU of the Income-tax Act, 1961 with an enabling power for the Central Government to notify which electronic payment modes remain free from charges.
- The government has said UPI will remain free for consumers, and any future Merchant Discount Rate (MDR) would apply only to a limited category of large merchant transactions at a nominal rate, to be decided by the NPCI led UPI and Services Steering Committee.
