India

New Income-tax law

The Government of India has enacted the Income-tax Act, 2025 (New Act), replacing the six-decade-old Income-tax Act, 1961 (Erstwhile Act), with effect from 1 April 2026 and applicable from financial year (FY) 2026-27 onwards. The New Act modernises and simplifies the direct tax system and streamlines compliance by reducing the number of provisions from 819 sections in 23 chapters to 536 sections within a revised set of 23 chapters. While the structure and drafting have been rationalised, the core scheme and fundamental principles of the Erstwhile Act largely remain intact under the New Act. Further, the Central Board of Direct Taxes (CBDT) has also notified the Income-tax Rules, 2025 to provide detailed procedural and compliance rules.

It is important to note that under the Erstwhile Act, income was taxed using the concepts of ‘previous year’ and ‘assessment year’; under the New Act, the ‘assessment year’ concept is dispensed with and only the ‘tax year’ terminology is used (tax year begins on 1 April and ends on 31 March of the following year; In India, ‘tax year’ is now synonymous with the ‘financial year’ and the year following a ‘tax year’ is referred to as ‘assessment year’), which will apply prospectively from FY 2026–27. ‘Assessment year’ will therefore remain relevant only for litigation and compliance matters relating to periods governed by the Erstwhile Act.

The New Act also contains transition provisions to ensure a smooth shift from the Erstwhile Act to the New IT Act. These transitional measures would enable the availability of tax credits, carry forward of losses and unabsorbed depreciation, amortisation or deferral of expenses across various years even after the Erstwhile Act is repealed. Separately, assessment and procedural aspects involved in respect of tax years prior to 2026-27 would be governed by the provisions of the Erstwhile Act and continuity would be provided to various Rules, Instructions, Notifications, and Schemes issued by CBDT under the Erstwhile Act.

Exemption to foreign companies for procuring data centre services

In order to attract foreign investment in data centres and to promote the AI‑focused data centre framework in India, the Finance Act, 2026 has introduced a tax exemption, effective from 1 April 2026, for foreign companies on income earned in India from procuring data centre services from a specified data centre. The exemption is available up to 31 March 2047 and is subject to the fulfilment of the prescribed conditions:

• Foreign company to be notified by the Government
• Such foreign company does not own or operate any of the physical infrastructure or any resources of the specified data centre
• Sales by such foreign company, to the extent the users are located in India, are made through a reseller entity being an Indian company
• Such foreign company will maintain and furnish such information in such form and manner, as may be prescribed
• Specified data centre to be set up under and approved scheme and to be owned and operated by an Indian company

Exemption for provision of capital equipment to contract manufacturers in customs bonded areas (up to tax year 2030–31)

Finance Act, 2026 has introduced a tax exemption for foreign companies that provide capital goods, equipment or tooling to Indian contract manufacturers engaged in electronic goods manufacturing located in bonded customs zone in India, for a period up to tax year 2030–31, subject to specified conditions.

The exemption applies where:

• The ownership of such capital goods, equipment or tooling continues to remain with the foreign company;
• The capital goods, equipment or tooling are kept under the control and direction of the Indian contract manufacturer; and
• The contract manufacturer manufactures electronic goods on behalf of the foreign company using such capital goods, equipment or tooling.

Rationalisation of penalty and prosecution

Finance Act, 2026 introduces a broad rationalisation of penalty and prosecution provisions, with a focus on decriminalisation, proportionality, and procedural relief.

Certain offences (such as failure to produce books of account, tax deducted at source (TDS) on in-kind transfers and certain other cases where tax amounts does not exceed INR 10,00,000) have been decriminalised.

For remaining offences, the nature of punishment has been rationalised, including a shift from rigorous to simple imprisonment in select cases, reduced maximum imprisonment terms aligned to the quantum of default, and monetary‑only consequences for lower‑value defaults.

Several penalties for compliance failures (e.g., delays in furnishing audit reports, transfer pricing documentation, and specified statements) are replaced or reframed as fixed or daily fees, often subject to caps, thereby providing greater certainty.

Moreover, to avoid multiplicity of proceedings, penalty orders for under‑reporting or misreporting of income are now required to be passed along with the assessment order. The interest on outstanding demand pertaining to penalty will be chargeable only after the appellate order is passed by the CIT(Appeals) or Income-tax Appellate Tribunal (for appeal against the Dispute Resolution Panel order).

The Finance Act, 2026 has expanded the definition of ‘misreporting of income’ to cover unexplained credit, investment, asset or expenditure. Further, immunity from penalty and prosecution has been extended to cases of misreporting of income on payment of additional tax amounting to 100% (120% in respect of unexplained credit/ expenditure etc.). However, such immunity will not be granted in case any prosecution proceedings have been initiated.

Minimum Alternate Tax (MAT)

The Minimum Alternate Tax regime has witnessed significant developments under the Finance Act, 2026, with a reduction in the MAT rate, a comprehensive overhaul of the MAT credit mechanism, and a shift towards treating MAT as a final tax for certain domestic companies. The amendments also introduce calibrated rules for utilisation of existing MAT credit, particularly for companies transitioning to concessional tax regimes, while further expanding the scope of non-applicability for specified foreign companies. Collectively, developments are discussed in detail below under the section 'Taxes on corporate income'.

Buy-back of shares

The tax framework for buyback of shares has seen a notable change under the Finance Act, 2026, with a shift from dividend taxation to capital gains and the introduction of a higher tax burden for promoter shareholders. These changes are discussed in detail below under the section 'Corporate – Other taxes'.

Fast track demerger

Fast-track demergers, introduced under section 233 of the Companies Act, 2013, provide a simplified and time-efficient restructuring mechanism for certain classes of companies, dispensing with the need for approval from the National Company Law Tribunal and instead requiring clearance from the Regional Director (Central Government). This route was not available under the erstwhile Companies Act, 1956 and was intended to facilitate ease of doing business, particularly for small and closely held entities.

The New Act recognises only demergers undertaken under sections 230 to 232 of the Companies Act, 2013 for the purposes of tax neutrality. Accordingly, demergers effected through the fast-track route under section 233 is not covered within the specified framework and, therefore, may not qualify for tax-neutral treatment.

Consolidation of the sections related to TDS

Unlike the Erstwhile Act, all provisions relating to tax deduction at source (TDS) under the New Act have been consolidated into a single section. This section is structured around three distinct tables, based on broad categories of payees: residents, non‑residents, and any person. Each table specifies the nature of the income or payment, the applicable monetary threshold, the person responsible for deduction, and the corresponding withholding rate. In addition, a separate table enumerates circumstances in which withholding is not required.

General Anti Avoidance Rules (GAAR)

The GAAR framework, which empowers tax authorities to curb impermissible tax avoidance arrangements, has seen a key clarification from the CBDT (notification dated 31 March 2026), providing that income arising from the transfer of investments made prior to 1 April 2017 shall remain outside the ambit of GAAR. The detailed provisions are discussed below under the section 'Topic of focus for tax authorities'. 

Entitlement of Treaty benefit

To claim treaty benefits, the non-resident must obtain a valid Tax Residency Certificate (TRC) confirming its tax residency status and furnish prescribed additional information to substantiate eligibility for treaty relief. Earlier, a prescribed form was generally required only where the TRC did not contain all the requisite information. However, pursuant to the Income-tax Rules 2025, filing of such prescribed form is mandatory even if the TRC contains all such required information. Further, the Indian Apex Court has recently held that TRC is only an eligibility condition and not conclusive proof for claiming treaty benefits. The taxpayers may be required to substantiate residency, liability to tax and economic/commercial substance in the relevant jurisdiction.

Incentivisation of International Financial Services Centre (IFSC)

• The Finance Act, 2026 has increased the tax holiday period for units in IFSC to 20 consecutive years (earlier 10 years) out of 25 years (earlier 15 years) and 20 consecutive years (earlier 10 years) for Offshore Banking Units (OBUs). Further any unit which has commenced operations on or after 1 April 2026, the aforesaid deduction shall be available only if it is not formed by splitting up or reconstruction or reorganisation or transfer of a business already in existence in India.
• A concessional rate of 15% has been introduced by the Finance Act, 2026 on business income earned by this units during the non-holiday tax period.
• Dividend taxation has been excluded in cases, with effect from 1 April 2026 pursuant to Finance Act, 2026 where loans are advanced by a treasury unit located in an IFSC to group entities situated outside India in a notified jurisdiction, provided that the parent entity or principal entity of the group is listed on a stock exchange in such notified jurisdiction.

Relief to eligible start-ups

In line with the Government’s continued focus on fostering innovation and strengthening the start-up ecosystem in India, the eligibility conditions for start-ups have been further liberalised, the Finance Act, 2026 has revised the turnover criteria for eligible start from INR 1 billion to INR 3 billion

Extending the scope to file the updated return

The Finance Act, 2026 has expanded the scope of filing of updated return with effect from 1 March 2026 as under:

• Filing of updated return income for reporting reduction in losses as compared to the loss claimed in the original return of income; no additional tax is payable for that loss year, but updated returns (with tax, interest and additional tax) must be filed for subsequent years where the original loss was set-off.
• Filing of updated return of income pursuant to issuance of reassessment notice, subject to payment of an additional 10% of the aggregate tax and interest over and above the tax payable on account of updated return of income, and the income so disclosed will not be used as a basis for penalty.