As a cross-border structuring adviser, you've likely already read in the headlines about the Taxation and Other Laws (Amendment) Bill, 2026. The majority of the commentary focuses on the pure tax issue. It isn't. Almost all the key amendments in TOLA 2026 affect a type of transaction that will eventually be the subject of structuring, documentation and defense by a FEMA consultant. This is what is important to your practice.
The government tabled TOLA 2026 in the Lok Sabha on 4th August, 2026, to replace the Income-tax (Amendment) Ordinance, 2026 and further expand the changes to the Income-tax Act, 2025, Finance Act, 2026 and Payment and Settlement Systems Act, 2007. The Ordinance arose out of the disruption of the world's supply chains. TOLA 2026 takes it a step further by providing tax certainty for sectors that have significant cross-border involvement, which includes foreign institutional investors, data centre operators, diamond traders and electronics contract manufacturers. The list should be quite familiar to anyone advising on FDI policy, structuring of ODI or RBI reporting. The tax treatment is finally in the same place as the FEMA work already is.
The following is quite an important development in the world of investing and tax planning.It's a pretty significant change in the tax planning and investment world.
The fundamental safety provided in ITA 2025 is that offshore funds would not be considered to have a business connection in India just because their fund manager is here. To qualify as an “eligible investment fund,” however, this required meeting 13 conditions in Schedule I.
TOLA 2026 brings it down to five from 20.TOLA 2026 reduces it to 5 from 20, from April 1, 2026. The minimum membership of 25, cap on single investor share of 10%, cap of top 10 investors to 50%, cap on investment per entity to Rs. 25 lakh, prohibition on investing in associate entities, etc. are all gone. Must have a corpus of 100 crore and a minimum of remuneration test for the fund manager.
What remains is no fund can be resident of India and must be based in a DTAA/TIEA jurisdiction or a notified territory and the resident Indian participation can be capped at 5% of corpus (Rs. The fund is not allowed to conduct any business in India except what the eligible fund manager conducts on its behalf and the fund manager's own commitment to invest Rs 25 crore with the fund has been changed from ‘not exceeding' to ‘up to'.
When the fund has been forced to explain to a fund client that, for another matter—such as a technicality like the number of investors or the timing of corpus—otherwise clean structure has broken, this eliminates a lot of that friction and the annual compliance certificate becomes shorter as well. One aspect to underscore for clients using IFSC-based fund managers is that the government is also revoked its mandate to ease Schedule I norms by issuing notification. But with only five conditions left, that safety valve was probably unnecessary, and that would leave less room for manoeuvre if a fund were to fall a little short in the future.
This is likely the biggest shift for any foreign portfolio investor's adviser. Prior to TOLA 2026, FPIs enjoyed a tax advantage in that their interest income on Government Securities was taxed at 20% rate under Section 210 of the Act and their long-term capital gains were taxed at 12.5% while their short-term capital gains were taxed at 30%, with tax treaty benefit. That is all eliminated by the New Entry 13D and 13E in Schedule IV of the regulations, both for the FII and the BIS, for the interest on G-Secs and capital gains from sale/exchange/transfer of G-Secs.
Here, there's no sunset clause. It will take effect on April 1, 2026, and continue indefinitely, which is unusual because most of the exemptions in this bill are enacted for a limited time. The exemption from the withholding obligations under Section 393(2) is also removed because exempt income is no longer considered to be "income from securities" for the purposes of withholding.
This alters the calculator of how foreign clients funnel money towards investment in debt into India. The G-Sec route is thus more appealing than other debt instruments that are still taxable, with full exemption on the coupon as well as on the capital gain and no withholding drag. Just remind clients who previously directed debt exposure into other areas to avoid the 20% withholding hit about it.
While earlier, it had been compulsory for the Indian operator of the data centre to own and operate the data centre, Entry 13C had already exempted foreign companies from the requirement to have a "specified data centre". That left out the bulk of the industry, as it is common for data centre operators in India to lease land and leased buildings.
To overcome this, TOLA 2026 proposes to redefine “specified data centre” to mean any data centre operated by an Indian company under its ownership or lease with the conditions to be prescribed. The need for the Central Government to notify the foreign company has also been removed and the exemption is now self-activating once the substantive conditions are fulfilled.
That might no longer be needed if the clients have, say, group entities as the owners of the underlying real estate. It is something to note to anyone with that type of a split.
In addition to providing the exemption, a new Special Notified Zone Exemption has been issued.Along with the exemption, a new Special Notified Zone Exemption has been published.
Foreign mining companies, sightholders, brokers, aggregators or tender or auction entities are exempted from income tax on income on rough diamond sale in notified Special Zone such as Bharat Diamond Bourse, Mumbai and Gujarat Hira Bourse, Surat. The diamonds must be unworked (or just sawed, cleaved or bruted) and be accompanied by a Kimberley Process Certificate. This is for the tax year 2040-41 and will run through October 1, 2026.
In the past, rough diamonds were allowed to be displayed in these areas by foreign mining companies without creating a business connection, but as soon as they were sold, the protection was removed. This fills the gap and seeks to bring global mining companies to sell directly in India's diamond centres and not through overseas trading centres. These zones are worth a face-to-face meeting with any gems and jewellery import and sale client to restructure the import and sale flow.
The customs exemption for foreign companies for income from supply of capital goods and tooling to Indian contract manufacturers in customs bonded warehouses has been extended for 10 years to 2040-41 from the current period of 2020-21. It also adopts a narrower meaning of “specified electronic goods”– which includes mobile phones, laptops, tablets, servers and sub-assemblies and accessories.
New Entry 13G builds on this by ensuring that income from the sale of components held within a customs bonded warehouse, and sold to a contract manufacturer is exempt from tax from October 1, 2026. The contract manufacturer doesn't even require being a manufacturer for the same foreign company that provided the components, which is important where your clients have an integrated manufacturing system with multiple principals.
TOLA 2026 eliminates the provision in the old regulations where the SPV elected to the concessional tax regime under Section 200 would lose the dividend exemption of unit holders of the business trust. Happy news for REIT & InvIT investors. But the bill simultaneously raises the surcharge on SPVs using that concessional regime from 10% to 25%, the government's way of recovering revenue it's giving up elsewhere. Advise foreign clients on election of the tax regime for an SPV by modeling both sides.
TOLA 2026 is not a tax bill which just happens to impact cross-border transactions. It's mostly a cross-border investment bill in tax-speak. The G-Sec exemption is likely to change the dynamics of foreign portfolio investment inflows into the debt market, while the changes in the data centres and electronics eliminate structural workarounds put in place by FEMA consultants for years. A majority of these exemptions have restrictions on when and how prescribed forms and information are furnished which have yet to be communicated to clients, so it is important to be alert to the compliance requirements as they are likely to become relevant in the near future.