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India has proposed tax changes to protect offshore investment funds from Indian liabilities when they appoint local fund managers. The measures form part of the Taxation and Other Laws Amendment Bill, 2026.
The government says the rules seek ‘to promote fund management activity and provide tax certainty.’ The proposal comes as India tries to attract foreign capital after overseas outflows and rupee pressure. Investors have raised concerns about aggressive tax administration.
Current safe harbour rules set conditions on fund size, ownership, investor numbers, and portfolio concentration. They also limit domestic participation and links with Indian businesses. Funds that fail these tests may create a taxable Indian business connection through their local manager. Some India-sourced profits can face tax rates of up to 38%.
The draft bill would remove eight of the existing 13 eligibility conditions. It would end minimum corpus tests, investor thresholds, ownership caps, and several portfolio restrictions. Funds could then appoint India-based managers without triggering tax solely through that arrangement. Fund size and investor concentration would no longer decide safe harbour access.
However, the government would retain five safeguards. Indian residents could not directly hold more than 5% of a fund’s corpus on testing dates. The fund must remain non-resident and cannot control an Indian business. These limits aim to keep locally controlled structures outside the exemption.
Offshore funds have often struggled with India’s current safe harbour rules. Many global funds use concentrated ownership structures or strategies that fail the existing tests. The proposed framework would focus on activities and control. It would also align eligibility rules for funds using India’s International Financial Services Centre.
Girish Vanvari of Transaction Square said the proposal had ‘substantially reduced the risk’ of a taxable connection. The government expects the change to support domestic financial services.
Nehal Sampat, a PricewaterhouseCoopers partner, said the measure would help offshore funds hire onshore managers. EY India’s Tejas Desai said the changes would offer more flexibility for global structures.
Moreover, the proposal supports India’s broader effort to bring more fund management activity onshore. Finance Minister Nirmala Sitharaman said in June that India needed more foreign capital.
The bill also proposes tax measures for electronics contract manufacturing. It would extend the existing five-year exemption by ten years, taking eligible relief through 2040-41.
Foreign companies supplying capital goods, equipment, or tooling to Indian electronics manufacturers could use the exemption. Certain component sales through customs-bonded areas would also qualify.
Additionally, specified foreign companies trading rough diamonds in notified special zones could receive a 15-year tax holiday. Eligible firms include miners, brokers, aggregators, sightholders, and auction operators.
The government also proposes simpler data centre rules. Eligible facilities could operate through ownership or leasing, matching commercial structures. The draft would remove separate central government notifications in some cases. This would reduce procedural steps for foreign companies buying eligible data centre services.
Finally, the bill would replace a June ordinance for foreign portfolio investors in government securities. That measure exempted qualifying interest income and capital gains from Indian tax. The government circulated the draft among lawmakers and may introduce it in Parliament this week. The measures require parliamentary approval before taking effect.
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