Government proposes tax relief for offshore funds, electronics’ contract manufacturing

The proposed amendments are part of the Taxation and Other Laws (Amendment) Bill, 2026, which is yet to be tabled in Parliament, but has been circulated with the members. The government is likely to introduce it in Parliament this week.

For offshore funds, the government has proposed to remove the majority of the conditions — 8 out of 13 — for their activities to not constitute business income in India. Offshore funds will not be required to meet conditions such as minimum investor threshold of 25 members, maximum 10% participation interest for a single investor, restriction on investing more than 25% of the corpus in a single entity, restriction on investments in associate entities, and minimum monthly average corpus requirement of Rs 100 crore to avail tax exemption on global income.

Experts said with these amendments India’s fund management ecosystem will be in line with global structures. “It is encouraging that several safe harbour conditions which were out of sync with global fund structures are sought to be removed…these changes should give the much needed flexibility to fund managers and significantly enhance India’s competitiveness as a fund management destination for both India-focused and global investment strategies,” Tejas Desai, Partner and Financial Services Tax Leader, EY India, said.

Revised conditions

The offshore funds are now proposed to meet only five conditions which include not being a resident of India and not controlling and managing directly or indirectly any business in India. Further, the total investment in the fund, directly by Indian residents, should not exceed 5% of the corpus as on April 1 and October 1 of the tax year.

The amendments in eligibility conditions for offshore funds will create a uniform framework for funds in the International Financial Services Centre (IFSC) also. “These proposed 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,” Abheet Sachdeva, Partner – M&A Tax, Nangia Global, said.

The Bill also seeks to replace the Ordinance promulgated on June 5, which was brought amid pressure on rupee and foreign outflows, to provide tax exemption for interest income and capital gains made by foreign portfolio investors (FPIs) from investments in government securities. In June, the Indian government promulgated the Income-tax (Amendment) Ordinance, 2026, completely exempting FPIs from capital gains and withholding taxes on government securities.

In the statement of objects and reasons of the Bill, the government said the Ordinance was promulgated with the objective of mitigating the impact of external economic shocks, ensuring stability in the domestic economy and supporting key sectors affected by the prevailing global conditions by amending certain provisions. “Subsequent policy assessment in view of representations received from stakeholders after the enactment of the Finance Act, 2026 has indicated that, while the objective sought to be achieved through the Ordinance continues to remain relevant, additional taxation measures are necessary to comprehensively achieve the same objective,” it said.

Further, having regard to the continuing global developments and the need for a timely and coherent response, it is considered appropriate to incorporate these measures in the present Bill itself, it said.

Finance Minister Nirmala Sitharaman had in June said the measures announced by the RBI and Government on boosting foreign fund inflows is the “first step” to bringing back foreign capital and indicated more steps could be in the offing. “We recognise we need more foreign capital to come in,” Sitharaman had said.

The Bill also proposes a new tax exemption for foreign companies undertaking the storage and sale of electronic components through customs bonded areas, where such components are supplied to Indian contract electronics manufacturers.

Tax relief for data centres is also proposed in the Bill by expanding the definition of an eligible data centre to include facilities operated through ownership and leasing and removal of requirement for a separate central government notification for foreign companies procuring data centre services from specified data centres in India. “These changes significantly ease the eligibility conditions for claiming the exemption and align the tax framework with prevailing commercial practices in the data centre sector. By reducing procedural hurdles and recognising leased facilities, the proposal is expected to improve the ease of doing business, encourage investment in India’s digital infrastructure, and support the continued growth of the country’s data centre ecosystem,” Amit Maheshwari, Managing Partner, AKM Global, said.