India's Lok Sabha has passed a significant tax bill that could fundamentally reshape the country's digital payment landscape, potentially introducing charges for merchants using UPI and RuPay debit cards. The Taxation and Other Laws (Amendment) Bill, 2026, approved on August 6, also includes provisions to simplify regulations for data centers and foreign fund managers, aiming to boost India's economic attractiveness.
Finance Minister Nirmala Sitharaman presented the bill on August 4, which also replaces a previous ordinance extending income-tax exemptions for foreign portfolio investors on government securities returns.
Potential for UPI Merchant Charges
Currently, banks and payment service providers are legally prohibited from levying any direct or indirect fees on UPI or RuPay debit card transactions. The new legislation, passed via a voice vote amidst opposition protests, severs the legal link between the Payment and Settlement Systems Act and the Income Tax Act that previously enforced this zero-charge model.
While the bill itself does not introduce specific merchant discount rates or fees, it grants the central government the explicit legal authority to determine, through notification, which electronic payment modes or transactions will continue to be free of charge. This opens the door for future government decisions regarding the introduction of merchant charges.
The stated objective behind this change is to foster a sustainable revenue model for banks, payment service providers, and the essential infrastructure companies supporting the digital payments ecosystem, while aiming to keep any potential charges on consumers and small businesses minimal.
Easing Rules for Foreign Fund Managers
Another key aspect of the bill is its effort to make India a more appealing base for global fund managers. It reduces the stringent conditions offshore funds must meet to avoid having their worldwide income taxed in India. This relaxation is expected to encourage fund managers overseeing global portfolios to relocate operations to India, attracting high-value work and employment opportunities.
The new provisions apply nationwide, including within the International Financial Services Centre (IFSC), offering fund managers greater flexibility in their setup locations. Experts like Deloitte India Partner Rajesh Gandhi and Nangia Global's Abheet Sachdeva anticipate these changes will significantly enhance India's onshore fund management ecosystem's allure for offshore funds.
Relief for REIT and InvIT Investors
The legislation also offers protection to small investors in business trusts, which pool capital into real estate and infrastructure assets through operating companies. Previously, dividends returned to investors were tax-free only if the operating company adhered to the older tax regime. As more companies transition to the newer, simpler tax structure, investors faced the risk of losing this benefit. The bill ensures that dividends remain tax-free even when the underlying company adopts the new tax framework, safeguarding ordinary investors from unintended tax consequences.
Boost for Data Centres and AI Infrastructure
The 2026-27 Budget had offered tax exemptions to foreign cloud companies utilizing Indian data centers until 2047, but practical application was hampered by multiple layers of government approvals. The new bill removes these approval requirements and, crucially, permits Indian data centers to operate on a lease basis rather than demanding direct ownership. This is projected to lead to a much larger and more flexible network of Indian data centers serving global cloud providers, significantly advancing India's ambition to build robust AI infrastructure.
Diamond Trade and Electronics Manufacturing Incentives
To attract a greater share of global rough diamond trading to India, the bill extends tax exemptions for foreign diamond miners and associated traders—including sight holders, brokers, aggregators, and auction houses—who sell rough diamonds in designated zones in Mumbai and Surat. This exemption is for a period of 15 years, allowing actual trade to occur, unlike the previous arrangement which only permitted display without tax liability. The goal is to establish India as a genuine hub for rough diamond commerce and cultivate a supporting financing ecosystem.
Furthermore, the bill extends an existing tax exemption for income earned by foreign companies supplying machinery and tools to Indian contract manufacturers of electronics (such as mobile phones, laptops, computers, tablets, and servers) by another decade, pushing it to 2040-41. This aims to bolster India's electronics manufacturing sector.