India Income Tax Act 2025 for Foreign Companies: 2026 Guide | A2

By Nagavarapu Sudheer, M.Com., F.C.S., L.L.B., Partner, A2 Consultants

India's Income Tax Act, 2025 replaces the 1961 Act for tax years from 1 April 2026, and the Taxation and Other Laws (Amendment) Act 2026, which received presidential assent on 17 August 2026, adds targeted reliefs for foreign investors. For a foreign company already operating in India, or planning to enter, the headline question is simple: what changes in how we are taxed? The honest answer is that rates and core principles matter less than the new reliefs and the compliance detail around them.

A new Act, mostly familiar principles

Commentary from Indian law firms describes the 2025 Act as a re-codification: simplified language, restructured provisions and renumbered sections, rather than a fundamental redesign of how non-residents are taxed. For foreign companies this means that existing positions on residence, business connection, royalties, fees for technical services and transfer pricing continue to matter, but every reference in your agreements, tax opinions and compliance templates needs to be mapped to the new section numbering.

Practical action: ask A2consultants for a reference map of old-to-new provisions and update your intercompany agreements and tax-position memos accordingly.

Electronics contract manufacturing: relief extended to 2040-41

One of the most commercially significant changes is for foreign companies that use Indian contract manufacturers. According to India Briefing, the relief for electronics manufacturing has been extended through tax year 2040-41, previously 2030-31. It covers mobile phones, laptops, tablets, servers and related sub-assemblies, and applies to contract-manufacturing arrangements between foreign companies and Indian manufacturers.

The amendment also provides income exemptions for foreign companies that store components in bonded warehouses for Indian contract manufacturers. Why this matters: the fear of creating a taxable presence in India, a permanent establishment or business connection, is a common reason foreign brands hesitate to place inventory or direct production in the country. A longer, more certain window helps support long-term investment decisions.

Caveat: the relief is conditional. The structure of the contract, who owns inventory, who controls production decisions, and the conditions in the statute all matter. Do not assume your existing arrangement qualifies without a review.

Foreign investment funds and Indian fund managers

For fund structures, the Amendment Act provides a safe harbour so that eligible foreign investment funds using Indian fund managers can avoid being treated as having a business connection in India. Conditions reported include a cap of 5% on Indian-resident holdings of the fund's corpus, testing on 1 April and 1 October each tax year, and independence of the fund manager. Prescribed statements are due within 90 days of the end of the tax year. If you are a global fund or family office with India-based advisory resources, this deserves a structured review.

Other reported changes

• Interest and capital gains on government securities are exempt for foreign institutional investors and the Bank for International Settlements.

• Specified special-purpose vehicles in REIT/InvIT structures face a 25% rate, versus 10% for other domestic companies, in the reported provisions.

What foreign companies should do now

1. Re-check your India footprint

List every way your group touches India: subsidiary, branch, liaison office, secondees, dependent agents, contract manufacturers, inventory, and fund managers. For each, confirm the current tax treatment under the new Act.

2. Revisit transfer pricing documentation

Safe-harbour rules and TP documentation requirements continue under the new Act and rules. Ensure your benchmarking, intercompany agreements and Form filings are mapped to the correct provisions and deadlines.

3. Align tax with FEMA and GST

Tax is one layer. Royalties, management fees and dividends also trigger FEMA remittance rules and GST considerations, including reverse charge on services from a foreign parent. A decision that saves income tax but creates indirect-tax or FEMA friction is not a saving.

4. Build a compliance calendar

New filing dates, such as fund statements within 90 days, only help if someone owns them. Assign owners and diarise deadlines.

An illustrative scenario

Consider a European consumer-electronics brand that designs devices abroad and engages an Indian contract manufacturer to assemble them for domestic sale and export. The brand wants to ship sub-assemblies to India and hold them in a bonded warehouse near the factory. Before the extension of relief, the group had to weigh whether the inventory, its engineers visiting the plant, and its influence on production schedules could be argued to create a taxable presence. Under the extended relief, a properly structured arrangement may give far more certainty, but the brand still needs to document who owns what, who bears inventory risk, how pricing is set and what its visiting engineers actually do.

Common pitfalls we see

• Relying on old section references in agreements and tax opinions that no longer map to the new Act.

• Assuming relief is automatic. Conditions on ownership, activities and reporting must be met and evidenced.

• Overlooking secondees and visiting staff, whose activities can create exposure independent of the headline relief.

• Neglecting GST and customs when planning bonded storage and cross-border component flows.

The bottom line

The new framework is evolutionary for most foreign companies, but the reliefs for electronics contract manufacturing and fund structures are material opportunities for those who qualify, and the re-codification is a good moment to clean up documentation. Treat the reliefs as conditional and verify your facts against the statute.

Talk to A2 Consultants

A2 Consultants supports foreign companies with India international tax, transfer pricing, FEMA and GST planning. If you are planning an India structure or reviewing an existing one under the new Act, we can help you map the changes to your business.

Book a free 30-minute consultation with A2 Consultants at www.a2consultants.in or write to us through the contact page. We will review your plans and tell you, plainly, which structure and sequence fit your business.