The Finance Bill, 2026 proposes a targeted tax exemption to encourage electronic manufacturing in India by providing certainty to foreign suppliers of capital equipment. Under the proposed amendment to Schedule IV of the Income-tax Act, 2025, income earned by a foreign company from providing capital goods, equipment, or tooling to an Indian contract manufacturer will be exempt from tax up to the tax year 2030–31. The exemption applies where the contract manufacturer is a resident company located in a customs bonded area, as defined under section 65 of the Customs Act, 1962, and manufactures electronic goods on behalf of the foreign company for consideration. Key conditions include retention of ownership of the capital equipment by the foreign company and operational control by the Indian manufacturer. The measure is intended to remove tax uncertainty around cross-border supply of manufacturing assets, support contract manufacturing models, and strengthen India’s electronics manufacturing ecosystem. The amendment will take effect from 1 April 2026 and apply from tax year 2026–27 onwards.
Exemption to a foreign company on income arising on account of providing capital equipment etc. to an electronic goods manufacturer located in a custom bonded area
The existing provisions of section 11 read with Schedule IV of the Income-tax Act specifies the eligible income, which shall not be included in the total income of the eligible non-residents, foreign companies and other such persons.
2. In order to promote manufacturing of electronic goods by a contract manufacturer and provide certainty on taxation of supply of capital equipment by a foreign company to such manufacturer, it is proposed to amend the Schedule IV to provide exemption to a foreign company for a period upto the tax year 2030-2031, on any income arising on account of providing capital goods, equipment or tooling to a contract manufacturer, being a company resident in India, who is located in a custom bonded area (warehouse referred to in section 65 of the Customs Act, 1962) and produces electronic goods on behalf of such foreign company for a consideration.
3. These amendments will take effect from the 1st day of April, 2026 and shall accordingly, apply in relation to the tax year 2026-27 and subsequent tax years.
[Clause 109]
Extract of Relevant Clauses of Finance Bill, 2026
Clause 109 of the Bill seeks to amend Schedule IV of the Income-tax Act, 2025 relating to income not to be included in total income of eligible non-residents, foreign companies and other such persons.
Schedule IV to the said Act specifies the eligible income, which shall not be included in the total income of the eligible non-residents, foreign companies and other such persons.
It is proposed to amend the said Schedule to provide exemption to a foreign company on income arising on account of providing capital goods, equipment or tooling to a contract manufacturer, being a company resident in India, who is located in a custom bonded area, that is, a warehouse referred to in section 65 of the Customs Act, 1962 and produces electronic goods on behalf of the foreign company for a consideration. The said exemption shall be provided up to the tax year 2030-2031.
It is further proposed to amend the said Schedule so as to provide exemption to an individual, being a non-resident for a period of five consecutive tax years immediately preceding the tax year during which he visits India for the first time for rendering services in India in connection with any scheme as may be notified by the Central Government, on any income which accrues or arises outside India, and is not deemed to accrue or arise in India, for five consecutive tax years commencing from the first tax year during which he visits India, if such person renders any service in India in connection with any scheme as may be notified by the Central Government and fulfils such other conditions, as may be provided by rules.
It is also proposed to amend the said Schedule so as to provide exemption to a foreign company, on any income accruing or arising in India or deemed to accrue or arise in India by way of procuring data centre services from a specified data centre, for a period up to tax year ending on 31st March, 2047, subject to the conditions specified therein.
It is also proposed to insert Note 3 so as to define the expressions “data centre”, “data centre services” and “specified data centre” for the purposes of the said provision in serial number 13C.
These amendments will take effect from 1st April, 2026 and will, accordingly, apply in relation to the tax year 2026-2027 and subsequent years.
Extract of Relevant Amendment Proposed by Finance Bill, 2026
109. Amendment of Schedule IV.
In Schedule IV to the Income-tax Act,––
(a) in the Table, after serial number 13 and the entries relating thereto, the following shall be inserted, namely:––
| A | B | C | D |
| 13A. | Any income arising on account of providing capital goods, equipment or tooling to a contract manufacturer, being a company resident in India, for use in electronic manufacturing in India. | A foreign company, who is providing capital goods, equipment or tooling to the contract manufacturer. | (a) Ownership of such capital goods, equipment or tooling remains with the foreign company;(b) such capital goods, equipment or tooling is under the control and direction of the contract manufacturer;
(c) the contract manufacturer is located in a custom bonded area, that is, a warehouse referred to in section 65 of the Customs Act, 1962 (52 of 1962); (d) the contract manufacturer produces electronic goods on behalf of the foreign company for a consideration; (e) such exemption shall be available up to the tax year 2030-2031. |
| 13B. | Any income which accrues or arises outside India, and is not deemed to accrue or arise in India. | An individual, being a non-resident for a period of five consecutive tax years immediately preceding the tax year during which he visits India for the first time for rendering services in India in connection with any scheme as may be notified by the Central Government. | (a) Such individual, during the relevant tax year renders any service in India in connection with any scheme as may be notified by the Central Government;(b) such exemption shall not be available beyond a period of five consecutive tax years commencing from the first tax year during which he visits India in connection with such scheme; and
(c) such other conditions, as may be prescribed. |
| 13C. | Any income accruing or arising in India or deemed to accrue or arise in India by way of procuring data centre services from a specified data centre. | A foreign company. | (a) Such foreign company is notified by the Central Government in this behalf;(b) such foreign company does not own or operate any of the physical infrastructure or any resources of the specified data centre;
(c) all sales by such foreign company to users located in India are made through a reseller entity being an Indian company; (d) such foreign company maintains and furnishes such information in such form and manner, as may be prescribed; and (e) such exemption shall be available up to tax year ending on the 31st March, 2047. |
(b) after Note 2 below the Table, the following Note shall be inserted, namely:––
‘Note 3: For the purposes of Sl.No.13C,––
(a) “data centre” means a dedicated secure space within a building or centralised location where computing and networking equipment is concentrated for the purpose of collecting, storing, processing, distributing or allowing access to large amounts of data;
(b) “data centre services” means the services provided by a data centre through the use of physical infrastructure including land, buildings, mechanical electrical power equipments, cooling system, security and information technology infrastructure including servers, computers, storage systems, operating systems, security solutions, network and associated software platforms, networking and other equipment, human resource in India;
(c) “specified data centre” means a data centre which is––
(i) set up under an approved scheme and is notified in this behalf by the Central Government in the Ministry of Electronics and Information Technology; and
(ii) owned and operated by an Indian company.’.
