What Happened
- The Central government notified the Income Tax Rules, 2026, implementing the Income-tax Act, 2025; the new compliance regime comes into force from April 1, 2026.
- For digital and remote businesses, the Significant Economic Presence (SEP) threshold is fixed at ₹2 crore in transactions or 3 lakh (300,000) users in India — bringing non-resident digital companies within India's tax net.
- Stricter corporate governance rules require companies to maintain share registers within India, hold AGMs domestically, and process dividend payments only within India.
- Stock exchanges must maintain audit trails for 7 years, prevent deletion of transaction records, and submit monthly reports on modified transactions to SEBI.
- Standardized, formula-based valuation rules have been introduced for listed shares, unlisted shares, foreign entities, and partnership interests to reduce disputes.
Static Topic Bridges
Significant Economic Presence (SEP) — Taxing the Digital Economy
The concept of SEP was introduced in India via the Finance Act 2018, inserting Explanation 2A into Section 9(1)(i) of the Income Tax Act, 1961. SEP allows India to tax non-resident digital businesses that earn income from Indian users or customers without maintaining any physical presence in India. The provision was operationalised by CBDT notification in May 2021, prescribing twin thresholds: transactions exceeding INR 2 crore, or systematic engagement with 3 lakh or more Indian users.
- Statutory basis: Section 9(1)(i) of the Income-tax Act (now carried forward in Act 2025)
- Revenue threshold: INR 2 crore aggregate payments from India in a financial year
- User threshold: 300,000 (3 lakh) users in India
- Operative from: Financial Year 2021-22
- Background: Developed alongside OECD BEPS Action Plan 1 (digital economy taxation); India is an active participant in Pillar One/Two global minimum tax discussions
Connection to this news: The Income Tax Rules 2026 re-codify and confirm the SEP thresholds as part of the comprehensive new compliance framework. This is significant for global tech firms — streaming platforms, app stores, social media companies — that generate revenue from Indian users without a permanent establishment in India.
Capital Gains Taxation — Holding Periods and Fair Market Value
Capital gains tax in India distinguishes between Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG) based on holding periods, which vary by asset class. The Income Tax Rules 2026 introduce standardized, formula-based Fair Market Value (FMV) rules to resolve long-standing disputes over the valuation of listed shares, unlisted shares, and foreign entity interests. The rules also clarify holding period calculation in complex restructuring scenarios.
- Listed shares LTCG threshold: held for more than 12 months (taxed at 12.5% above ₹1.25 lakh exemption under Act 2025)
- Unlisted shares LTCG: held for more than 24 months
- Listed shares FMV: based on highest-volume recognized exchange price
- Unlisted shares FMV: determined by qualified merchant bankers using internationally accepted methodologies
- Holding period for converted securities: includes pre-conversion tenure
Connection to this news: The standardized valuation framework removes discretion from assessing officers, reducing litigation — a major reform goal of the Income-tax Act 2025 which aims to cut disputes and create tax certainty for investors, including foreign portfolio investors.
Corporate Governance and Dividend Payment Rules
The Companies Act, 2013 and SEBI regulations mandate extensive corporate governance for listed entities. The new Income Tax Rules 2026 add a taxation layer to dividend governance — requiring share registers, AGMs, and dividend payments to remain onshore (within India). This prevents tax arbitrage by companies routing dividend declarations through foreign jurisdictions.
- Stock exchanges: must maintain 7-year audit trail; monthly reporting of modified transactions to SEBI
- Dividends: companies must hold general meetings and pay dividends only within India
- Non-resident income estimation: where actual Indian income is unclear, officers may estimate using percentage of turnover or proportion of global profits
- Zero-coupon infrastructure bonds: 10-20 year tenure, investment-grade rating from two agencies, listed on a stock exchange
Connection to this news: These provisions strengthen the link between India's direct tax and securities regulatory systems, closing leakage points that multinational corporations previously exploited. They complement SEBI's concurrent push on enhanced market transparency.
Key Facts & Data
- The Income-tax Act, 2025 replaces the Income Tax Act, 1961 (in force for 65 years)
- Effective date of Income Tax Rules 2026: April 1, 2026
- Old Act: 819 sections, 5.12 lakh words, ~1,200 provisos; New Act: 536 sections, 2.6 lakh words
- SEP revenue threshold: ₹2 crore in Indian transactions
- SEP user threshold: 3 lakh (300,000) Indian users
- SEP provisions operative since FY 2021-22 under CBDT notification (May 2021)
- Stock exchange audit trail retention: 7 years
- New concept: "Tax Year" replaces the old Assessment Year/Previous Year distinction
- Implementing authority: Central Board of Direct Taxes (CBDT) under Ministry of Finance