Clause 109 of the Finance Bill, 2026 proposes amendments to Schedule IV of the Income-tax Act, 2025, which specifies categories of income not to be included in total income of certain eligible non-residents, foreign companies and other specified persons. The amendment introduces three narrowly tailored exemptions, each aligned with a specific policy objective:
- Supporting electronics contract manufacturing in bonded zones,
- Providing tax certainty to non-resident individuals rendering services under notified government schemes, and
- Promoting long-term use of Indian data centre infrastructure by foreign companies.
All these changes apply from 1 April 2026, i.e. tax year 2026-27 onwards.
Legal Context: Schedule IV of the Income-tax Act, 2025
Schedule IV operates alongside section 11 of the Act and lists specific incomes that are excluded from total income, subject to conditions. These are exemptions by classification, not deductions, and apply only where each statutory requirement is fulfilled.
Clause 109 does not introduce a general exemption for non-residents; it inserts purpose-specific entries into Schedule IV.
Amendments Introduced by Clause 109
1. Exemption for Foreign Companies Supplying Capital Goods to Contract Manufacturers
Scope of Exemption
Schedule IV is proposed to be amended to exempt income of a foreign company arising from:
- providing capital goods, equipment or tooling,
- to a contract manufacturer, being a company resident in India,
- located in a customs bonded area, i.e. a warehouse referred to in section 65 of the Customs Act, 1962,
- where the manufacturer produces electronic goods on behalf of the foreign company,
- for a consideration.
Time Limitation
- The exemption is available up to tax year 2030-31.
Implications
- Facilitates contract manufacturing without permanent asset transfer
- Reduces tax friction in electronics supply chains
- Confined to bonded manufacturing, ensuring customs and regulatory control
- Does not exempt profits from sale of goods, only income from providing capital goods/equipment/tooling
2. Exemption for Non-Resident Individuals Rendering Services under Notified Schemes
Who Is Eligible
An individual who:
- has been a non-resident for five consecutive tax years immediately preceding the year of first visit to India, and
- visits India for the first time to render services in connection with a scheme notified by the Central Government.
Nature of Exempt Income
- Income accruing or arising outside India,
- which is not deemed to accrue or arise in India under the Act.
Duration
- Exemption available for five consecutive tax years,
- commencing from the first tax year of visit to India,
- subject to fulfilment of conditions prescribed by rules.
Implications
- Provides tax certainty for globally mobile experts
- Encourages participation in strategic or government-notified schemes
- Does not exempt Indian-source income or income deemed to accrue in India
- Residence status rules continue to apply independently
3. Exemption for Foreign Companies Procuring Data Centre Services in India
Scope of Exemption
Schedule IV is further amended to exempt income of a foreign company:
- 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.
Validity Period
- Exemption available up to the tax year ending 31 March 2047.
Definitions Introduced
A new Note 3 is proposed to define:
- “data centre”,
- “data centre services”, and
- “specified data centre”, for the purposes of this exemption.
Implications
- Provides long-term tax certainty aligned with data infrastructure investment horizons
- Encourages global enterprises to host and process data in India
- Exemption is service-specific, not entity-wide
- Subject to compliance with conditions in Schedule IV and rules
Summary of New Exemptions
Clause 109: Schedule IV Additions
| Category | Eligible Person | Nature of Exempt Income | Time Limit |
| Contract manufacturing support | Foreign company | Income from providing capital goods/ equipment/ tooling | Up to FY 2030-31 |
| Notified schemes | Non-resident individual | Foreign-source income (not deemed Indian income) | 5 years from first visit |
| Data centre services | Foreign company | Income from procuring data centre services in India | Up to 31 March 2047 |
What the Amendment Does and Does Not Do
What It Does
- Introduces targeted, purpose-linked exemptions
- Provides time-bound tax certainty
- Supports electronics manufacturing, talent inflow and data infrastructure
What It Does Not Do
- ❌ Does not grant blanket exemption to non-residents or foreign companies
- ❌ Does not exempt Indian-source income unless expressly provided
- ❌ Does not override PE, source or attribution rules beyond Schedule IV
Effective Date
✔ 1 April 2026
✔ Applicable from tax year 2026-27 onwards
Conclusion
Clause 109 of the Finance Bill, 2026 carefully expands Schedule IV exemptions to address specific economic priorities, electronics manufacturing, specialised foreign talent engagement, and long-term data centre capacity. The exemptions are precisely scoped, conditional, and time-limited, reflecting a calibrated policy approach rather than broad tax relief.
The amendment strengthens India’s positioning as a manufacturing, services and digital infrastructure destination, while maintaining the integrity of the income-tax framework.
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