CBDT Notifies Income-tax Rules 2026: What Companies & Foreign Investors Must Know

Ahead of the April 1 transition, India has officially notified the Income-tax Rules, 2026, operationalizing the Income-tax Act, 2025, and marking a shift to a modernized tax framework. The broader reform simplifies and reorganizes the tax code, reducing the number of sections in the Act, while the rules introduce structured, formula-based Fair Market Value (FMV) methodologies for cross-border transactions.

For international investors, the framework provides greater clarity on Significant Economic Presence (SEP) thresholds and digital taxation.

Income tax applicability

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The rules have been issued by the CBDT, the official authority for regulating direct taxation under the Union Ministry of Finance. The rules will be governed under the Income-tax Act, 2025, which was announced in August 2025. Both the new Act and Rules will come into effect on April 1, 2026, officially replacing the Income-tax Act, 1961, and Income-tax Rules, 1962. 

These rules replace earlier procedural systems and establish a modernized tax administration framework.

Strengthened corporate governance and dividend rules

The new income tax rules impose tighter controls on dividend declaration and distribution. Companies are now required to:

• Maintain shareholder registers within India
• Conduct annual general meetings (AGMs) domestically
• Ensure dividend payments are made only within India

This framework reinforces domestic regulatory oversight and ensures that dividend-related activities remain within the Indian tax jurisdiction.

Enhanced stock exchange compliance framework

To improve transparency and accountability in financial markets, stricter conditions have been introduced for recognized stock exchanges. These include:

• Mandatory approval from Security Exchange Board of India (SEBI)
• Maintenance of detailed client information, including Permanent Account Number (PAN) and unique IDs
• Preservation of transaction audit trails for seven years
• Restrictions on deletion or modification of trade records (except in genuine cases)
• Submission of monthly reports on modified transactions

These measures are aimed at strengthening data integrity and monitoring of trading activities, particularly in derivatives markets.

Clarity on capital gains and holding period

The new income tax rules provide detailed guidance for determining the holding period of capital assets, particularly in complex and previously ambiguous scenarios. These clarifications help ensure consistent classification of gains as short-term or long-term at the time of taxation.

Converted securities

The holding period now includes the time for which the asset was held before conversion (for example, conversion of debentures into shares). This ensures that taxpayers are not disadvantaged due to a change in the form of the asset.

Declared assets under the Income Declaration Scheme (IDS) 2016

• Immovable property: The holding period is counted from the original date of acquisition.
• Other assets: The holding period is considered from June 1, 2016 (the date linked to the IDS framework).
  This distinction provides clarity on legacy assets disclosed under the scheme.

Cross-border restructuring

In cases where assets are transferred from a foreign branch to an Indian entity (such as during corporate restructuring), the holding period includes the duration for which the asset was held by the foreign entity prior to the transfer.

In addition to the above, the rules also align the classification of capital gains with the nature and status of the asset at the time of taxation, particularly in cases involving pooled or pass-through structures. This reduces ambiguity where multiple asset types or ownership layers are involved.

Zero-coupon bonds

A dedicated framework has been introduced for zero-coupon bonds, particularly to support infrastructure financing. Key conditions include:

• Minimum tenure of 10 years and maximum of 20 years
• Requirement of investment-grade ratings from at least two credit rating agencies
• Mandatory listing on a recognised stock exchange
• Phased deployment of funds within specified timelines
• Annual compliance certification

Additionally, issuers must apply at least three months prior to issuance, reflecting a more controlled approval process.

Determination of income in case of non-residents

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The new tax rules provide a method for determining the taxable income of non-residents in situations where the exact income earned from India cannot be clearly identified.

If the tax officer (assessing officer) believes that the actual income earned by a nonresident from India cannot be precisely calculated, whether it arises from:

• Assets or income sources located in India
• Property situated in India
• Business connections or operations in India

Then the officer has the authority to estimate the income using reasonable methods.

Methods of estimation

In such cases, the income may be calculated using one of the following approaches:

1. Percentage of turnover: The officer may apply a reasonable percentage to the revenue generated from India to estimate taxable income.
2. Proportion of global profits: Income may be determined based on the share of Indian receipts relative to the company’s total global receipts, and then applying that ratio to overall profits.
3. Any other reasonable method: The officer may use an alternative method if it better reflects the income attributable to India.

Also Read: NRI’s Guide to Lower or Nil TDS Certificate

Taxation of digital economy

To address challenges posed by digital and remote business models, the rules define thresholds for establishing a sizeable economic presence in India. A non-resident entity may be subject to Indian taxation if it:

• Earns INR 20 million or more from Indian transactions, or
• Engages with 300,000 or more users in India

This expands the tax base to include digital businesses operating without a physical presence.

Standardized valuation and fair market value rules

The rules introduce a more uniform and structured framework for determining the fair market value (FMV) of assets across various scenarios. The objective is to ensure consistent valuation practices and reduce ambiguity, particularly in cross-border transactions.

Under the revised approach:

Listed shares: Valued based on observable market prices on recognized stock exchanges. Where shares are listed on multiple exchanges, the price from the exchange with the highest trading volume is considered to ensure accuracy.

Unlisted shares: Valued using internationally accepted valuation methodologies by a qualified merchant banker or accountant, ensuring alignment with global valuation standards.

Foreign entities: The valuation is determined based on the overall value of the entity, typically combining:

• Market capitalization (based on transaction value or stock price, where applicable), and,
• Book value of liabilities

In cases where shares are unlisted, a professional valuation is required. For listed entities, market-based pricing is used, while private transactions may rely on the actual deal value.

Key takeaways

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The Income-tax Rules, 2026, place a strong emphasis on transparency, standardization, and digitization, supported by enhanced reporting requirements and data-driven compliance systems. This shift is further reinforced by tighter corporate governance norms, including stricter dividend regulations and strengthened oversight of stock exchanges.

At the same time, the rules introduce greater clarity in critical areas such as capital gains classification and holding periods, helping reduce ambiguity in complex transactions. Parallelly, expanded provisions on non-resident taxation and significant economic presence enhance India’s ability to effectively tax cross-border and digital business activities.

In addition, the introduction of standardized FMV rules ensures greater consistency in asset valuation, particularly in international and multi-jurisdictional transactions.

Overall, the new framework establishes a more predictable yet compliance-intensive tax environment, requiring businesses to prioritize accurate reporting, robust documentation, and alignment with global best practices.

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