Laws and regulation

Draft for review: sources checked 21 Oct 2026.

This guide lists the laws and regulations that most often bear on a foreign company setting up a capability centre in India. Each is stated as a rule, with its source and the date of that source, and never as a conclusion about your case. This is general information, not legal or tax advice; take advice on your facts. Each section links the deeper GCC Vector guide where one exists.

Incorporate under the Companies Act 2013

A private company may be formed by two or more persons (Companies Act 2013, s.3(1)(b)). It must have at least two directors, and every company must have at least one director who stays in India for a total period of not less than 182 days during the financial year (s.149(1) and (3)).

Structures other than a wholly owned subsidiary, namely a limited liability partnership, a branch or liaison office, an IFSC unit and build-operate-transfer, are compared in Entity structures. The incorporation sequence is in the India entry primer.

Check the foreign investment route before you capitalise

Foreign investment is permitted up to 100% on the automatic route, subject to applicable laws, security and other conditions, in sectors or activities not listed in Schedule I of the Non-debt Instruments Rules and not prohibited (RBI Master Direction on Foreign Investment, updated up to 15 June 2026, para 5.2.3).

An entity or citizen of a country that shares a land border with India, or an investor whose beneficial owner is a citizen of such a country, may invest only under the Government route (same Master Direction, para 3.2). Check the beneficial ownership of every investing entity in the chain before you plan the first capital injection.

Report foreign investment on time

An Indian company that issues equity instruments to a person resident outside India, where the issue counts as foreign direct investment, reports it in Form FC-GPR not later than thirty days from the date of issue (FEMA 395/2019-RB, amended up to 13 June 2026, reg 4(1)). A company that has received foreign direct investment in the previous year, including the current year, submits the annual return on foreign liabilities and assets to the Reserve Bank on or before 15 July each year (reg 4(2), same regulations).

Where these filings fall in the first months of a new centre is set out in The first ninety days.

Price intercompany services at arm's length

Income from an international transaction is computed having regard to the arm's length price (Income-tax Act 1961, s.92(1)). From 1 April 2026 the Income-tax Act, 2025 replaces the 1961 Act (Union Budget 2026-27 speech, para 99). KPMG reports that the CBDT notified the final Income-tax Rules, 2026 on 20 March 2026, effective 1 April 2026, and that Form 48 replaces Form 3CEB for reporting arm's length prices (KPMG, 26 March 2026).

On safe harbour, the Budget 2026-27 speech (paras 124 to 127) proposed a single Information Technology Services category covering software development, IT-enabled services, knowledge process outsourcing and contract R&D, with a common safe harbour margin of 15.5%, a threshold raised from 300 crore rupees to 2,000 crore rupees, automated approval and continuation for five years at the company's choice. KPMG reported that the draft rules published in February 2026 set the 15.5% margin on operating expenses and a five-year validity (KPMG, 11 February 2026). This guide has not read the notified rule text; confirm the final terms before you elect safe harbour.

Keep permanent establishment risk in view

In the transfer pricing chapter of the 1961 Act, a permanent establishment includes a fixed place of business through which the business of the enterprise is wholly or partly carried on (Income-tax Act 1961, s.92F(iiia)). This guide has not confirmed the corresponding provision of the Income-tax Act, 2025, and whether a foreign parent has a permanent establishment in India also turns on the tax treaty between India and the parent's country. The questions counsel will ask about seconded staff and reporting lines are in Entity structures.

Track the labour codes and the state rules under them

The four labour codes came into effect on 21 November 2025, replacing 29 central labour laws (DD News, 21 November 2025). The central government notified final central rules under all four codes on 8 May 2026; EY notes that they apply immediately to establishments for which the central government is the appropriate authority, and that state rules were still awaited (EY, 10 May 2026).

Status as of the July 2026 Khaitan & Co employment law bulletin: the central government notified the Employees' Provident Fund Scheme, 2026 and related schemes under the Code on Social Security on 29 June 2026; Andhra Pradesh, Bihar and Gujarat had released final rules under all four codes; Rajasthan and Sikkim had notified final rules under one or two; and states including Karnataka, Maharashtra, Telangana and Tamil Nadu had released draft rules under some or all of the codes for consultation (Khaitan & Co, July 2026).

Because state rules are at different stages, read the current rules of the state you choose as well as the central rules. The first ninety days lists the registrations that usually come first.

Map personal data obligations under the DPDP Act

Under the Digital Personal Data Protection Act, 2023, the central government may by notification restrict the transfer of personal data by a Data Fiduciary for processing to such country or territory outside India as it notifies (DPDP Act 2023, s.16(1)). The provisions of Chapter II (except sections 8(1) and 8(5)), Chapter III and section 16 do not apply where personal data of Data Principals not within the territory of India is processed under a contract with a person outside India by a person based in India (s.17(1)(d)). How far that exemption reaches for a centre that also handles Indian residents' data is a question for counsel.

The government notified the DPDP Rules, 2025 on 14 November 2025 with an 18-month phased compliance timeline, and the Rules require Consent Managers to be Indian companies (PIB, 14 November 2025). In January 2026 MeitY consulted large technology firms on shortening some of those timelines, and the proposal was reported as pending approval (Takshashila Institution, 26 January 2026). This guide has not confirmed whether any change to the timeline has been notified.

Know the zone schemes: SEZ, STPI and GIFT IFSC

SEZ units are required to achieve positive net foreign exchange, calculated cumulatively for a period of five years from the commencement of production (SEZ India, FAQ). The income tax exemption on export income for SEZ units under section 10AA of the 1961 Act carries a sunset clause for units effective from 1 April 2020 (SEZ India, facilities and incentives).

The STP scheme is a 100% export-oriented scheme for the development and export of computer software, including professional services delivered over communication links. An STP unit may be set up anywhere in India, 100% foreign equity is permitted, imports of hardware and software are duty free, and the export performance norm is positive net foreign exchange earnings (STPI, STP scheme page, last updated 23 January 2021).

In GIFT City, IFSCA issued the Global In-House Centres Regulations, 2025 on 24 December 2025, repealing the 2020 regulations, and published FAQs on them on 13 February 2026 (IFSCA). SCC Online reports that only entities classified as a Financial Institution Group may apply, that a GIC serves non-resident entities of the group, and that the regulations came into force on 29 December 2025 (SCC Online, 5 January 2026). The full route is in Setting up in GIFT City, and state schemes are in State incentives for capability centres.

Understand the GST position on exported services

A zero-rated supply includes an export of services, and a registered person making a zero-rated supply may supply under bond or Letter of Undertaking without payment of integrated tax and claim a refund of unutilised input tax credit (IGST Act 2017, s.16(1) and (3)). Whether a centre's services to its parent are an export depends on every condition in the IGST Act's definition of export of services being met.

The Finance Act, 2026 omitted section 13(8)(b) of the IGST Act, so the place of supply of intermediary services now follows the default rule in section 13(2), which looks first to the location of the recipient. Grant Thornton Bharat reports that the omission takes effect from 30 March 2026, and that such services qualify as exports only where all the conditions of section 2(6) are satisfied (Grant Thornton Bharat, 4 April 2026).

Check before you rely on this

• Statute text for the Companies Act and the Income-tax Act is cited from reproductions (Corporate Law Reporter, Indian Kanoon) because the official MCA and income tax sites refused our fetcher.
• The safe harbour terms in the Budget 2026-27 speech are proposals as stated there, and the KPMG summary is of draft rules; read the notified Income-tax Rules, 2026 before electing.
• The section numbers of the Income-tax Act, 2025 that replace sections 92 and 92F of the 1961 Act (s.92F) have not been confirmed here.
• The DPDP compliance timeline: whether the shortening discussed in January 2026 has been notified is unconfirmed.
• State labour rules change month to month; the status above is as of the July 2026 bulletin.
• GIFT IFSC eligibility is from SCC Online's report, not from the regulation text, which the gift city guide discusses in more detail.