SEBI Directs Market Intermediaries to Overhaul KYC and Tax Reporting Systems Under New Income Tax Rules — November 11, 2026
The Securities and Exchange Board of India (SEBI) has mandated that all registered capital market intermediaries update their Know Your Customer (KYC) frameworks and tax-reporting systems. The circular requires intermediaries that qualify as Reporting Financial Institutions (RFIs) to align their due diligence and data collection mechanisms with the newly notified Income-tax Act, 2025 and Income-tax Rules, 2026.
The regulatory overhaul centers on the Automatic Exchange of Information (AEOI) regime, which governs financial accounts covered under the United States' Foreign Account Tax Compliance Act (FATCA) and the OECD's Common Reporting Standard (CRS). These international reporting frameworks are designed to prevent offshore tax evasion by sharing financial account data between participating jurisdictions.
Mandatory Systemic Upgrades
In its circular issued under Section 11(1) of the SEBI Act, 1992, read with Rule 239(12)(a) of the Income-tax Rules, 2026, the markets watchdog directed intermediaries to ensure strict compliance with Rules 238 to 240. SEBI underscored that intermediaries must independently review and calibrate their operational and technological architecture.
Key Technology and Process Updates Ordered by SEBI:
- Self-Certification Verification: Intermediaries must upgrade their customer onboarding workflows to capture explicit validity indicators during client self-certification.
- Controlling Person Identification: Identification software must be reconfigured to record precise roles of controlling persons in non-individual entities, distinguishing specifically between settlors, trustees, protectors, beneficiaries, and other legal capacities.
- Account Classification Systems: Systems must be updated to automatically categorize account classifications, delineating between pre-existing accounts and newly opened accounts.
- Form 166 XML Generation: Intermediaries must overhaul their tax-reporting software to ensure Form 166 XML schemas include all newly designated mandatory fields. SEBI cautioned that any omission will trigger automated validation errors and rejection on the Income Tax Department's reporting portal.
Centralized Repository and Intermediary Liability
SEBI has also mandated that intermediaries upload all client FATCA and CRS self-certifications directly to the centralized systems of KYC Registration Agencies (KRAs).
The market regulator clarified that the legal onus of obtaining, verifying, and reporting accurate FATCA and CRS certifications lies solely with the respective market intermediaries. Stockbrokers, mutual fund houses, depository participants, and alternative investment funds cannot transfer this compliance responsibility to third-party verification agencies or distributors.
Implications for Market Participants
The directive introduces tighter customer onboarding checks across brokerage accounts, demat holdings, portfolio management services (PMS), and mutual funds.
Investors—particularly Non-Resident Indians (NRIs), High-Net-Worth Individuals (HNIs), and family trusts—will face more detailed inquiries regarding foreign tax residencies, cross-border business interests, and underlying beneficial ownership. Intermediaries are expected to roll out updated digital self-certification forms and outreach campaigns immediately to ensure legacy accounts and fresh onboarding comply with the revised tax rules without operational disruption.
