SEBI Tightens KYC Norms for Financial Firms Under New Tax Reporting Rules

India's market regulator, the Securities and Exchange Board of India (SEBI), has directed financial intermediaries to strengthen their Know Your Customer (KYC) procedures and upgrade tax reporting systems. The move aims to ensure compliance with updated international tax disclosure requirements and improve transparency in financial transactions.

In a circular issued on November 11, 2026, SEBI instructed registered intermediaries classified as Reporting Financial Institutions (RFIs) to incorporate revised Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standard (CRS) requirements into their customer onboarding, verification and reporting processes.

The updated instructions follow the introduction of the Income-Tax Act, 2025, and Income-Tax Rules, 2026, which replaced the previous tax legislation with effect from April 1, 2026. Financial institutions will now need to make changes to their existing systems, documentation procedures and reporting software to meet the revised requirements.

New Tax Reporting Framework Under SEBI's Directions

The revised tax reporting framework introduces updated compliance requirements for financial institutions handling reportable financial accounts.

Under the new provisions, financial account reporting obligations are covered by Section 508 of the Income-Tax Act, 2025, Rules 238 to 240 and Form 166. These provisions establish the requirements for collecting, verifying and submitting financial account information.

Understanding FATCA and CRS Requirements

The Foreign Account Tax Compliance Act (FATCA) is a US law designed to prevent tax evasion by American taxpayers who hold financial assets outside the United States. It requires participating financial institutions to identify relevant account holders and report specified financial information.

The Common Reporting Standard (CRS), on the other hand, provides a framework through which participating countries automatically exchange financial account information. This helps tax authorities identify undeclared overseas financial assets and address potential cross-border tax evasion.

By updating these reporting requirements, SEBI aims to ensure that Indian financial intermediaries follow the latest international standards for financial information disclosure.

Changes in Customer Self-Certification

SEBI has directed financial institutions to revise their customer self-certification procedures to collect additional information and verify the validity of declarations.

The updated process will also improve the identification of individuals who exercise control over financial accounts. These may include:

• Settlors

• Trustees

• Protectors

• Beneficiaries

• Other controlling persons

Collecting accurate information about these individuals will help financial institutions establish account ownership and control more effectively.

Financial Institutions Must Upgrade KYC Systems

The new instructions require financial intermediaries to make important changes to their existing KYC and account management systems.

Updated Account Classification Procedures

Financial firms must modify their account classification systems to clearly distinguish between existing accounts and newly opened accounts. They must also capture the relevant account categories required under the revised reporting framework.

These changes are expected to improve the accuracy of customer records and make it easier for institutions to identify accounts that fall under international tax reporting requirements.

Mandatory Changes to Form 166 XML Software

Another important requirement involves upgrading the software used to generate Form 166 XML files.

Financial intermediaries must incorporate all newly mandatory reporting fields into their existing systems. SEBI has cautioned that missing or incomplete information could result in validation errors when institutions submit their reports through the Income Tax portal.

Therefore, firms will need to review their reporting software and ensure that the updated formats and information requirements are properly implemented.

FATCA and CRS Certifications Must Be Uploaded to KRAs

SEBI has also instructed financial intermediaries to upload FATCA and CRS certifications collected from customers to the systems maintained by KYC Registration Agencies (KRAs).

This requirement is intended to improve the availability and accessibility of customer certification records and strengthen the overall reporting process.

Financial Intermediaries Remain Responsible for Compliance

SEBI has clearly stated that the responsibility for meeting the revised requirements will remain with the respective financial intermediaries.

This means that firms must ensure that customer certifications are collected correctly, information submitted to the relevant authorities is accurate, and all applicable regulatory requirements are followed.

Uploading customer documents to KRA systems does not transfer the compliance responsibility to the agencies. Financial institutions must continue to maintain proper verification and reporting procedures.

Why the Revised KYC and Tax Reporting Rules Matter

The updated requirements are part of India's efforts to strengthen financial transparency and improve the accuracy of international tax information exchange.

For financial intermediaries, the changes will require investments in technology, updated customer verification processes and improvements to existing reporting infrastructure.

The revised framework may also help reduce information gaps, improve the identification of controlling individuals and support better cooperation between tax authorities across countries.

Conclusion

SEBI's revised KYC and tax reporting directions highlight the growing importance of accurate customer information and international financial transparency. By requiring financial intermediaries to upgrade their FATCA and CRS processes, account classification systems and Form 166 reporting software, the regulator aims to improve compliance with the updated tax framework.

Financial institutions will need to review their existing systems and procedures to meet these requirements. The changes are expected to strengthen India's financial reporting mechanisms and bring them closer to evolving international tax disclosure standards.