SEBI Directs Market Intermediaries to Update KYC and Tax-Reporting Systems

The Securities and Exchange Board of India (SEBI) has directed registered market intermediaries to update their Know Your Customer (KYC) and tax-reporting systems. Issued via a circular, the directive aims to ensure compliance with revised income tax rules and international financial account reporting requirements.

According to SEBI, registered intermediaries must incorporate Automatic Exchange of Information (AEOI) reporting and due diligence requirements directly into their customer onboarding and KYC frameworks. These directions follow the introduction of the Income-tax Act, 2025, and Income-tax Rules, 2026, which replaced the previous income tax framework effective April 1, 2026.

Under the updated framework, reporting requirements for accounts covered under the Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS) have been revised. FATCA is a US tax compliance framework, whereas CRS serves as an international standard for exchanging financial account information between participating jurisdictions to prevent tax evasion.

SEBI stated that all registered intermediaries acting as Reporting Financial Institutions (RFIs) must take necessary steps to comply with Rules 238 to 240 of the IT Rules, 2026. The regulator has instructed intermediaries to review and update several internal processes, including customer self-certification procedures, systems for identifying controlling persons, and account classification processes that distinguish between existing and new accounts.

Additionally, intermediaries must update their reporting software to incorporate mandatory fields under Form 166 of the revised rules. SEBI warned that failure to include these required fields will result in validation errors on the Income Tax portal.

The regulator further mandated that intermediaries upload FATCA and CRS certifications collected from clients directly to the systems of KYC Registration Agencies (KRAs). SEBI clarified that the sole onus of obtaining and reporting FATCA and CRS certifications, alongside related compliances, lies with the respective intermediaries.

This latest directive builds upon SEBI’s earlier circulars issued in August 2015, September 2015, and February 2024 regarding FATCA and CRS reporting requirements. Intermediaries have also been advised to consult the Central Board of Direct Taxes’ guidance note on FATCA and CRS, issued on July 24, 2026, to ensure full compliance with the revised regulations.

"This regulatory update by SEBI marks a critical compliance shift for market intermediaries operating in India. With the implementation of the new income tax rules and revised AEOI frameworks, financial institutions must prioritize upgrading their internal software, customer onboarding procedures, and KRA integration. Ensuring accuracy in Form 166 and adhering strictly to FATCA and CRS guidelines will be essential to avoid portal validation errors and maintain regulatory standing." — Dr. Shishir Gupta, Founder & CEO, StartupLanes