Government proposes easier tax rules for offshore funds managed from India
A draft Taxation and Other Laws (Amendment) Bill, 2026 proposes to relax the eligibility conditions offshore investment funds must meet to claim tax exemption on their global income when managed by a fund manager based in India.
The bill proposes to remove several existing conditions — including the requirement of a minimum monthly average corpus of ₹100 crore, a cap of 10% participation by any single investor, a 25% ceiling on investment in a single entity, and restrictions on investing in associate entities.
The reform also proposes a unified eligibility framework for offshore funds, removing the separate enabling provision that allowed different exemption conditions for funds operating from the International Financial Services Centre (IFSC) versus those outside it.
Separately, the draft bill proposes tax exemptions for foreign companies that store electronic components in India for supply to domestic manufacturers.
The stated objective is to provide greater tax certainty and make India's onshore fund management ecosystem more attractive to global fund managers and foreign capital.
Section 9A of the Income Tax Act, 1961 — The Fund Manager Regime
Section 9A was inserted by the Finance Act, 2015 to address the problem that a fund's presence would be deemed to arise in India (and thus become taxable) merely because its investment manager operated from India. It provides that fund management activity carried out in India by an "eligible fund manager" on behalf of an "eligible investment fund" will not, by itself, constitute a "business connection" in India for that fund, and the fund will not be treated as an Indian tax resident merely because its manager is based in India — provided the fund and the manager satisfy prescribed conditions (fund structure, investor diversification, arm's-length remuneration to the manager, etc.).
Key Details
- Introduced via the Finance Act, 2015, effective from Assessment Year 2016-17.
- Original conditions for an "eligible investment fund" include a minimum of 25 members not connected to each other, and caps such as no single investor holding more than 10% participation, and a minimum monthly average corpus (₹100 crore, other than in the first year of operation).
- Before this reform, funds operating from the IFSC (GIFT City) could be prescribed separate, generally more relaxed, exemption conditions than funds outside the IFSC.
The 2026 proposal amends Section 9A's conditions to remove several of these thresholds and unify the IFSC and non-IFSC regimes, directly reducing the compliance burden for offshore funds seeking the "no business connection" tax shield when managed from India.
"Business Connection" under Section 9(1)(i) of the Income Tax Act, 1961
Section 9 deems certain income to "accrue or arise in India" for non-residents, including income attributable to a "business connection" in India — a wider term than the treaty concept of "permanent establishment," covering any real and continuous business relationship yielding profit in India. Explanation 2A, inserted by the Finance Act, 2018, extended this to a "Significant Economic Presence" (SEP) test, taxing non-residents with substantial digital or transactional presence in India even without physical presence.
Key Details
- SEP provisions apply from Assessment Year 2019-20 (inserted by Finance Act, 2018).
- Without a carve-out like Section 9A, an offshore fund whose manager operates in India could be deemed to have a "business connection," exposing its global income to Indian tax.
The entire rationale for easing Section 9A conditions is to prevent offshore funds from being caught by the "business connection" rule under Section 9 simply because their managers are based in India — directly incentivising onshore (India-based) fund management.
International Financial Services Centre (IFSC) — GIFT City
An IFSC is a jurisdiction offering financial services to non-residents and residents (in permitted areas) in freely convertible foreign currency, with a distinct, more liberal regulatory regime. India's first IFSC is at GIFT City, Gujarat, regulated by the International Financial Services Centres Authority (IFSCA), a unified regulator established under the IFSCA Act, 2019.
Key Details
- IFSCA Act, 2019 created a single regulator for banking, capital markets, insurance, and fund management in IFSCs, replacing multi-regulator oversight (RBI, SEBI, IRDAI, PFRDA).
- Funds set up in GIFT City IFSC have historically enjoyed tax concessions to compete with offshore fund hubs like Singapore and Mauritius.
The proposed bill removes the specific provision allowing separate, IFSC-only exemption conditions, moving toward a single uniform framework applicable to eligible investment funds regardless of whether they are IFSC-based — a structural shift in how India differentiates (or no longer differentiates) IFSC funds from other onshore-managed offshore funds.
- The reform is proposed via the Taxation and Other Laws (Amendment) Bill, 2026, expected to be introduced in Parliament's Monsoon Session (week of August 3, 2026).
- Conditions proposed for removal: minimum monthly average corpus of ₹100 crore; single-investor participation cap of 10%; single-entity investment cap of 25% of corpus; restriction on investment in associate entities.
- Section 9A's "eligible investment fund" definition (as it currently stands) requires a minimum of 25 unconnected members.
- Section 9 SEP provisions (Explanation 2A) were inserted by the Finance Act, 2018, effective Assessment Year 2019-20.
- The bill also proposes tax exemption for foreign firms storing electronic components in India destined for domestic manufacturers, part of a broader push to strengthen India's electronics manufacturing supply chain.