Government proposes to ease tax relief conditions for offshore funds
The government has circulated a Bill among Members of Parliament proposing to relax the eligibility conditions offshore funds must meet to be treated as an "eligible investment fund" for tax purposes.
The Bill is expected to be introduced in the Lok Sabha as the Taxation and Other Laws (Amendment) Bill, 2026.
It is also intended to replace an Ordinance promulgated earlier to exempt foreign institutional investors from withholding tax on investments in government securities.
The proposed changes remove a separate enabling provision that allowed different exemption conditions for funds operating from International Financial Services Centres (IFSCs) versus other offshore funds, moving toward a single, uniform eligibility framework.
Section 9A of the Income-tax Act — Offshore Fund Safe Harbour
Section 9A was inserted into the Income-tax Act to address the "business connection" and "residency" risk faced by offshore investment funds whose fund managers operate from India. It provides that the fund management activity of an eligible fund manager acting for an eligible investment fund does not, by itself, constitute a business connection in India, and the offshore fund is not treated as India-resident merely because its manager is based in India.
Key Details
- Introduced to encourage offshore fund managers to relocate to India (including GIFT City/IFSC) without triggering adverse tax residency consequences for the funds they manage
- Conditions historically included: minimum 25 investors in the fund, no single investor holding more than 10% participation, aggregate participation of 10 or fewer investors capped at 50%, a monthly average corpus of at least ₹100 crore (except in the first year), restrictions on investment concentration in a single entity/associate entities, and residency in a jurisdiction with which India has a Double Taxation Avoidance Agreement
- Aggregate participation by India-resident persons in the fund is capped (around 5% of corpus) to preserve its "offshore" character
- Eligible fund managers must be SEBI-registered as portfolio managers/investment advisers and file an annual compliance statement within 90 days of the financial year-end
The current Bill proposes to relax or remove several of these numerical eligibility conditions (investor count, participation caps, corpus thresholds), directly amending the Section 9A safe-harbour framework to make it easier for offshore funds — including those in IFSCs — to qualify for the exemption.
Money Bill vs Ordinary Bill — Article 110 and Article 117
The Constitution distinguishes a "Money Bill" (Article 110), which deals exclusively with specified fiscal matters (taxation, government borrowing, Consolidated Fund appropriations) and can only be introduced in the Lok Sabha with the Speaker's certification, from an ordinary "Financial Bill" (Article 117), which may contain fiscal provisions alongside other matters and can be introduced in and must be passed by both Houses.
Key Details
- Article 110(1) lists the specific matters (imposition/abolition/regulation of a tax, borrowing by government, Consolidated Fund/Contingency Fund matters, etc.) that qualify a Bill as a Money Bill
- A Money Bill requires only the Speaker's certificate; the Rajya Sabha can merely recommend changes within 14 days, which the Lok Sabha may accept or reject
- Taxation Bills that combine amendments to multiple laws (like a "Taxation and Other Laws (Amendment) Bill") are typically classified based on whether their provisions fall squarely within Article 110's list or extend beyond it into Article 117 territory
- The Speaker's certification of a Bill as a Money Bill has been a subject of judicial scrutiny, including in cases examining the scope of Article 110
Since this Bill amends tax exemption conditions and replaces a taxation-related Ordinance, its classification as a Money Bill or Financial Bill determines the Rajya Sabha's role in its passage — a recurring UPSC theme when any tax-related legislation is introduced.
Ordinance-Making Power — Article 123
Article 123 empowers the President to promulgate Ordinances when Parliament is not in session, if satisfied that circumstances require immediate action. An Ordinance has the same force as an Act of Parliament but must be laid before both Houses and ceases to operate six weeks after Parliament reassembles unless a resolution disapproving it is passed earlier, or a replacing Act is passed.
Key Details
- Ordinances lapse at the latest six weeks after Parliament's reassembly (Article 123(2)(a))
- Ordinances cannot make provisions that Parliament itself could not enact under the Constitution
- Replacing an Ordinance with a regular Act (as referenced in this news) is the standard constitutional route to give the Ordinance's provisions permanent legal effect
The Taxation and Other Laws (Amendment) Bill, 2026 is reported to replace an earlier Ordinance that exempted foreign institutional investors from withholding tax on government securities investments — a textbook instance of Article 123's ordinance-to-Act conversion process.
- Relevant provision: Section 9A, Income-tax Act (offshore fund/fund-manager safe harbour)
- Existing eligibility conditions include: minimum 25 investors, single-investor cap of 10% participation, 10-or-fewer-investor aggregate cap of 50%, monthly average corpus of at least ₹100 crore
- Proposed Bill: Taxation and Other Laws (Amendment) Bill, 2026, expected to be introduced in the Lok Sabha
- Proposed change: removes separate IFSC-specific exemption conditions, moving to a uniform framework for offshore funds
- Related Constitutional provisions: Article 110 (Money Bill), Article 117 (Financial Bill), Article 123 (Ordinance-making power)