India proposes tax relief for offshore funds using local managers
The government has proposed easing tax rules for offshore investment funds that use India-based fund managers, by removing existing conditions related to fund size and minimum investor numbers.
The changes are proposed through the Taxation and Other Laws (Amendment) Bill, 2026.
The stated aim is to attract greater foreign capital into India and to promote domestic fund management activity, encouraging global asset managers to base fund management operations in India.
The amendments would also introduce uniform eligibility standards for offshore funds operating through India's International Financial Services Centre (IFSC) and those operating outside it, removing existing regulatory ambiguity between the two.
Section 9A of the Income-tax Act — the Safe Harbour Regime
Section 9A, introduced by the Finance Act, 2015, provides that an "eligible investment fund" is not treated as having a business connection in India, and is not treated as an Indian tax resident, merely because its "eligible fund manager" carries out fund management activity from India. This was designed to solve a long-standing problem: global fund managers avoided locating in India because doing so could make the entire offshore fund's income taxable in India.
Key Details
- The safe harbour requires the fund to satisfy conditions on residence, corpus size, investor diversification ("broad-basing"), and investment diversification, along with the fund manager receiving arm's-length or CBDT-prescribed minimum remuneration.
- Original eligibility conditions included a minimum of 25 investors, no single investor holding more than a 10% stake, the top 10 or fewer investors not holding more than 50% collectively, no more than 25% of corpus in a single investee entity, restrictions on investing in associate entities, and a minimum monthly average corpus of ₹100 crore.
- The Finance Act, 2019 replaced the earlier "arm's length remuneration" requirement for fund managers with a CBDT-prescribed minimum fee.
- An "eligible fund manager" must be registered with SEBI as a portfolio manager or investment adviser.
The current proposal removes several of these Section 9A conditions (investor count, participation caps, corpus threshold), directly widening the safe harbour so that more offshore funds can use India-based managers without losing their tax status.
International Financial Services Centre (IFSC) and Fund Management Hubs
India has sought to build GIFT City (Gujarat International Finance Tec-City) into an onshore hub for managing offshore capital, competing with jurisdictions like Singapore and Mauritius that have traditionally hosted fund managers serving India-focused and global funds.
Key Details
- The International Financial Services Centres Authority (IFSCA), a unitary regulator, was established under the IFSCA Act, 2019 to regulate financial services in India's IFSCs, including fund management.
- Funds set up within IFSCs already enjoy a separate, generally more liberal tax and regulatory regime than funds managed from the rest of India (non-IFSC).
- The current proposal aims to harmonize eligibility conditions between IFSC-based and non-IFSC-based offshore fund managers, reducing the regulatory gap that previously favoured IFSC structures.
By aligning non-IFSC fund manager rules more closely with the liberal IFSC regime, the proposal supports the broader policy goal (also served by GIFT City) of relocating fund management activity — and the associated jobs, fees, and expertise — onshore to India rather than offshore financial centres.
- Section 9A (safe harbour for offshore funds with India-based managers) was introduced by the Finance Act, 2015.
- Conditions proposed for removal: minimum 25 investors, 10% single-investor cap, 50% aggregate cap for top 10 investors, 25% single-entity investment cap, and ₹100 crore minimum monthly average corpus.
- The Finance Act, 2019 replaced the arm's-length remuneration condition with a CBDT-prescribed minimum fee for fund managers.
- The reform is proposed via the Taxation and Other Laws (Amendment) Bill, 2026.
- IFSCA (established under the IFSCA Act, 2019) is the unitary regulator for India's International Financial Services Centres, including GIFT City.