In a significant move aimed at reducing compliance burdens and facilitating the relocation of fund managers of offshore funds, the Government has proposed amendments to Section 9A of the Income-tax Act, 1961.
Section 9A of the Income Tax Act, 1961 was introduced through the Finance Act, 2021 and has been effective from 1st April 2021. This section deals with taxation of income arising from transfer of shares or units of an Indian company or a unit of a business trust by a non-resident taxpayer.
The proposed changes were introduced through a Government Amendment to the Finance Bill, 2025.
Current Conditions for Investment in Eligible Investment Funds
As per the existing provisions under Section 9A(3)(c) of the Income-tax Act, 1961, the aggregate participation or investment by a person resident in India, directly or indirectly, in an eligible investment fund must not exceed five percent of the corpus of such fund. This restriction ensures that these funds remain largely foreign-controlled and do not trigger taxation in India due to significant domestic participation.
Proposed Amendment to Section 9A(3)(c)
The Government Amendment proposes that only direct participation or investment by a person resident in India should be considered for the five percent threshold. This means that indirect participation or investment by a person resident in India will no longer be counted towards this limit. The removal of this requirement will simplify compliance, making it easier for offshore funds to operate without the burden of monitoring indirect investments by Indian residents.
Provisions Under Section 9A(8A)
Section 9A(8A) of the Income-tax Act, 1961, grants the Central Government the power to relax or modify specific conditions for eligible investment funds and fund managers. This includes 13 conditions under Section 9A(3) for investment funds and four conditions under Section 9A(4) for fund managers, provided that the fund manager is located in an International Financial Services Centre (IFSC).
Restoration of Central Government’s Powers Under Section 9A(8A)
Initially, the Finance Bill, 2025, proposed that the condition under Section 9A(3)(c) would not be subject to modification by the Central Government, as it was being relaxed directly in the Income-tax Act, 1961. However, the Government Amendment has restored the Central Government’s power to modify and relax this condition if necessary. This flexibility allows the government to make further adjustments in response to evolving financial and regulatory needs.
Implications of the Proposed Amendments
These amendments are expected to:
- Reduce compliance costs for offshore investment funds.
- Enhance India’s attractiveness as a destination for fund managers relocating from other jurisdictions.
- Strengthen the regulatory framework by providing the Central Government with the flexibility to adapt conditions as required.
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