New Delhi, April 1 – The Income Tax Department has explicitly excluded income arising from the transfer of investments made before April 1, 2017, from the scope of the General Anti-Avoidance Rules (GAAR), thereby resolving a long-standing industry concern regarding retrospective applicability.
The Central Board of Direct Taxes (CBDT) has amended the Income-tax Rules, 2026, stating that any income accruing or received by any person from the transfer of investments made before April 1, 2017, will not fall under the General Anti-Avoidance Rules (GAAR).
AKM Global Partner-Tax, Sandeep Sehgal, said that the amendment to Rule 128 of the Income-tax Rules, 2026, is largely clarifying in nature and helps remove ambiguity surrounding GAAR grandfathering.
"It effectively resolves the interpretive uncertainty highlighted in that ruling on the interplay between GAAR and grandfathering, where tax benefits arise after 2017. This clarification provides much-needed certainty to investors, while ensuring that GAAR continues to apply to arrangements made after 2017," Sehgal said.
GAAR, announced in the 2012-13 Union Budget, aimed to check tax avoidance by overseas investors. It aimed to prevent tax avoidance by entities involved in arrangements that are not genuine or lack commercial substance.
However, the proposal generated controversy, with investors expressing concerns that it would lead to unnecessary harassment by tax authorities.
The GAAR rules were finally implemented on April 1, 2017. It also provided that any transaction, arrangement, or tax benefit from investments acquired before April 1, 2017, would be grandfathered.
AMRG Global, Managing Partner, Rajat Mohan, said that the CBDT has now explicitly mentioned that income arising from the transfer of investments made prior to April 1, 2017, will be excluded from the scope of GAAR. With this, the government has resolved a long-standing industry concern regarding retrospective applicability, he said.
Deloitte India Partner, Rohinton Sidhwa, said that the controversy largely centers around the applicability of Mauritius treaty benefits to grandfathered investments, which was discussed in detail by the Supreme Court in the Tiger Global case. The court held that due to the overriding impact of GAAR, treaty benefits would not be available irrespective of the grandfathering provision.
"The circular has corrected this understanding by removing the 'without prejudice' wording relied upon by the SC," Sidhwa said.
In January, the Supreme Court had ruled in favour of the Indian Tax Department's demand for levying tax on capital gains by Tiger Global following its exit from e-commerce company Flipkart in 2018. US-based Tiger Global had made capital gains when it exited Flipkart in 2018 by selling its holding to Walmart for Rs 14,500 crore.
Grant Thornton Bharat Partner, Riaz Thingna, said that there were some concerns raised by various experts that, pursuant to the Tiger Global ruling, the grandfathering provisions may not apply. Further, the provisions under the new Income-tax Act did not specifically address these concerns.
"The CBDT notification dated 31st March 2026 clarifies the rules regarding grandfathering provisions for certain investments and assets to ensure that gains accrued up to a specific cut-off date are protected from subsequent changes in tax regulations. The impact of this notification is that it preserves the tax treatment for gains realised before 1st April 2017, allaying fears of retrospective taxation," Thingna said.
Nangia Global Advisors, M&A Tax Partner, Sandeep Jhunjhunwala, at Nangia Global Advisors, however, said that while the amendment appears to safeguard the income arising from investments made before April 1, 2017, the Tiger Global doctrine preserves GAAR's reach over the broader arrangement.
"This raises a critical question for investors – whether grandfathering protects the investment but leaves the holding structure exposed, thereby underscoring that the contours of India's tax anti-avoidance regime continues to operate within a highly technical, fact-intensive matrix, marked by significant interpretive indeterminacy," Jhunjhunwala said.
Tiger Global had argued that no capital gains tax was payable in India on the transaction as the capital gains arose from investments made prior to April 1, 2017, and were therefore covered by the grandfathering provisions of the India-Mauritius tax treaty. It also stated that its Mauritius entities held valid Tax Residency Certificates (TRCs) issued by the Mauritius authorities; and hence it claimed full treaty protection and a nil tax liability in India.
The Income Tax Department, based on examination of the overall structure and surrounding facts, was of the view that the Mauritius entities were interposed entities, with limited commercial substance of their own; and the real control and decision-making in respect of the investments and the exit lay outside Mauritius. It argued that the arrangement appeared to be structured primarily to obtain treaty benefits, raising concerns of treaty abuse and impermissible avoidance.
The Supreme Court held that mere possession of a TRC does not bar enquiry into whether an entity is a conduit and the Revenue department had established an impermissible avoidance arrangement.
It also ruled that the amendments to the India-Mauritius DTAA were intended to curb treaty abuse.
BTG Advaya, Head to Tax, Amit Baid, said that the amendment in the rule expressly confirms that GAAR will not apply to income arising on transfer of investments made before April 1, 2017, even if the exit occurs later.
"This appears to address the uncertainty that emerged after the recent Tiger Global ruling on GAAR grandfathering. While Tiger Global may remain relevant on broader questions of substance and treaty abuse, this amendment materially reduces its relevance on the issue of GAAR grandfathering for pre-1 April 2017 investments," Baid said.
In effect, CBDT has realigned the rule text with the original grandfathering intent. That should provide comfort to long-term investors, especially offshore funds and legacy structures, and reduce avoidable controversy on exits, Baid added.