GAAR Relief: Income Tax Department Clarifies Rules for Pre-2017 Investments

The Income Tax Department provides clarity on GAAR applicability, confirming that income from investments made before April 1, 2017, will not be subject to the anti-avoidance rules, offering relief to investors and simplifying tax regulations.

Illustration: Dominic Xavier/Rediff

The Income Tax Department has explicitly excluded income arising from transfer of investments made prior to April 1, 2017, from the ambit of GAAR, thus settling a long-standing industry concern regarding retrospective applicability.

The Central Board of Direct Taxes (CBDT) has amended Income-tax Rules, 2026, saying that any income accruing or received by any person from transfer of investments made before April 1, 2017, will not come under the General Anti Avoidance Rules (GAAR).

AKM Global Partner-Tax Sandeep Sehgal, said the amendment to Rule 128 of the Income-tax Rules, 2026 is largely clarificatory in nature and helps remove ambiguity around GAAR grandfathering.

“It effectively resolves the interpretational uncertainty highlighted in that ruling on the interplay between GAAR and grandfathering where tax benefits arise post-2017.

“This clarification provides much-needed certainty to investors, while ensuring that GAAR continues to apply to post-2017 arrangements,” Sehgal said.

GAAR, announced in Union Budget 2012-13, were aimed at checking tax avoidance by overseas investors.

It aimed to prevent tax avoidance by entities participating in arrangements that are not bonafide or that lack commercial substance.

The proposal, however, generated controversy, with investors expressing apprehensions that it would result in unnecessary harassment by tax authorities.

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 the CBDT has now explicitly mentioned that income arising from the transfer of investments made prior to April 1, 2017 would be excluded from the ambit of GAAR.

With this, the government has settled a long-standing industry concern regarding retrospective applicability, he said.

Impact of the Tiger Global Ruling

Deloitte India Partner Rohinton Sidhwa said the controversy largely centers around the applicability of the Mauritius treaty benefits to grandfathered investments which was discussed in detail by the Supreme Court in the case of Tiger Global.

The court held that because of the overriding impact of GAAR, benefits under the treaty would not be available irrespective of the grandfathering provision.

“The circular has corrected this understanding by dropping the “without prejudice” wording relied upon by the SC,” Sidhwa said.

In January, the Supreme Court had ruled in favour of Indian Tax Department’s demand for levy of tax on capital gains to Tiger Global’s 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 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.

Expert Opinions and Remaining Concerns

Nangia Global Advisors, M&A Tax Partner, Sandeepp Jhunjhunwala, at Nangia Global Advisors however said 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-Â Mauritius tax treaty.

Also 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-Â Mauritius DTAA were intended to curb treaty abuse.

BTG Advaya, Head to Tax Amit Baid, said 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.