Executive Summary

The Central Board of Direct Taxes (CBDT) issued Notification No. 91/2026, notifying the Income-tax (Second Amendment) Rules, 2026. The amendment updates Rule 2AB, expanding the categories of investment vehicles that qualify as 'Specified Funds' under Section 10(4D) of the Income-tax Act, granting tax exemptions to eligible non-resident investors in offshore and IFSC-domiciled fund structures.

Regulatory Background

Section 10(4D) provides tax exemptions on specified income accrued by eligible Specified Funds from the transfer of capital assets (such as GDRs, rupee-denominated bonds, derivatives, and foreign securities) listed on recognized IFSC exchanges. Updating the operational criteria under Rule 2AB harmonises tax administration with evolving fund management structures in GIFT City.

What Has Changed?

1. SEBI-Regulated Category I & II AIFs

To qualify under this route, the fund must meet the following statutory criteria:

• Legal Constitution: Established or incorporated in India as a Trust, Company, Limited Liability Partnership (LLP), or Body Corporate.
• Registration: Granted a certificate of registration as a Category I or Category II Alternative Investment Fund (AIF).
• Regulatory Governance: Regulated under the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012.

2. IFSC-Based Fund Structures

Recognising GIFT City's financial ecosystem, the rule explicitly includes funds regulated under the IFSCA (Fund Management) Regulations, 2022:

• Structure: Established or incorporated in India in an eligible legal form (Trust, Company, LLP, Body Corporate).
• Classification: Registered under Category I or Category II AIF frameworks.
• Location & Governance: Located within an IFSC and regulated under the IFSCA fund management regime.

Key Changes Comparison

Who Will Be Affected?

• Category I & II Alternative Investment Funds (AIFs) in GIFT IFSC
• Offshore Institutional Investors and Non-Resident Unit Holders
• Fund Managers (GPs), Investment Advisors, and Practising Chartered Accountants

Effective Date & Applicability

• Date of Issue: 21 July 2026
• Effective Date: Date of publication in the Official Gazette (21 July 2026)
• Applicability: Applicable for Assessment Year 2027–28 and subsequent tax years.

Compliance Impact

• Documentation Review: Fund managers should evaluate constitutive documents (PPMs, trust deeds, partnership agreements) against the revised Rule 2AB criteria.
• Distribution Protocols: Update tax withholding and reporting configurations on income distributions to non-resident investors.

KGS Practical Takeaway: This amendment supports GIFT City’s development as an international fund domiciliation hub. Investment managers setting up fund vehicles in IFSC should assess their structures against the revised criteria to optimise cross-border tax certainty.

Source / Reference

• Authority: Central Board of Direct Taxes (CBDT)
• Document: Notification
• Reference No.: Notification No. 91/2026
• Date: 21 July 2026
• Official Source: Income Tax Gazette Notifications