Relief to legacy PE investments as Govt affirms GAAR grandfathering – Business News
Foreign investors holding legacy assets in India received significant relief as the Central Board of Direct Taxes (CBDT) issued a clarification exempting capital gains from investments made before April 1, 2017, from the General Anti-Avoidance Rules (GAAR).
In a gazette notification issued on Tuesday, the government amended Rule 128 of the Income-tax Rules, 2026, to explicitly ring-fence pre-2017 investments from GAAR provisions. The changes came into effect from April 1.
The provisions state that GAAR will not apply to any income from the transfer of investments made before April 1, 2017. Similarly, while Chapter XI of the Income-Tax Act, 2025, continues to apply to arrangements involving tax benefits obtained on or after April 1, 2017, an explicit exception has been carved out for income derived from pre-2017 investments.
Tiger Global Fallout
The move addresses growing uncertainty among private equity and venture capital firms following a Supreme Court ruling in the Tiger Global case in January this year. In that judgment, the top court held that New York-based Tiger Global was liable to pay capital gains tax on its 2018 sale of shares in Flipkart, rejecting benefits under the India-Mauritius tax treaty. The decision had raised concerns that GAAR could potentially override grandfathering protections for legacy investments when tax benefits materialised after the 2017 cut-off date.
Sandeep Sehgal, Partner-Tax at AKM Global, said the amendment helps remove ambiguity around GAAR grandfathering. “By refining the language and expressly ring-fencing capital gains from investments made prior to April 1, 2017, it reinforces the original intent that such legacy investments should remain outside the ambit of GAAR,” he noted. Sehgal added that while the clarification does not alter the outcome of the Tiger Global case, it effectively resolves interpretational uncertainty regarding the interplay between GAAR and grandfathering for post-2017 tax benefits.
Restoring Investor Confidence
Riaz Thingna, Partner at Grant Thornton Bharat, pointed out that concerns had emerged after the Tiger Global ruling that grandfathering provisions might not apply as intended. “This preserves the tax treatment for gains realised from pre-2017 investments and allays fears of retrospective taxation,” he said. The clarification is expected to provide much-needed certainty to foreign investors and private equity funds sitting on billions of dollars in legacy assets. It should facilitate smoother exits on older deals without the overhang of potential GAAR challenges, thereby boosting confidence in India’s tax regime for long-term investments.
The latest amendment substitutes sub-rule (1)(d) and sub-rule (2) of Rule 128.
