The Centre has proposed a key change in the safe harbour rules through an amendment in the Finance Bill 2025.
Such rules were introduced through Section 9A of the Income Tax Act a decade ago to encourage fund management activities of offshore funds from India.
The latest amendment will pave the way for Indian fund managers to set up and manage global or India-focussed funds out of India. Until now, most Indian managers opted to act as “investment advisers” to these funds.
Current rules allow such a set-up only if less than 5 per cent of the fund’s investment corpus is by Indian residents, directly or indirectly. The amendment has done away with the word “indirectly”, thereby doing away with a major hurdle for such arrangements.
Major relaxation
“The change is a big step towards reducing compliance burden and bringing clarity for fund managers,” said Jaiman Patel, Partner, EY India.
“This is a significant relaxation and will boost the movement of fund management activity from overseas into mainland India as well as GIFT City without any adverse tax impact on the fund,” added Rajesh Gandhi, Partner, Deloitte India.
The current requirement of capping investment by Indian residents to 5 per cent of the fund’s corpus is onerous, as investors in such funds include institutional investors or discretionary wealth managers who allocate a portion of the wealth managed by them on behalf of their clients. Obtaining written declarations from such direct investors regarding the participation of Indian residents is often not easy, said Patel.
An offshore fund that is managed by an Indian manager is neither treated as an Indian tax resident nor considered as having a taxable presence in India, subject to satisfaction of conditions prescribed under Section 9A.
“Currently, there is no mechanism or guidance to assess as to what constitutes an ‘indirect’ participation, making it challenging to comply with this condition. The amendments propose to delete the reference to ‘indirect’ participation. Further, if the fund manager is located in the International Financial Services Centre, the government may relax the condition of direct participation by Indian residents as well,” said Rahul Jain, Director, Khaitan & Co.
It remains to be seen, however, if the relaxation will prompt fund managers sitting in jurisdictions such as Singapore and Hong Kong to relocate to India.
“I am not sure whether that will happen,” said a senior official from a consultancy firm. “Even GIFT City has a conducive fund management regime but that has not attracted such managers to relocate in a big way. There are other factors that come into play.”
The move may not result in new money coming into India. But Indian fund managers acting as advisors will be more comfortable becoming managers. And therefore, to that extent, we will get more management fees into India, the official said.
