CBDT Amends Rule 10U: GAAR Grandfathering Clarified for Pre-2017 Investments

Background: Understanding India's General Anti-Avoidance Rules

The General Anti-Avoidance Rules (GAAR), codified under Chapter X-A of the Income-tax Act, 1961 (Sections 95 to 102), represent India's principal legislative weapon against aggressive tax avoidance. Originally introduced through the Finance Act, 2012, GAAR's implementation was deferred multiple times before finally becoming effective from 1st April 2017 (applicable from Assessment Year 2018-19).

At its core, GAAR empowers the tax authorities to declare any arrangement an "impermissible avoidance arrangement" if its main purpose is to obtain a tax benefit and it satisfies any of these conditions under Section 96:

• Creates rights or obligations not ordinarily created between parties dealing at arm's length
• Results in misuse or abuse of the provisions of the Income-tax Act
• Lacks commercial substance under Section 97
• Is carried out in a manner not ordinarily employed for bona fide purposes

Once invoked, GAAR allows authorities to disregard, reallocate, or re-characterise any step in an arrangement, including denial of treaty benefits under a DTAA.

The Original Grandfathering Clause

Recognising that GAAR's sweeping powers could unsettle existing investments, the government included a grandfathering provision under Rule 10U of the Income-tax Rules, 1962. CBDT Circular No. 7 of 2017 further clarified that GAAR provisions would apply to income or tax benefits arising on or after 1st April 2017 from arrangements entered into on or after that date.

The original intent was clear: investments made before the GAAR effective date would not face retrospective anti-avoidance scrutiny. This was a deliberate policy choice to protect investor confidence, particularly for foreign portfolio investors (FPIs) and PE funds that had routed investments through treaty-favoured jurisdictions such as Mauritius and Singapore.

The Tiger Global Judgment: A Jolt to Investor Confidence

The understanding around GAAR grandfathering received a significant jolt on 15th January 2026, when the Supreme Court delivered its judgment in the Tiger Global case. Tiger Global's Mauritius-based entities had invested in Flipkart before 2017 and subsequently exited during Walmart's acquisition in 2018, realising capital gains of approximately USD 1.6 billion.

The Supreme Court's ruling had far-reaching implications:

1. GAAR applied to pre-2017 investments: The Court held that GAAR could apply to any arrangement resulting in a tax benefit arising on or after 1st April 2017, even if the underlying investment was made before that date.
2. Tax Residency Certificate not conclusive: While a TRC is necessary for claiming treaty benefits, the Court ruled it is not sufficient. Authorities can examine whether the entity has genuine economic substance.
3. Taxability requirement in residence state: The Court introduced an additional requirement that the taxpayer must demonstrate gains are actually taxable in the state of residence.

The ruling sent ripples through the foreign investment community. If GAAR could override grandfathering for pre-2017 investments based on a substance test applied retroactively, the predictability of India's tax regime was called into question.

The CBDT Amendment: What Exactly Changed

Responding to these concerns, the CBDT issued Notification No. 54/2026 (amending Rule 10U under Income-tax Rules, 1962) and Notification No. 55/2026 (amending Rule 128 under Income-tax Rules, 2026) on 31st March 2026 (F. No. 370142/15/2026-TPL).

The core amendment: GAAR provisions shall not apply to any income derived from the transfer of investments made before 1st April 2017, even if the arrangement through which the investment was held is not itself grandfathered, and irrespective of when the arrangement was entered into.

The amendments under the 1962 Rules took effect from 31st March 2026; those under the 2026 Rules (new Act) from 1st April 2026.

Impact on Foreign Investors

FPIs and Institutional Funds

FPIs and PE/VC funds that built India portfolios through Mauritius or Singapore structures prior to 2017 can now exit legacy holdings without the threat of GAAR-driven denial of treaty benefits. This is particularly relevant for long-hold funds that invested during 2010-2016 and are only now approaching exit timelines.

Mauritius and Singapore Treaty Investors

Investors who relied on the India-Mauritius DTAA (prior to its amendment effective 1st April 2017) and the India-Singapore DTAA for capital gains exemptions now have certainty that GAAR will not unwind those treaty benefits for pre-2017 investments.

Relationship with Tiger Global Ruling

The CBDT amendment does not overrule the Supreme Court's judgment. Rather, it clarifies the rule framework going forward. Tiger Global involved specific facts around economic substance and conduit arrangements. The amendment ensures genuine legacy investments are not swept into GAAR scrutiny merely because gains are realised post-2017.

Legacy Investments vs. Aggressive Arrangements

One of the amendment's most important contributions is the conceptual distinction between:

• Genuine legacy investments: Where an investor made a bona fide investment before April 2017 under the then-prevailing framework, gains from eventual transfer are now clearly outside GAAR's reach.
• Aggressive tax arrangements: Where an arrangement is entered into post-2017 or involves restructuring or transfer of investments to new entities after 2017, GAAR continues to apply in full force. The grandfathering protection does not transfer to subsequent investors who acquire the investment after 1st April 2017.

Practical Implications for Tax Advisors

1. Review legacy portfolios: Identify all client investments made before 1st April 2017 involving cross-border structures. These now have explicit GAAR protection.
2. Document investment dates: The date of investment, not the date of the arrangement, is the relevant anchor. Maintain clear documentation.
3. Assess pending assessments: For clients facing ongoing GAAR proceedings on pre-2017 investments, the amendment provides strong grounds for relief. However, the interplay with Tiger Global on substance requirements should be evaluated case by case.
4. Caution on restructuring: Any restructuring or transfer of pre-2017 investments to new entities must be approached carefully — GAAR protection is person-specific and does not follow the investment through subsequent transfers.
5. Track dual regime: With the new Income-tax Act, 2025 alongside the existing ITA 1961, ensure compliance under both Rule 10U and Rule 128 as applicable.

Timeline of GAAR Provisions in India

Conclusion

The CBDT's amendment to Rule 10U represents a timely course correction. By explicitly shielding income from transfer of pre-2017 investments from GAAR scrutiny, the government has reaffirmed the legislative intent behind the original grandfathering clause while addressing the ambiguity created by the Tiger Global judgment. For foreign investors with legacy India exposures, this amendment significantly reduces litigation risk and restores the predictability essential for long-term capital commitment to the Indian market.