Introduction
The Central Board of Direct Taxes (‘CBDT’) issued a notification[i], introducing the Income-tax (Second Amendment) Rules, 2025 (‘Amendment’). The notification amends Rule 21AIA and inserts new Rules 2DAA and 21ACA in the Income-tax Rules, 1962 (‘ Rules’). This amendment prescribes conditions applicable to Venture Capital (‘VC’) funds under s. 10(23FB) and finance companies operating in International Financial Services Centres (‘IFSCs’) under s. 94B of the Income-tax Act, 1961 (‘Act’). This update highlights the key modifications introduced by these rules and their implications for stakeholders.
Key Amendments Introduced
1. R. 2DAA: Conditions for VC Funds under s. 10(23FB) of the Act
R. 2DAA specifies the conditions for VC funds to qualify under s. 10(23FB). Key provisions include:
VC funds must be recognised as Category I Alternative Investment Funds under the International Financial Services Centres Authority (Fund Management) Regulations, 2022 (‘IFSC Regulations’).
This condition aligns with reg.18(2) of the IFSC Regulations, issued under the IFSC Authority Act, 2019 (‘IFSC Act’).
2. R. 21ACA: Conditions for IFSC Finance Companies under s. 94B of the Act
R. 21ACA prescribes conditions for finance companies in IFSCs to be eligible under s. 94B. The rule provides:
Finance companies may engage in activities such as:
i. Lending (loans, commitments, guarantees, credit enhancement, securitizations, and financial lease);
ii. Factoring and forfaiting of receivables;
iii. Global or Regional Corporate Treasury Centre functions, including borrowings, lending, hedging, intra-group financing, structured credit, and financial budgeting.
Any interest paid by such finance companies, being the borrower, on debt issued by a non-resident must be in foreign currency.
3. Amendments to R. 21AIA: Conditions for Retail Schemes and Exchange Traded Funds
The amendment to r. 21AIA introduces new conditions for retail schemes and Exchange Traded Funds (‘ETFs’) under s. 10(4D) of the Act to qualify under the tax provisions:
Retail schemes must:
i. Have at least 20 investors, with no single investor holding more than 25% of the total investment.
ii. Not invest more than 25% of the total assets in an associate entity.
iii. Not invest more than 15% of the total assets in unlisted securities.
iv. Not invest more than 10% of the total assets in a single company.
ETFs must:
i. Be mandatorily listed and traded on a recognised stock exchange.
ii. Comply with the IFSC Regulations.
Our Analysis
The newly prescribed eligibility conditions align with existing IFSC Regulations, ensuring uniformity and transparency in tax exemptions and financial operations. This would encourage adherence to international best practices, potentially attracting both domestic and foreign investment.
However, these amendments pose certain challenges. The stringent eligibility criteria for VC funds may restrict the participation of emerging funds, while Finance Companies could face limitations in diversifying their operations beyond the prescribed activities. Additionally, the mandatory foreign currency requirement for debt payments introduces currency risk exposure that needs careful management.
For retail schemes and ETFs, the introduction of investment caps and mandatory listing requirements enhances investor protection but may also limit fund managers’ flexibility in optimizing asset allocations. Striking a balance between regulatory oversight and market-driven flexibility will be crucial.
Moving forward, a well-structured implementation strategy, industry training programmes, and periodic regulatory reviews will be essential to mitigate the potential drawbacks. Regulators should actively engage with market participants to assess real-world challenges and refine the framework accordingly. With these measures, the Amendment has the potential to strengthen India’s IFSC ecosystem and attract greater domestic and foreign investment while ensuring compliance and stability.
End Notes
[i] Notification G.S.R. 76(E) [NO. 10/2025/ F. NO.370142/26/2024-TPL], DATED 27-01-2025.
Authored by Priyavansh Kaushik, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.
AUTHORED BY
More Insights
25 Aug 2026
12
Min Read
A Game of Treasure Hunt: Service of GST Notices and Orders under S. 169 of the CGST Act and the Emerging Split among High Courts
Luxmi Traders addresses a fundamental question in GST adjudication: can a notice or order be treated as duly served merely because it is uploaded on the Common Portal? The Punjab and Haryana High Court held that portal-only service, absent the requisite statutory and notified basis, cannot by itself defeat a taxpayer’s remedies. With Madras and Allahabad adopting different approaches and Delhi subsequently applying Luxmi Traders, the issue reflects a significant divergence in judicial approach awaiting authoritative resolution.
10 Jul 2026
7
Min Read
Faceless Reassessment after S. 147A: What the Supreme Court Did – and Did Not – Decide
The Supreme Court's decision in Tej Pratap Singh does not settle the JAO–FAO controversy. Following Parliament's retrospective insertion of s. 147A, it remands the issue to the High Courts for fresh consideration. Faceless reassessment was never merely about moving tax files from paper to portal; it fundamentally changed the statutory authority responsible for communicating with the taxpayer, examining the record, drafting the order and completing the assessment. The real question now is how far a retrospective legislative clarification can go.
23 Apr 2026
18
Min Read
Mandatory Pre-Deposit for Appeals in Indirect Tax Laws: A Barrier to Justice?
Mandatory pre-deposit has become a defining feature of indirect tax litigation, balancing revenue protection with access to appellate remedies. While the shift to a fixed statutory framework has improved procedural efficiency, it also raises concerns regarding financial barriers and effective access to justice. This insight examines the legal evolution, judicial interpretation, and practical implications of the regime.