CBDT Restores Certainty On GAAR Grandfathering

In a rare and welcome 1 April move, the Central Board of Direct Taxes (CBDT) has restored clarity on one of the most contentious aspects of India’s anti-avoidance regime.

By way of a notification dated 31 March 2026, the CBDT has amended Rule 128 of the Income-tax Rules, 2026 to unequivocally confirm that income from the transfer of investments made before 1 April 2017 remains outside the ambit of GAAR, even if the exit takes place subsequently.

This clarification, though concise, carries significant implications. It realigns the rule text with what most taxpayers and advisors had always understood to be the original intent behind GAAR grandfathering.

What was the issue? The Tiger Global context.

GAAR, introduced from 1 April 2017, was accompanied by a clear policy promise: legacy investments would be protected. In other words, investments made before the GAAR era would not be reopened to anti-avoidance scrutiny merely because they were exited later.

However, the drafting of the rules, particularly the “without prejudice” clause, left room for a more expansive interpretation. This ambiguity came into sharp focus following the Supreme Court’s ruling in the Tiger Global case.

A key concern emerging from that decision was: could GAAR still apply where the tax benefit arises on exit (post-2017), even if the investment itself was made pre-2017?

For offshore funds and long-term investors, this was not a theoretical question - it went to the heart of exit certainty.

CBDT’s course correction

The amended Rule 128 now decisively addresses this concern. It clarifies that:

• Income arising from the transfer of investments made before 1 April 2017 is outside GAAR, regardless of when the transfer takes place; and

• While GAAR may apply to arrangements yielding tax benefits post-2017, this will not override the protection granted to such grandfathered investments.

Notably, the grandfathering protection is limited to income arising on transfer of pre-1 April 2017 investments and does not extend to other income streams (such as dividends or interest), which may continue to be evaluated under GAAR principles.

Does this neutralise Tiger Global? Not quite.

While the amendment significantly narrows the relevance of Tiger Global on the specific issue of grandfathering, it does not dilute GAAR more broadly. Tax authorities are still likely to scrutinize:

• commercial substance of structures,

• use of intermediary or conduit entities,

• treaty entitlement and potential abuse, and

• overall alignment between form and economic reality.

In other words, the amendment should not be read as a blanket dilution of anti-avoidance enforcement - it is a targeted clarification to uphold a specific policy commitment.

Who benefits and how?

This clarification should bring immediate comfort to:

• offshore private equity and venture capital funds with legacy India exposures;

• Mauritius, Singapore and other treaty-based investment platforms involving pre-1 April 2017 acquisitions;

• investors contemplating exits from long-held Indian assets; and

• taxpayers currently facing (or anticipating) GAAR-related controversy on such exits.

For such taxpayers, the amendment should significantly reduce avoidable controversy on the issue of whether GAAR can be invoked solely because the transfer occurs after 1 April 2017. It may also strengthen positions in ongoing assessments or representations where the tax office seeks to rely on a broad reading of the earlier rule.

The bigger message

This amendment is a thoughtful and timely intervention. It does not weaken GAAR. It does not create new exemptions. It honours the original grandfathering promise.

For investors who placed long-term capital into India before GAAR came into force, that promise matters. And with this clarification, it has now been meaningfully restored.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.