India Proposes Simpler Fund Management Safe Harbour Rules for Offshore Investment Funds

The Taxation and Other Laws (Amendment) Bill, 2026, introduced in the Lok Sabha on 31 July 2026, proposes a major overhaul of India’s fund management safe harbour regime. The bill seeks to replace Schedule I of the Income-tax Act, 2025, with a simplified framework. It aims to simplify the conditions under which offshore investment funds can appoint Indian-based fund managers without creating a taxable business connection.

The Lok Sabha, or lower house of the parliament, approved the memorandum accompanying the Bill on 6 August 2026. According to the memorandum, the proposed reforms aim to promote fund management activities in India and provide greater tax certainty for international investors.

Existing safe harbour framework in India

Currently, a foreign investment fund may establish a business connection in India if it carries out investment management activities through a fund manager located in the country. Such a business connection could subject the foreign fund to Indian tax on income attributable to its operations in India.

The Income-tax Act, 2025 currently provides a fund management safe harbour under which the activities of an eligible fund manager do not constitute a business connection for an eligible investment fund, provided both the fund and the fund manager satisfy the prescribed eligibility conditions. The Taxation and Other Laws (Amendment) Bill, 2026, proposes to simplify this framework by replacing Schedule I of the Income-tax act with a revised set of eligibility conditions.

Proposed changes for fund management safe harbour

The bill replaces the existing Schedule I with a framework that reduces compliance needs while retaining key safeguards necessary to prevent misuse of the safe harbour.

For eligible investment funds, the revised schedule retains the core eligibility requirements while streamlining the overall framework. To qualify for the safe harbour, a fund must:

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1. Be established, incorporated, or registered outside India and remain a non-resident
2. Be resident in a jurisdiction with which India has a tax treaty or be established in another jurisdiction notified by the central government
3. Ensure that aggregate participation by Indian residents does not exceed 5 per cent of the fund’s corpus, subject to the prescribed relaxation mechanism
4. Refrain from carrying on or controlling any business in India
5. Ensure that any activities undertaken in India are limited to those performed through an eligible fund manager.

Which conditions for the eligible fund manager remain the same

The Bill largely retains the existing eligibility requirements for eligible fund managers. Accordingly, the fund manager must:

• Not be an employee or connected person of the foreign investment fund
• Be registered as a fund manager or investment adviser under the applicable Securities and Exchange Board of India (SEBI) regulations
• Act in the ordinary course of business
• Not be entitled, together with its connected persons, to over 20 per cent of the investment fund’s profits from transactions managed by the fund manager.

While the proposed legislation simplifies the eligibility framework, it does not relax the reporting obligations. Eligible investment funds must continue to submit a prescribed statement to the income-tax authority within 90 days from the end of the relevant tax year. Additionally, investment funds must furnish the prescribed information and supporting documents to demonstrate compliance with the revised conditions.

What requirements have been removed?

The bill removes several structural eligibility requirements that existed under the earlier Schedule I.

Source: Legislation, Bills; Indian Parliament

These deletions substantially reduce the number of conditions that foreign investment funds must satisfy to qualify for the safe harbour.

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Expected impact of the fund management safe harbour reforms

The explanatory memorandum states that these amendments are intended to rationalise the conditions applicable to eligible investment funds and fund managers. India is preparing to reduce compliance barriers while retaining the principal anti-abuse safeguards.

Legislative status

The proposed reforms to India’s fund management safe harbour are currently contained in the Taxation and Other Laws (Amendment) Bill, 2026. The proposed legislation comes under the category of money bills; therefore, it does not require the approval of the upper house of parliament. Once the legislative process is completed and the bill receives presidential assent, the revised safe harbour framework will replace the existing Schedule I of India’s Income-tax Act, 2025.

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