India’s GAAR grandfathering of legacy investments: ending a chapter or beginning another?

The grandfathering of investments made into India from jurisdictions such as Mauritius and Singapore before April 1 2017 from the applicability of the General Anti-Avoidance Rules (GAAR) has been the subject of debate for almost a decade. In a significant move, the Central Board of Direct Taxes (CBDT) has amended Rule 10U of the Income-tax Rules, 1962 and the corresponding Rule 128 (through notifications 54 and 55 of 2026, dated March 31) to specifically exclude income from transfers of investments made before April 1 2017 from the ambit of the GAAR, even where the investments are transferred after that date.

This amendment assumes greater relevance in light of the ruling of the Supreme Court of India (SC) in Tiger Global (The Authority for Advance Rulings (Income Tax) and Others v Tiger Global International II Holdings, 2026). While there is no doubt that the amendment seeks to restore confidence by purportedly ring‑fencing past investments from the applicability of the GAAR, the question remains as to whether investors can finally breathe a sigh of relief.

Under the original framework of the India–Mauritius double taxation avoidance agreement (DTAA) entered into in 1982, taxing rights with respect to capital gains from the alienation of shares were exclusively allocated to the state of residence of the alienator. India adopted a similar residence-based approach to taxation in DTAAs entered into with Singapore, Cyprus, and several EU countries.

In practice, this allocation, when combined with domestic tax regimes in residence jurisdictions such as Mauritius and Singapore, resulted in double non‑taxation. Over time, this led to treaty shopping and aggressive tax planning involving sophisticated investment structures.

Against this background, Indian courts, even prior to the introduction of the GAAR, evolved judicial anti‑avoidance doctrines by embracing the principle of ‘substance over form’, examining the real intention of the parties and the commercial effect of transactions in appropriate cases. These principles were later codified in the Indian income tax law in the form of the GAAR from April 1 2017.

Concurrently – with the intention to curb revenue loss, prevent double non-taxation, and streamline the flow of investments – India amended treaties with jurisdictions such as Mauritius, Singapore, and Cyprus to provide for source-based taxation of capital gains arising from the alienation of shares acquired on or after April 1 2017, while grandfathering investments made before that date.

Interestingly, the GAAR provisions (Rule 10U(2)) were made applicable to any “arrangement” in respect of which a tax benefit is obtained on or after April 1 2017, irrespective of the date on which the arrangement was entered into. Thus, the GAAR was meant to apply prospectively in respect of tax benefits arising on or after April 1 2017, even if the underlying tax avoidance arrangement was put in place prior to the introduction of the GAAR. However, Rule 10U(1)(d) expressly provided that the GAAR shall not apply to income arising from the transfer of investments made prior to April 1 2017.

In Tiger Global, the SC, inter alia, dealt with a question as to whether the GAAR could be invoked in respect of investments made prior to April 1 2017.

The SC held that, notwithstanding the grandfathering of investments made prior to April 1 2017, the GAAR could still be invoked if the investment constituted a tax avoidance “arrangement”. Thus, the SC substantially diluted the scope of the grandfathering provision. This conclusion was based on the purported conflict between two provisions of the Income-tax Rules, 1962 and the fact that one was “without prejudice” to the other.

This reasoning significantly expands the applicability of the GAAR and exposed investments made prior to April 1 2017 to scrutiny, which were previously considered ring-fenced. This affected long-term venture capital/private equity structures, particularly where funds reorganise or exit through offshore share transfers. Many previously ‘protected’ investments may now be exposed to GAAR scrutiny if the investment structures or vehicles are viewed as impermissible arrangements.

As a reaction to the Tiger Global ruling, amendments have been made to the GAAR (CBDT notifications 54 and 55 of 2026). Provisions that were previously distributed between two rules and connected by the phrase “without prejudice” are now consolidated in the same rule. Now the same rule that makes the GAAR applicable to arrangements (irrespective of the date on which the same is entered into) resulting in any tax benefit on or after April 1 2017 also contains an exception that the GAAR will not apply to investments made before April 1 2017. This is intended to eliminate the confusion supposedly caused by the phrase “without prejudice to”.

The above substitution has been positioned by the Indian tax administration as a clarification, intended to affirm that GAAR provisions are not meant to apply to income arising from transfers of investments made prior to April 1 2017.

However, a closer examination suggests the amendment may not completely resolve the interpretational issue flagged by the SC in Tiger Global. In its ruling, the court effectively read the phrase “without prejudice to” to mean that irrespective of the date of the underlying investment, if such investment was an impermissible tax avoidance “arrangement”, then the GAAR provisions could apply. The amendment does not expressly engage with or override the interpretation rendered by the SC in Tiger Global, leaving open the broader question of whether, notwithstanding the subsequent amendment, the interpretation accorded by the SC in Tiger Global would continue to govern the application of the GAAR, given that the law laid down by the SC constitutes the law of the land, under Article 141 of the Constitution of India.

Another aspect that remains unclarified is whether the amendment to Rule 10U is intended to operate retrospectively and cover transfers made from April 1 2017 to March 31 2026, particularly since the amendment’s explanatory memorandum provides that GAAR shall not be invoked on or after the date of publication of the amended rules.

Furthermore, the amendment reflects a degree of inconsistency in the Revenue’s position on the applicability of Rule 10U. It was vehemently argued before the SC that where a transaction is found to be an impermissible avoidance arrangement, then the GAAR could apply, notwithstanding the initial investment being made prior to April 1 2017. However, the amendment seeks to clarify exactly the opposite. If this was always the intent of the government, then why was a contrary position canvassed in Tiger Global and a ruling invited from the SC? It is hard to reconcile.

The recent amendment to the GAAR is a meaningful course correction to reaffirm the government’s stated policy of protecting transfers of investments made prior to April 1 2017 from the GAAR. However, the amendment does not fully put to rest the consequences flowing from the SC’s interpretation in Tiger Global.

In the absence of express guidance on retrospectivity and the amendments’ applicability to past transfers/pending GAAR proceedings, uncertainty persists as to how Revenue will implement these amendments. A clarification from the CBDT addressing the above issues is, therefore, critical to ensure uniform application of the amended rule and to prevent protracted litigation.