Legacy assets: New I-T rules shield pre-FY18 foreign holdings from GAAR; clarity after Tiger Global

Tax changes 2026: In a decisive policy clarification, the Central Board of Direct Taxes (CBDT) has amended key provisions under the Income-tax Rules to ensure that foreign investments made before April 1, 2017 (pre-FY18) remain fully insulated from the General Anti-Avoidance Rules (GAAR). The March 31, 2026 notification removes lingering ambiguity by confirming that even if gains are realised after 2017, such legacy investments will not attract GAAR scrutiny.

The changes, introduced through amendments to Rule 10U of the Income-tax Rules, 1962 and Rule 128 of the Income-tax Rules, 2026, effectively “ring-fence” pre-2017 investments, restoring certainty for global investors with long-held India exposures.

What is GAAR and why does it matter

GAAR is a regulatory anti-abuse framework designed to curb “impermissible avoidance arrangements”—structures primarily created to secure tax benefits without genuine commercial substance. First proposed in the 2012–13 Union Budget and effective from April 2017, GAAR seeks to deter tax avoidance by scrutinising arrangements that are engineered mainly for tax advantages rather than genuine business purpose.

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The framework has been particularly relevant for foreign investors -- such as private equity and venture capital funds—who often route investments through treaty jurisdictions to optimise tax outcomes.

The Tiger Global trigger

The need for clarification intensified after the Supreme Court’s January 16 ruling in the Tiger Global case. The court set aside a Delhi High Court judgment that had favoured Mauritius-based Tiger Global International (TGI) and held that capital gains from its $1.6 billion Flipkart stake sale in 2018 were taxable in India.

Crucially, the ruling questioned the absolute nature of grandfathering protections. It suggested that if tax benefits arose after GAAR came into force, authorities could still invoke anti-avoidance provisions—creating uncertainty for legacy investments.

What has changed now

Through Notifications 54 and 55 of 2026, the CBDT has clarified that:

• Income from the transfer of investments made before April 1, 2017 will not be subject to GAAR
• This protection applies even if gains are realised after 2017
• Grandfathering is absolute and unconditional

AKM Global Partner-Tax Sandeep Sehgal said the amendment is largely clarificatory but significant in resolving ambiguity. “It effectively resolves the interpretational uncertainty highlighted in that ruling on the interplay between GAAR and grandfathering where tax benefits arise post-2017. This clarification provides much-needed certainty to investors, while ensuring that GAAR continues to apply to post-2017 arrangements,” he said.

Ravi Mehta, Leader – Transaction Tax, Bhuta Shah & Co, said the move marks a calibrated response to judicial developments.

“In a swift response to the Supreme Court’s Tiger Global ruling, the government has rewritten the GAAR rulebook at least partly. By amending Rules 10U and 128, the CBDT has reaffirmed what was always promised: investments made before 1 April 2017 will not attract GAAR upon exit. Grandfathering, it seems, has been formally restored. For foreign investors, especially PE and VC funds sitting on legacy India portfolios, this brings a welcome dose of certainty. The immediate GAAR overhang on pre-2017 investments has eased, and the government has signalled alignment with its original legislative intent," Mehta said. 

But this is not a full rollback of Tiger Global. Far from it.

"The bigger message of the judgment remains firmly intact. GAAR may be ring-fenced, but judicial anti-avoidance doctrines, treaty abuse rules and the MLI Principal Purpose Test continue to loom large. Offshore holding structures can no longer rely on form alone. Substance, real decision-making, commercial rationale and governance are now table stakes, not optional extras. The amendments also leave behind few nagging questions. Why did the Revenue argue against grandfathering in the first place? What happens to cases already caught in the GAAR net between 2017 and March 2026? And can the law logically apply one day and vanish the next, for the same investment? The rules may be fixed. The standard, however, has been permanently reset,” Mehta added.

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What this means for investors

1. No retrospective tax risk
Concerns over reopening of past investments have been addressed.

2. Clarity on exits
Foreign investors can now execute exits from legacy holdings with greater certainty.

3. Reduced litigation
The amendment narrows the scope for disputes arising from the Tiger Global interpretation.

4. Alignment with policy intent
The original promise of protecting pre-2017 investments has been formally restored.

Not a dilution of the anti-avoidance framework

While GAAR has been ring-fenced for pre-FY18 investments, the broader anti-avoidance ecosystem remains intact. Treaty abuse provisions, judicial doctrines, and the Multilateral Instrument’s Principal Purpose Test (PPT) will continue to apply.

The takeaway is clear: while legacy investments are protected, future tax structuring must be backed by substance, commercial rationale, and robust governance.