GAAR amendments strengthen certainty for pre-April 2017 foreign investors.
Written by Acclime Global Business,
India has taken a decisive step to reinforce tax certainty for foreign investors. On 31 March 2026, the Central Board of Direct Taxes (CBDT) issued two notifications amending the General Anti-Avoidance Rules (GAAR). The changes confirm that income from the transfer of investments made before 1 April 2017 will not be subject to GAAR, regardless of when the sale or exit occurs.
This clarification resolves a long-standing ambiguity and strengthens India’s position as a predictable investment destination. For private equity funds, foreign portfolio investors and multinationals with legacy investments, it provides much-needed certainty on tax exposure at exit.
What is GAAR and why does it matter?
GAAR is a provision in Indian income tax law that allows tax authorities to deny tax benefits where an arrangement, though legally valid, lacks commercial substance and is primarily designed to obtain a tax advantage.
Introduced in 2012 and effective from 1 April 2017, GAAR included a grandfathering provision to protect investments made before that date. The intention was to ensure that historical investments would not be retrospectively challenged. In practice, however, uncertainty remained over whether capital gains realised after 2017 from those investments were covered.
A Supreme Court ruling that raised questions
In January 2026, the Supreme Court ruled on a case involving capital gains from the 2018 sale of a Flipkart stake held through Mauritius-based entities. Although the investment was made before April 2017, the Court allowed GAAR to apply, citing lack of commercial substance.
This decision raised concerns among global investors about the reliability of grandfathering protection, particularly for treaty-based investment structures. Rather than leaving the issue unresolved, the CBDT acted quickly to clarify its policy intent through a formal amendment.
What the amendment does
The CBDT’s amendment clarifies that GAAR will not apply to income arising from the transfer of investments made before 1 April 2017, regardless of when the transaction occurs. This clarification covers the Income tax Act 2025, effective 1 April 2026, ensuring continuity of the grandfathering protection across the legislative transition.
However, GAAR remains fully applicable to any tax-driven arrangement made on or after 1 April 2017 that lacks commercial substance.
Two key limitations apply:
- The exemption mainly covers capital gains from the transfer of pre-2017 investments; other income linked to such investments may still be reviewed.
- Broader anti-avoidance principles and judicial doctrines continue to apply independently of the GAAR grandfathering rules.
What this means for foreign investors
The amendment is particularly relevant for investors using structures in Mauritius, Singapore, Cyprus and other jurisdictions that have historically been used to structure inbound investment. Many of these structures were established before 2017, and uncertainty around exit taxation had been a concern.
The CBDT’s action confirms that the government stands behind its original grandfathering promise. This gives long-term investors a clearer basis to assess tax exposure on exits and supports confidence in India’s tax framework.
Overall, the move has been widely viewed by tax professionals as a practical and welcome step that reduces the risk of GAAR challenges on legacy investments.
Structuring considerations for future investments
While the amendment resolves the uncertainty on pre-2017 investments, it reinforces that GAAR remains a central part of India’s tax regime. For investments made from 1 April 2017 onwards, structures must be supported by genuine commercial substance. Treaty benefits remain available, but structures created primarily to access treaty benefits are likely to face scrutiny.
Investors should also consider broader judicial principles on substance and not rely solely on GAAR exemptions. A holistic approach to structuring is essential to ensure long-term tax certainty.
