Tax Free Investments: The Central Board of Direct Taxes has explicitly stated that gains arising from legacy investments will not fall within the ambit of the General Anti-Avoidance Rules (GAAR). This decision will provide relief to existing investors and dispel the uncertainty surrounding taxation.
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Tax Free Investments: Income derived from the transfer of investments made prior to April 1, 2017, has been excluded from the ambit of the General Anti-Avoidance Rules (GAAR). This will provide clarity and relief to investors holding legacy assets. The Central Board of Direct Taxes (CBDT) has issued a notification to this effect. This decision by the CBDT will bring relief to long-term investors and dispel the uncertainty surrounding taxation.
The notification issued by the CBDT amends Rule 128 of the Income-tax Rules, 2026. Under this amendment, gains arising from investments made before April 2017 have been accorded ‘grandfathering’ status (a special exemption). It is pertinent to note that GAAR is a provision under the Income-tax Act that empowers tax authorities to disregard or recharacterize artificial arrangements—primarily entered into for the purpose of tax avoidance—even if such arrangements appear legally valid on paper. The rule was introduced in 2012 but came into effect on April 1, 2017.
No Tax on Income Arising from Investment Transfers
The clarification states that GAAR provisions will not apply to income arising from the transfer of investments made on or before April 1, 2017. This amendment will resolve the uncertainty created by the Supreme Court’s verdict in the Tiger Global case in January. It reinforces the government’s original objective of ‘grandfathering’ at the time of introducing GAAR.
The notification also clarifies that GAAR will not cover income (capital gains) arising from the transfer of investments made on or before April 1, 2017. However, GAAR will apply to tax-saving arrangements involving the transfer of shares acquired prior to April 1, 2017.
What is Grandfathering?
Grandfathering is a provision under which existing situations continue to be governed by old rules, while new rules apply to future matters. This grants current stakeholders an exemption from the new regulations. It ensures certainty, provides protection against sudden compliance costs, and maintains continuity in policies, investments, or user pricing.
The GAAR, announced in the Union Budget for the financial year 2012-13, aimed to curb tax evasion by foreign investors. Its objective was to prevent tax evasion by entities participating in arrangements that do not qualify as legitimate. However, this proposal also sparked controversy. Investors expressed apprehensions that it could lead to undue harassment by tax authorities.
