CBDT Omits Rule 21AIA(4) for Retail Schemes and ETFs

Notification no. 136/2025, dated 21-08-2025

1. Exemption under Section 10(4D)

Section 10(4D) of the Income-tax Act provides an exemption for certain categories of income earned by a ‘specified fund’. The term ‘specified fund’ is defined under clause (c) of the Explanation to Section 10(4D). Initially, this provision was applicable to certain funds operating in the International Financial Services Centre (IFSC). The Finance (No. 2) Act, 2024, expanded the ambit of the term ‘specified fund’ to also include funds that are certified as retail schemes or Exchange Traded Funds (ETFs). However, these inclusions were subject to compliance with the conditions laid down in the International Financial Services Centres Authority (Fund Management) Regulations, 2022, framed under the IFSCA Act, 2019, along with additional conditions as may be prescribed by the Central Government.

2. Prescribed Conditions under Notification No. 10/2025

To operationalize this amendment, the Central Board of Direct Taxes (CBDT) issued Notification No. 10/2025 dated 27-01-2025, amending Rule 21AIA of the Income-tax Rules, 1962. By this notification, a new sub-rule (4) was inserted to specify the eligibility conditions for retail schemes under Section 10(4D). These included a minimum investor threshold of 20, with restrictions on concentration by capping individual investor holdings at 25%. Furthermore, investment exposure was restricted to 25% in associates, 15% in unlisted securities, and 10% in a single company. For ETFs, the notification mandated listing and trading on recognised stock exchanges, in addition to adherence to IFSCA’s regulatory framework.

3. Amendment by the Finance Act, 2025

The Finance Act, 2025, further refined the legislative intent of Section 10(4D) by amending the provision to remove the requirement of satisfying the additional prescribed conditions under the Income-tax Rules. Instead, it provided that retail schemes and ETFs shall only be required to comply with the conditions already laid down under the IFSC (Fund Management) Regulations, 2022. This change simplified the compliance burden by eliminating the need for funds to meet dual sets of conditions under both the IFSCA framework and the Income-tax Rules. Consequently, the focus of compliance shifted entirely to the sectoral regulator, i.e., IFSCA.

4. Omission of Sub-rule (4) by CBDT

To align the rules with the amendment made by the Finance Act, 2025, the CBDT omitted sub-rule (4) of Rule 21AIA, which had earlier been inserted through Notification No. 10/2025. This omission ensures that no additional conditions are prescribed under the Income-tax Act for retail schemes or ETFs. Instead, such entities are now solely governed by the conditions embedded in the IFSCA (Fund Management) Regulations, 2022. This legislative shift highlights the government’s intention to streamline regulation by avoiding overlapping compliance requirements, thus making the IFSC regime more attractive to investors and fund managers.

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