CBDT Clarifies GAAR Grandfathering for Pre-2017 Investments

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  • Last Updated on 2 April, 2026

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GAAR grandfathering rule 10U

Notification No. 54/2026 & Notification No. 55/2026, dated 31-03-2026

The Central Board of Direct Taxes (CBDT) has amended Rule 10U and corresponding Rule 128 of the Income-tax Rules to provide clarity on the scope of grandfathering under the General Anti-Avoidance Rules (GAAR).

1. Background – Grandfathering under Rule 10U

Rule 10U specifies situations where GAAR shall not apply, particularly through the concept of grandfathering.

  • Rule 10U(1)(d) provides that GAAR shall not apply to income arising from the transfer of investments made before 1st April 2017.
  • This ensures protection for investments made prior to the introduction of GAAR.

2. Issue with Pre-Amendment Position

Earlier, Rule 10U(2) was framed using a ‘without prejudice’ clause, which:

  • Operated alongside Rule 10U(1)(d)
  • Effectively overrode the grandfathering provision in certain cases
  • Allowed GAAR to apply if tax benefits arose on or after 1st April 2017, irrespective of when the investment was made

This created ambiguity and uncertainty for taxpayers.

4. Key Amendments Introduced

The CBDT has now made the following significant changes:

  • Removal of ‘without prejudice’ language from Rule 10U(2)
  • Introduction of a clear and explicit exception structure
  • Clarification that grandfathering applies strictly to investments made before 01-04-2017

5. Revised Position on GAAR Applicability

Under the amended rules:

  • GAAR applies to arrangements generating tax benefits on or after 1st April 2017
  • Exception: GAAR shall not apply where such income arises from the transfer of investments made before 1st April 2017

This restores and reinforces the intended protection under the grandfathering provision.

6. Effective Date of Amendment

  • The amendment comes into force on 31st March 2026
  • The Explanatory Memorandum clarifies that Chapter X-A (GAAR provisions) shall not be invoked on or after the date of publication in cases involving pre-April 2017 investments

7. Conclusion

The amendment brings much-needed clarity and certainty to the application of GAAR by:

  • Strengthening the grandfathering protection
  • Eliminating interpretational conflicts
  • Ensuring that legacy investments are not adversely impacted by post-2017 anti-avoidance provisions

This move aligns with the principle of tax certainty and fairness in retrospective application of anti-avoidance rules.

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Author: Taxmann

Taxmann Publications has a dedicated in-house Research & Editorial Team. This team consists of a team of Chartered Accountants, Company Secretaries, and Lawyers. This team works under the guidance and supervision of editor-in-chief Mr Rakesh Bhargava.

The Research and Editorial Team is responsible for developing reliable and accurate content for the readers. The team follows the six-sigma approach to achieve the benchmark of zero error in its publications and research platforms. The team ensures that the following publication guidelines are thoroughly followed while developing the content:

  • The statutory material is obtained only from the authorized and reliable sources
  • All the latest developments in the judicial and legislative fields are covered
  • Prepare the analytical write-ups on current, controversial, and important issues to help the readers to understand the concept and its implications
  • Every content published by Taxmann is complete, accurate and lucid
  • All evidence-based statements are supported with proper reference to Section, Circular No., Notification No. or citations
  • The golden rules of grammar, style and consistency are thoroughly followed
  • Font and size that's easy to read and remain consistent across all imprint and digital publications are applied