CBDT notifies ‘other condition’ to be fulfilled by ‘original fund’ claiming benefit of Sec. 47(viiad)

Notification No. 80/2022, dated 08-07-2022

Section 47(viiad) provides that any transfer by an investor, in a relocation, of a capital asset being a share or unit or interest held by him in the original fund in consideration for the share or unit or interest in the resultant fund shall not be considered as a transfer for capital gain tax purpose.

“Original Fund” is defined to mean a fund established or incorporated or registered outside India, which collects funds from its members for investing for their benefit and fulfills the following conditions, namely:

(a) The fund is not a person resident in India;
(b) The fund is a resident of a country or a specified territory with which India has entered into DTAA or is established or incorporated or registered in a notified country or a specified territory;
(c) The fund and its activities are subject to applicable investor protection regulations in the country or specified territory where it is established or incorporated or is a resident; and
(d) Fulfills such other conditions as may be prescribed;

To prescribe the ‘other conditions’ as mentioned in (d) above, the Central Board of Direct Taxes (CBDT) has inserted a new Rule 21AL to the Income-tax Rules, 1962.

As per the newly inserted rule, in the case where a capital asset is transferred to a resultant fund being a Category III Alternative Investment Fund (AIF), the original fund shall fulfill the condition that the aggregate participation or investment in the original fund, directly or indirectly, by persons resident in India shall not exceed 5% of the corpus of such fund at the time of such transfer.

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