- CBDT has expanded PAN exemptions for non-resident investors through Category I and II alternative investment funds.
- The July twenty-first update includes IFSC-based funds regulated by the IFSCA (Fund Management) Regulations, twenty twenty-two.
- These changes aim to reduce compliance costs and simplify onboarding for foreign limited partners in India.
CBDT notified the Income-tax (Second Amendment) Rules, 2026 on 21 July 2026, widening the definition of a “specified fund” to include eligible Category I and Category II alternative investment funds. The change took effect immediately.
The amendment expands the PAN exemption available to non-resident investors using qualifying funds. It covers eligible funds regulated in India under SEBI rules and certain vehicles located in an International Financial Services Centre.
Notification No. 94/2026 gives effect to the change. It substitutes clause (c) of sub-rule (5) of Rule 157 of the Income-tax Rules, 2026.
Free toolSubstantial Presence Test CalculatorThe relief remains conditional. It applies to qualifying investments through funds that meet the required legal form, registration and regulatory conditions.
The previous route was narrower. Category III AIFs had been covered, while Category I and Category II vehicles were outside the expanded treatment.
The revised framework now reaches funds established in India as a trust, company, LLP or body corporate, provided they hold the required registration. Eligible overseas investors can use the relief without obtaining a PAN solely for that investment.
Category I and II AIFs now qualify under two regulatory routes
The amended rule creates two routes into the revised fund definition. One covers AIFs registered under the SEBI (Alternative Investment Funds) Regulations, 2012. The other covers funds regulated under the IFSCA (Fund Management) Regulations, 2022, when they are located in an IFSC.
| Fund route | Conditions under the revised framework | Affected investment channel |
|---|---|---|
| India-based AIF | Category I or Category II registration under the SEBI (Alternative Investment Funds) Regulations, 2012 | Non-resident investment through an eligible fund |
| IFSC-based fund | Regulation under the IFSCA (Fund Management) Regulations, 2022 and location in an IFSC | Non-resident investment through an eligible fund |
| Earlier route | Category III AIFs were covered under the previous framework | Investment through qualifying Category III funds |
Category I funds include vehicles associated with venture capital and infrastructure. Category II funds include private equity and real estate strategies. Category III funds had been the category expressly covered through the earlier route.
The fund’s structure also matters. The revised provision lists a trust, company, LLP or body corporate established in India, alongside the applicable regulatory registration.
Foreign investors get relief from an additional identification step
Non-resident investors in eligible SEBI-registered Category I and Category II AIFs can now invest without obtaining a PAN solely for that investment. The route also covers eligible funds based in an IFSC.
The change can simplify onboarding for foreign limited partners. Fund managers may avoid documentation delays tied specifically to obtaining the tax identification number before an eligible investment proceeds.
Lalitha Rao, a tax expert at DSA, said the notification “reduces the cost of doing business” and translates into “improved cash flow, fewer TDS refund claims, and lower compliance costs.”
“reduces the cost of doing business” and translates into “improved cash flow, fewer TDS refund claims, and lower compliance costs.”
The revised treatment targets a procedural hurdle rather than removing the broader conditions attached to the investment. A fund must still satisfy the relevant legal, registration and location requirements.
Passive global investors had viewed the earlier administrative burden as a deterrent to entering the Indian market. The broader route is intended to support faster onboarding and bring the tax treatment closer to the fund categories recognized by India’s financial regulators.
Rule 157 supplies the operative change
The amendment relies on Section 533 read with Section 262 of the Income-tax Act, 2025. The Income-tax Act, 2025 and the Income-tax Rules, 2026 came into effect on April 1, 2026.
The full instrument is identified as Notification No. 94/2026 [F. No. 370142/24/2026-TPL] / G.S.R. 646(E). Rohit Singh, Under Secretary to the Government of India, signed and issued the notification.
Its operative provision replaces clause (c) of sub-rule (5) of Rule 157. The substituted clause expressly recognizes Category I and Category II AIFs and adds the IFSCA-regulated route for funds located in an IFSC.
The board issued the rules on 21 July 2026, the same day they became effective. Funds and investors therefore must apply the revised provision to transactions covered from that date.
IFSC vehicles receive a direct place in the framework
The inclusion of IFSCA-regulated funds gives IFSC-based vehicles an express route into the revised treatment. GIFT City is an example of an IFSC location identified in the regulatory context.
That route may support fund-management activity in IFSCs by reducing an administrative step for qualifying international investors. It also places eligible mainland and IFSC fund structures within one expanded tax framework, although each vehicle must meet its own conditions.
The change reflects the transition to India’s updated tax legislation. The Income-tax Act, 2025 and the related rules began operating on April 1, 2026, while the July amendment updates Rule 157 to recognize both SEBI and IFSCA regulatory pathways.
SEBI’s related circular addresses specialized investment funds
SEBI issued Circular No: HO/24/13/17(1)2026-IMD-POD-1 on 21 July 2026 concerning certification requirements for distribution of specialized investment funds. The circular formed part of the regulatory alignment accompanying the tax-rule change.
The amendment was discussed publicly on July 22, 2026 as a measure supporting expeditious onboarding of foreign investors. Its legal effect comes from the notified substitution in Rule 157, not from the accompanying commentary.
Eligible funds can now assess Category I and Category II structures against the updated conditions. The immediate effective date gives the revised route a starting point of 21 July 2026.
