Finance Bill 2025 removes indirect investment tracking for offshore funds, boosts India's appeal for global fund managers

Verifying indirect participation through institutional investors proves difficult

The government has introduced key amendments to offshore fund management rules through the Finance Bill 2025, aiming to reduce compliance hurdles and make India a more attractive jurisdiction for global fund managers.

The amendments revise the safe harbour threshold for indirect participation by Indian residents in offshore funds. The move is expected to lower regulatory complexities, making it easier for offshore funds to operate from India, experts said.

Siddharth Mody, Partner at law firm J. Sagar Associates (JSA), said, “The Finance Bill 2025 introduces significant amendments to enhance India’s position as a favourable jurisdiction for offshore fund management. Removing the requirement to track indirect Indian ownership simplifies compliance while restoring the government’s flexibility to modify conditions ensures adaptability. This move is expected to attract more offshore funds and top talent to India’s financial ecosystem.”

A safe harbour rule provides businesses or taxpayers with predefined conditions under which they can avoid disputes with tax authorities. In the case of offshore fund management, India's safe harbour provisions of the Income-tax Act, 1961, ensure that offshore funds managed by Indian professionals are not considered as having a permanent establishment (PE) in India. This means such funds will not be taxed in India solely because their manager is based in India, as long as they meet the prescribed conditions.

What changes?

The Finance Bill 2025 has amended the rules so that only direct investments by Indian residents will be considered within the 5 percent threshold, eliminating the need for fund managers to track indirect holdings.

Earlier, under Section 9A of the Income-tax Act, 1961, both direct and indirect investments by Indian residents were counted within the 5 percent safe harbour threshold for offshore funds. This meant that fund managers had to track not just individual Indian investors but also indirect holdings through institutional investors, making compliance challenging. The change is expected to encourage more offshore funds to appoint Indian managers, boosting the country’s fund management sector.

In simple terms, the government has made it easier for offshore funds to be managed from India without the risk of triggering tax liabilities. Previously, if Indian residents indirectly invested in an offshore fund beyond 5 percent of the fund’s total corpus, it could complicate tax compliance. Now, fund managers only need to track direct Indian investments, significantly reducing administrative burdens.

In 2015, the Ministry of Finance introduced Section 9A of the Income Tax Act, 1961, to create a tax-safe harbour for offshore funds managed by Indian fund managers. The provision aimed to prevent offshore funds from being taxed in India simply because they were managed by an Indian professional. However, certain stringent conditions made compliance challenging. A significant pain point was the requirement that Indian residents could not directly or indirectly hold more than 5 percent of the offshore fund’s corpus. It was relatively straightforward to check whether an Indian resident was directly investing in an offshore fund. This is because individual investors typically have clear ownership records, and their holdings can be easily identified.

However, verifying indirect participation through institutional investors proved difficult as investments are made through entities like mutual funds, private equity funds, or other investment vehicles. These institutions pool money from multiple investors, making it hard to determine if Indian residents indirectly held more than 5 percent of the offshore fund's corpus through such intermediaries. This created compliance complexities for fund managers, as they had to track and disclose multiple layers of investment structures.

Industry reactions

“With the Indian fund management industry maturing rapidly, it’s natural for Indian fund managers to be appointed to manage offshore funds. The requirement to track both direct and indirect ownership was a significant impediment. This change makes the provision more practical, and we should see more fund managers taking advantage of this section,” Keyur Shah, Partner, EY India, told Moneycontrol.

Punit Shah, Partner at tax and regulatory firm Dhruva Advisors, concurred. “The key amendment is that the exemption from tax liability will now be available even if Indian residents indirectly hold more than 5 percent in an offshore fund. This removes the burden of tracking indirect investments and is a welcome step in promoting offshore fund management from India,” he said.