India to Simplify Offshore Investment Fund Rules to Attract Foreign Capital

A forthcoming bill is set to substantially simplify the regulatory framework for offshore investment funds, a move designed to attract increased foreign capital into India. The proposed legislation will relax eligibility conditions for funds managed from India, enabling them to benefit from tax exemptions on their global income.

Finance Minister Nirmala Sitharaman is expected to introduce the Taxation and Other Laws (Amendment) Bill, 2026, in Parliament soon. This bill will supersede the ordinance issued on June 5, which already provided income tax exemptions for interest and capital gains on investments in G-Secs by Foreign Portfolio Investors (FPIs).

In addition to these measures, the bill proposes tax exemptions for foreign companies that store and sell electronic components through customs bonded areas and supply them to Indian manufacturers. It also includes a tax exemption until March 31, 2041, for eligible foreign entities involved in the rough diamond trade, covering income from sales conducted within designated special zones in India.

By significantly relaxing the eligibility criteria for an Eligible Investment Fund (EIF) managed in India to qualify for tax exemption on its worldwide income, the government aims to solidify India's position as a global fund management hub. This initiative comes amid ongoing efforts to attract foreign inflows, particularly in the context of the West Asia crisis. Measures announced previously by the government and the Reserve Bank of India (RBI) on June 5 included swap facilities for FCNR(B) deposits and external commercial borrowings, along with tax exemptions for FPI capital gains and interest income.

Finance Minister Sitharaman had previously indicated that these initial steps were part of a broader strategy to encourage foreign capital, stating, "We recognise, we need more foreign capital to come in."

The proposed amendments will remove several conditions previously required for offshore funds, including a minimum investor threshold of 25 members, a maximum 10% participation interest for any single investor, restrictions on investing more than 25% of the corpus in one entity, limitations on investments in associate entities, and a minimum monthly average corpus requirement of Rs 100 crore.

Experts anticipate a positive impact. Amit Maheshwari, Managing Partner at AKM Global, stated, "By simplifying the eligibility framework for offshore investment funds, the amendment is expected to strengthen India's attractiveness as a fund management jurisdiction and further the Government's objective of promoting India as a competitive global investment hub."

The bill, circulated among Members of Parliament, is slated for introduction in the Lok Sabha shortly. According to its statement of objects and reasons, these additional taxation measures are deemed necessary to fully achieve the objectives outlined in the Taxation Laws (Amendment) Ordinance, especially considering continuing global developments.

The proposed changes also aim to eliminate separate exemption conditions for funds operating from the International Financial Services Centre (IFSC), thereby resolving existing ambiguities between IFSC and non-IFSC offshore funds and establishing a uniform eligibility framework for all eligible investment funds managed in India.

Abheet Sachdeva, Partner- M&A Tax at Nangia Global, noted, "These proposed changes are expected to significantly enhance the attractiveness of India's onshore fund management ecosystem for offshore funds and facilitate greater relocation of offshore fund management activities to India."

Tejas Desai, Partner and Financial Services Tax Leader at EY India, described the amendments as "one of the most consequential reforms for India's fund management ecosystem in recent years," highlighting that only 5 out of the original 13 conditions for qualifying as an eligible investment fund remain. He added, "These changes should give the much-needed flexibility to fund managers and significantly enhance India's competitiveness as a fund management destination for both India-focused and global investment strategies."

The statement of objects and reasons for the bill elaborated that the Ordinance was promulgated to mitigate the impact of external economic shocks, ensure domestic economic stability, and support key sectors affected by global conditions. Subsequent assessments, following stakeholder representations, confirmed the continued relevance of these objectives, necessitating further taxation measures for comprehensive achievement.

Richa Sawhney, Partner-Tax at Grant Thornton Bharat, characterized the bill as signaling "a calibrated shift from short-term relief to long-term competitiveness." She further commented, "The liberalisation of the fund management regime, incentives for electronics supply chains, facilitation measures for data centres and diamond trading and tax relief for foreign investors in Government securities collectively point towards a policy objective of attracting global capital and business activity into India. Collectively, the amendments reflect a clear emphasis on investment facilitation, supply-chain resilience and long-term tax certainty."

The Ordinance was initially necessitated by evolving geopolitical developments and disruptions in international trade and supply chains, which created significant global economic uncertainty. The need arose for immediate taxation measures to counter external economic shocks, ensure domestic stability, and support vulnerable sectors, requiring urgent amendments to the Act in the larger public interest.