The Draft Income Tax Rules, 2026 have introduced Rule 285, laying down the methodology for computing exempt income in the nature of capital gains arising in connection with the relocation of an original fund to a resultant fund. The rule is aimed at providing clarity for specified funds, especially where units are held by non-resident investors.
Applicability of Rule 285
Rule 285 applies to capital gains income arising or received by a specified fund that is attributable to units held by non-resident investors (excluding permanent establishments in India). The provision is relevant in cases involving the transfer of shares of an Indian company received during fund relocation.
Formula for Computing Exempt Income
Where the specified fund furnishes Form No. 178, the exempt income under Schedule VI will be calculated using the formula:
Exempt Income = A × B / C
Where:
- A = Capital gains arising from the transfer of shares of an Indian company received by the resultant fund during relocation, which would not have been taxable if relocation had not occurred.
- B = Aggregate daily assets under management (AUM) attributable to non-resident unit holders from the date of acquisition of shares to the date of transfer.
- C = Aggregate daily total AUM of the specified fund for the same period.
No Form Filing Means No Exemption
Rule 285 clearly states that if Form No. 178 is not filed, the exempt income will be treated as NIL, making compliance critical for funds seeking tax relief.
Mandatory Reporting and Certification
The rule introduces strict compliance requirements:
- Specified funds must file an annual statement of exempt income in Form No. 178 electronically under digital signature before the due date.
- The statement must be certified by an accountant.
- The accountant must submit a certificate in Form No. 179 electronically before the specified date (one month prior to the due date).
Key Definitions Clarified
Rule 285 also defines important terms to avoid interpretational disputes:
- Assets under management (AUM) refers to the closing value of assets or investments of the specified fund on a particular date.
- Due date will follow the meaning provided under section 263(1)(c).
- Terms like original fund, resultant fund, relocation, securities, unit, and specified fund will carry meanings assigned in Schedule VI notes.
- Permanent establishment will have the meaning assigned under Section 173(c).
Impact on Investment Funds and Non-Resident Investors
Tax experts believe Rule 285 strengthens the regulatory framework around fund relocation transactions by linking tax exemption directly to investor composition and robust reporting requirements. Funds with significant non-resident participation will need to carefully track AUM and maintain accurate records to compute exemptions correctly.
Why Rule 285 Matters
The rule ensures transparency in cross-border fund restructuring while preserving tax neutrality for genuine relocation transactions. However, the strict filing and certification requirements signal the government’s focus on compliance and audit trail for exemptions.
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