Rule 128 — Chapter XI relating to General Anti Avoidance Rule not to apply in certain cases. Made under s.184, s.210, s.159 of the Income-tax Act, 2025.
Rule 128 gives effect to Section 184, Section 210 and Section 159 of the Income-tax Act, 2025. A rule cannot go beyond the section it serves: where the two seem to differ, the section governs.
Sub-rule (1) takes four cases outside Chapter XI, the General Anti Avoidance Rule. Clause (a) exempts an arrangement where the aggregate tax benefit in the relevant tax year to all the parties to the arrangement does not exceed a sum of three crore rupees. Clause (b) exempts a Foreign Institutional Investor who is an assessee under the Act, who has not taken the benefit of an agreement referred to in section 159, and who has invested in listed securities, or in unlisted securities with the prior permission of the competent authority, in accordance with the Securities and Exchange Board of India (Foreign Institutional Investors) Regulations, 1995, in relation to those investments. Clause (c) exempts a non-resident in relation to investment made by him by way of offshore derivative instruments or otherwise, directly or indirectly, in a Foreign Institutional Investor. Clause (d) exempts any income accruing or arising to, or deemed to accrue or arise to, or received or deemed to be received by, any person from transfer of such investments which were made before the 1st April, 2017 by that person.
Sub-rule (2) fixes the temporal reach: Chapter XI applies to any arrangement, irrespective of the date on which it was entered into, in respect of the tax benefit obtained from the arrangement on or after the 1st April, 2017, except for income which accrues or arises to, or is deemed to accrue or arise to, or is received or deemed to be received by, any person from transfer of such investments which were made before the 1st April, 2017 by that person.
Sub-rule (3) supplies the definitions. "Foreign Institutional Investor" takes its meaning from section 210(6)(a); "offshore derivative instrument" from the Securities and Exchange Board of India (Foreign Institutional Investors) Regulations, 1995; "Securities and Exchange Board of India" from section 2(1)(a) of the Securities and Exchange Board of India Act, 1992. "Tax benefit", as defined in section 184(11) and computed in accordance with Chapter XI, is to be read as the amount of tax for section 184(11)(a) to (e), and for section 184(11)(f) as the tax that would have been chargeable had the increase in loss referred to there been the total income.
Clause (d) of sub-rule (1) and sub-rule (2) were each substituted by the IT (Amdt.) Rules, 2026 with effect from 1-4-2026, and the rule sets out the text as it read before substitution.
Chapter XI lets an arrangement be recharacterised where its main purpose is a tax benefit, and a power that wide needs a floor and a set of carve-outs or it will be turned on ordinary commercial transactions and on portfolio investment structures that were built long before the Chapter existed. This rule sets that floor at an aggregate tax benefit of three crore rupees, protects Foreign Institutional Investors and those investing into them, and grandfathers the transfer of investments made before 1st April, 2017. Sub-rule (2) then makes clear that grandfathering attaches to the investment, not to the date the arrangement was entered into.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Aggregate tax benefit below which Chapter XI does not apply | Three crore rupees | The aggregate tax benefit in the relevant tax year to all the parties to the arrangement must not exceed this sum; tax benefit is as defined in section 184(11) and computed under Chapter XI | Sub-rule (1)(a) |
| Cut-off date for grandfathered investments | 1st April, 2017 | Income from transfer of investments made before this date by that person is outside Chapter XI | Sub-rule (1)(d) and sub-rule (2) |
| Date from which tax benefit from any arrangement is within Chapter XI | On or after the 1st April, 2017 | Applies irrespective of the date on which the arrangement was entered into, subject to the grandfathering exception | Sub-rule (2) |
The three crore rupees threshold is measured across all the parties to the arrangement and for the relevant tax year, not per person and not over the life of the arrangement, so an arrangement can be inside Chapter XI in one year and outside it in another. It is a threshold on tax benefit as section 184(11) defines it, and sub-rule (3)(d) tells you how to quantify it: an amount of tax for clauses (a) to (e), and for clause (f), where the benefit is an increased loss, the tax that would have been chargeable had that increase been the total income — a loss year is therefore not automatically below the line. Sub-rules (1)(d) and (2) work together and should not be read as one grandfathering the arrangement: the date that matters is when the investment was made, and the tax benefit obtained on or after 1st April, 2017 from an older arrangement is squarely within Chapter XI. The Foreign Institutional Investor carve-out in clause (b) is conditional on all three of its limbs, including that no benefit of an agreement referred to in section 159 has been taken.
A company enters into an arrangement in the tax year whose aggregate tax benefit to all the parties, computed under section 184(11) and Chapter XI, is Rs. 2.4 crore. It falls under sub-rule (1)(a) and Chapter XI does not apply to it for that year. If in a later year the same arrangement yields an aggregate tax benefit of Rs. 5 crore to the parties, the exemption is not available for that year and Chapter XI applies, whatever the date the arrangement was entered into.
A reader meets this rule when a General Anti Avoidance Rule reference or notice is proposed, where the threshold and the carve-outs are the first answer, and when advising on whether an older investment structure or a Foreign Institutional Investor's holdings are exposed to Chapter XI.
an arrangement, where the aggregate tax benefit in the relevant tax year, to all the parties to the arrangement does not exceed a sum of three crore rupees
The provisions of Chapter XI shall apply to any arrangement, irrespective of the date on which it has been entered into, in respect of the tax benefit obtained from the arrangement on or after the 1st April, 2017
