Rule 274 — Procedure for investment fund for availing benefit under section 9(12) read with Schedule I to Act. Made under s.9, s.172 of the Income-tax Act, 2025.
Rule 274 gives effect to Section 9 and Section 172 of the Income-tax Act, 2025. A rule cannot go beyond the section it serves: where the two seem to differ, the section governs.
The rule works out the conditions in Schedule I for an eligible investment fund and its fund manager for the purposes of section 9(12).
Sub-rule (1) allows a look-through where investment in a fund has been made directly by an institutional entity: the number of members and the participation interest are determined by looking through that entity if it independently satisfies the conditions in paragraphs 1(1)(c), (e), (f) and (g) of Schedule I, has been set up solely for pooling funds and investing them, and is resident of a country or specified territory with which an agreement referred to in section 159 has been entered into, or is established, incorporated or registered in a country or specified territory notified by the Central Government.
Sub-rule (2) forgives certain lapses. A fund is not denied the benefit of being an eligible fund where non-fulfilment of the conditions in paragraphs 1(1)(c), (d) and (e) of Schedule I is for reasons beyond its control and does not exceed ninety days; or does not exceed eighteen months from the date the fund is set up or the final closing of the fund, whichever is earlier, and bona fide efforts are made to satisfy those conditions; or is because the fund is being wound up and does not exceed one year from the date the winding up began. Nor is it denied the benefit where there is a delay in furnishing the statement referred to in paragraph 1(4) of Schedule I not exceeding ninety days.
Sub-rule (3) puts a figure on control: for paragraph 1(1)(k) of Schedule I, a fund is said to be controlling or managing a business carried out by an entity if it directly or indirectly holds rights resulting in the fund holding more than 26% of the total share capital or voting power or interest in the entity.
Sub-rule (4) fixes the floor for the fund manager's remuneration under paragraph 1(1)(m) of Schedule I. Where the fund is a Category-I foreign portfolio investor of the descriptions given, the remuneration shall not be less than 0.10% of the asset under management. In other cases it shall not be less than 0.30% of the asset under management; or 10% of profits derived by the fund in excess of the specified hurdle rate from the fund management activity, where the manager is entitled only to remuneration linked to income or profits; or 50% of the management fee, whether fixed or linked to income or profits, paid by the fund in respect of the fund management activity, as reduced by amounts incurred towards operational expenses including distribution expenses, where the fund is also paying a management fee to another fund manager.
Sub-rules (5) and (6) provide the escape from that floor: where the remuneration is lower, the fund may apply to the Member, Central Board of Direct Taxes referred to in rule 275(2) for the Board's approval of the lower amount, and the Board, if satisfied on the relevant facts, may approve it; rule 275(3) to (12) apply to such an application mutatis mutandis.
Sub-rule (7) requires the fund manager, in addition to any report under section 172, to obtain a report from an accountant as defined in section 515(3)(b) in respect of the activity undertaken for the fund and furnish it on or before the specified date in Form No. 172, duly verified by the accountant, and all the provisions of the Act apply as if it were a report to be furnished under section 172.
Sub-rules (8) and (9) settle two points on connection and profits: a fund manager is not a connected person of the fund merely because he undertakes its fund management activity; and remuneration in the nature of a fixed charge not dependent on the fund's income or profits is not included in the profits referred to in paragraph 1(3)(d) of Schedule I, provided the conditions in paragraph 1(1)(m) are satisfied and the fixed charge was agreed by the fund manager in writing at the beginning of the relevant fund management activity.
Sub-rule (10) defines "asset under management" as the annual average of the monthly average of the opening and closing balances of the part of the fund managed by the fund manager; "management fee" as the amount mentioned in a certificate obtained from an accountant as defined in rule 10(a); and "specified hurdle rate" as a pre-defined threshold beyond which the fund agrees to pay a share of the profits earned from the fund management activity.
Schedule I keeps a fund from being taxed in India merely because its manager is here, but only if the fund is genuinely broad-based, passive and independently managed. Those conditions can fail for reasons that have nothing to do with avoidance — a fund still building its investor base, a fund winding down, an institutional investor pooling other people's money. The rule supplies the look-through, the tolerances and the numeric tests that make the conditions administrable, and fixes a minimum arm's length remuneration for the manager so that the arrangement is not made to look independent by underpaying him.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Tolerance for non-fulfilment for reasons beyond the fund's control | Not exceeding ninety days | Non-fulfilment of the conditions in paragraphs 1(1)(c), (d) and (e) of Schedule I | Sub-rule (2)(a)(i) |
| Tolerance for a newly set up fund | Not exceeding eighteen months from the date the fund is set up, or the final closing of the fund, whichever is earlier | Bona fide efforts must be made to satisfy the conditions in paragraphs 1(1)(c), (d) and (e) | Sub-rule (2)(a)(ii) |
| Tolerance for a fund being wound up | Not exceeding one year from the date on which the process of winding up has begun | Non-fulfilment is for the reason that the fund is in the process of being wound up | Sub-rule (2)(a)(iii) |
| Tolerance for delay in the Schedule I statement | Not exceeding ninety days | Delay in furnishing the statement referred to in paragraph 1(4) of Schedule I | Sub-rule (2)(b) |
| Holding at which a fund is treated as controlling or managing a business | More than 26% of the total share capital or voting power or interest in the entity | Rights held directly or indirectly, for paragraph 1(1)(k) of Schedule I | Sub-rule (3) |
| Minimum remuneration where the fund is a Category-I foreign portfolio investor of the specified descriptions | 0.10% of the asset under management | A floor, not the amount payable; a lower amount may be approved by the Board under sub-rule (5) | Sub-rule (4)(a) |
| Minimum remuneration in other cases | 0.30% of the asset under management | A floor; alternatives in sub-rule (4)(b)(ii) and (iii) apply to the situations described there | Sub-rule (4)(b)(i) |
| Minimum remuneration where the manager is entitled only to profit-linked remuneration | 10% of profits derived by the fund in excess of the specified hurdle rate from the fund management activity | Where the fund manager is entitled only to remuneration linked to the income or profits derived by the fund | Sub-rule (4)(b)(ii) |
| Minimum remuneration where the fund also pays another fund manager | 50% of the management fee, as reduced by amounts incurred towards operational expenses including distribution expenses | Management fee whether fixed or linked to income or profits, paid in respect of the fund management activity undertaken by the fund manager | Sub-rule (4)(b)(iii) |
| Time to furnish the accountant's report | On or before the specified date | Report in Form No. 172, duly verified by the accountant, in addition to any report under section 172 | Sub-rule (7) |
The figures in sub-rule (4) are minimums, not the remuneration: the rule says the amount to be paid shall not be less than the amount calculated in the manner given, so a fund paying more is unaffected, and a fund paying less is not automatically outside Schedule I — it must apply to the Member, Central Board of Direct Taxes under sub-rule (5) and obtain the Board's approval of the lower amount, with rule 275(3) to (12) applying to that application. Which of the sub-rule (4)(b) alternatives applies depends on the manager's arrangement, not on the fund's preference: clause (ii) is for a manager entitled only to profit-linked remuneration and clause (iii) for a fund that is also paying a management fee to another manager. "Asset under management" is a defined two-stage average — the annual average of the monthly averages of opening and closing balances — and only of the part of the fund the manager manages. The tolerances in sub-rule (2) are conditional and short: ninety days for matters beyond the fund's control, eighteen months for a new fund but capped at the final closing if that comes earlier, one year for a winding up, ninety days for a late Schedule I statement. Sub-rule (7) adds a report that is separate from anything required under section 172 and yet is treated as if furnished under it. Sub-rule (9) protects a fixed-charge remuneration from being counted in the paragraph 1(3)(d) profits only where it was agreed in writing at the beginning of the relevant fund management activity — an arrangement recorded later does not qualify.
A fund that is not a Category-I foreign portfolio investor has an asset under management, computed as the annual average of the monthly averages of opening and closing balances of the part managed by its manager, of Rs 1,000 crore. Under sub-rule (4)(b)(i) the remuneration to the manager must be at least 0.30% of that, or Rs 3 crore. If the fund proposes to pay Rs 2 crore, it does not lose the benefit outright: it may apply to the Member, Central Board of Direct Taxes referred to in rule 275(2), and the Board may approve the lower amount. Separately, if the fund holds rights giving it 30% of the voting power in an operating company, sub-rule (3) treats it as controlling or managing that business for paragraph 1(1)(k).
A fund manager meets it in the Form No. 172 report filed by the specified date, and a fund meets it when testing its Schedule I conditions for the year — and, where the manager is paid below the floor, in the application to the Member, Central Board of Direct Taxes.
a fund shall be said to be controlling or managing a business carried out by any entity, if it directly or indirectly holds such rights which results in the fund holding more than 26% of the total share capital or voting power or interest in the entity, as the case may be
The amount of remuneration to be paid by the fund to a fund manager, referred to in paragraph 1(1)(m) of Schedule I to the Act, shall not be less than the amount calculated in the following manner
"asset under management" means the annual average of the monthly average of the opening and closing balances of the value of such part of the fund as managed by the fund manager
