Income Tax Rules Amendment 2025: New Conditions for Venture Capital Funds, Finance Companies in IFSCs, Retail Schemes, and ETFs [Read Notification]

The Ministry of Finance, through the Central Board of Direct Taxes ( CBDT ), has issued Notification No. 10/2025 dated January 27, 2025, announcing important amendments to the Income Tax Rules, 1962.

The amendments effective from the date of publication in the Official Gazette, focus on new conditions for venture capital funds, finance companies, requirements for retail investment schemes, and exchange-traded funds (ETFs), particularly in the context of International Financial Services Centres (IFSCs).

New Title: Income-tax (Second Amendment) Rules, 2025

Conditions for Venture Capital Funds:

Rule 2DAA states that a Venture Capital Fund (VCF), as mentioned in clause (23FB) of section 10 of the Income-tax Act, must meet the following conditions:

• It should be established as a Category I Alternative Investment Fund (AIF).
• It must be recognised under regulation 18(2) of the International Financial Services Centres Authority (Fund Management) Regulations, 2022.
• The fund will be regulated by the International Financial Services Centres Authority (Fund Management) Regulations, 2022, created under the International Financial Services Centres Authority Act, 2019 (50 of 2019).

Conditions for Finance Company operating in IFSC

Rule 21ACA provides the conditions and permissible activities for a Finance Company operating in an International Financial Services Centre (IFSC) under section 94B of the Income-tax Act. It outlines the following:

Permitted Activities:

1. Lending Operations: Loans, commitments, guarantees, credit enhancement, securitization, and financial leasing.
2. Factoring and Forfaiting of Receivables: Helping businesses manage cash flow by discounting receivables or invoices.
3. Global or Regional Corporate Treasury Functions: Includes borrowings, lending, hedging currency or commodity risks, investments, cash management, structured credit, intra-group financing, financial budgeting, and similar treasury services.

Key Requirement: If the Finance Company borrows funds from a non-resident, the interest payment must be made in foreign currency.

Explanation:

“Finance Company” means a finance company as defined in clause (e) of sub-regulation (1) of regulation 2 of the International Financial Services Centres Authority (Finance Company) Regulations, 2021, made under the International Financial Services Centres Authority Act, 2019 (50 of 2019); and

“International Financial Services Centre” shall have the meaning as assigned to it in clause (q) of section 2 of the Special Economic Zones Act, 2005 (28 of 2005).”

Conditions for Retail Schemes:

Minimum Investors: The scheme must have at least 20 investors, and no single investor can contribute more than 25% of the total investment.

Limits on Investments:

• The scheme cannot invest more than 25% of its total assets under management in its associates.
• It cannot allocate more than 15% of its total assets under management to unlisted securities.
• Investments in a single company must not exceed 10% of its total assets under management.

Conditions for Exchange Traded Funds (ETFs):

Mandatory Listing: ETFs must be listed and traded on a recognized stock exchange.

Regulatory Compliance: ETFs must meet the requirements outlined in the International Financial Services Centres Authority (Fund Management) Regulations, 2022, under the International Financial Services Centres Authority Act, 2019 (50 of 2019).

Explanations:

Associate: “associate” shall have the meaning as assigned to it in clause (e) of sub-regulation (1) of regulation 2 of the International Financial Services Centres Authority (Fund Management) Regulations, 2022 made under the International Financial Services Centres Authority Act, 2019 (50 of 2019)

Fund Management Entity: “fund management entity” shall have the same meaning as assigned to it in clause (p) of sub-regulation (1) of regulation 2 of the International Financial Services Centres Authority (Fund Management) Regulations, 2022 made under the International Financial Services Centres Authority Act, 2019 (50 of 2019)

Specified Fund: "specified fund" shall have the same meaning as assigned to it in sub-clause (i) of clause (c) of the Explanation to clause (4D) of section 10 of the Act.”

To Read the full text of the Notification CLICK HERE

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