CBDT Amends Rule 21AIA of Income Tax Rules: ETF Specified Fund Explanation Revised, Sub-Rule Omitted [Read Notification]

The Ministry of Finance, Department of Revenue, through the Central Board of Direct Taxes (CBDT), issued Notification No. 136/2025 dated August 21, 2025, announcing amendments to the Income Tax Rules, 1962.

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The notification introduces the Income-tax (Twenty-Fourth Amendment) Rules, 2025, effective immediately upon publication in the Gazette of India. These amendments make important changes to Rule 21AIA.

Key changes under the amendment:

1. Omission of Sub-rule (4):

Previously, Sub-rule (4) of Rule 21AIA laid down conditions for retail schemes and Exchange Traded Funds (ETFs) to qualify as “specified funds.” These conditions included:

• A minimum of 20 investors, with no single investor holding over 25%.
• Restrictions on concentration of investments in associates, unlisted securities, and single companies.
• Mandatory listing and compliance requirements for ETFs under IFSC regulations.

With the latest amendment, this entire sub-rule has been deleted.

2. Revision of Explanation:

The Explanation to Rule 21AIA has been replaced. Instead of detailed fund-specific conditions, the term “specified fund” will now directly take its meaning from Section 10(4D)(c)(i) of the Income-tax Act, 1961.

What does “specified fund” mean under Section 10(4D)(c)(i)?

A specified fund refers to:

• A fund established in India as a trust, company, LLP, or body corporate,
• Registered as a Category III Alternative Investment Fund (AIF) and regulated either by SEBI or the International Financial Services Centres Authority (IFSCA),
• Located in an International Financial Services Centre (IFSC), and
• Whose units (except those held by sponsor or manager) are held by non-residents.

Impact of the amendment:

By omitting Sub-rule (4) and aligning the definition of “specified fund” directly with Section 10 of the Act, the CBDT has simplified the rules and ensured consistency between the Act and the Rules. This reduces duplication, avoids interpretational conflicts, and provides greater clarity for funds operating within IFSCs and regulated under SEBI/IFSCA frameworks.

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