SCHEDULE I CONDITIONS FOR CERTAIN ACTIVITIES NOT TO CONSTITUTE BUSINESS CONNECTION IN INDIA.

Income-tax Act, 2025

At a Glance

The document is SCHEDULE I to the Income Tax Bill, 2025 (Old Version), setting out conditions u/s 9(12) for when activities of certain foreign investment funds and their fund managers will not constitute a "business connection" in India. It matters to non-resident funds, their managers, Indian investors, and tax authorities because satisfaction of these conditions removes a key nexus for Indian taxation. Who is affected: eligible investment funds established outside India, eligible fund managers, Indian resident investors and regulatory authorities. Effective date or decision date: Not stated in the document.

Background & Scope

Statutory hook: Schedule I is framed "See section 9(12)" and supplies conditions under which certain activities shall not constitute a business connection in India. Scope: applies to eligible investment funds established/incorporated/registered outside India that collect funds from members for investment for their benefit and to eligible fund managers engaged in fund management activity on behalf of such funds. Definitions provided include associate, connected person (cross-referenced to section 184(5)), corpus, entity, and "specified regulations" (including SEBI Portfolio Managers Regulations, 1993 and SEBI Investment Advisers Regulations, 2013, or other notified SEBI regulations).

Statutory Provision Mode

Text & Scope

The Schedule specifies exhaustive conditions that an eligible investment fund must satisfy to attract non-application of business-connection rules u/s 9(12). Key textual ingredients: the fund must be non-resident; either resident of or established in a country/territory covered by agreements u/s 159(1) or (2) or notified; aggregate Indian resident participation (directly or indirectly) must not exceed 5% of corpus on 1 April and 1 October each tax year (with certain computation carve-outs); investor protection regulations must apply in the fund's jurisdiction; minimum 25 members who are not connected persons; individual member participation caps of 10%; top ten-members' aggregate participation <50%; single-entity concentration limit of 25%; prohibition on investing in associate entity; minimum monthly average corpus of INR 100 crore (with startup and wind-up exceptions); prohibition on carrying on or controlling business in India; fund must not be engaged in activities constituting business connection in India except those undertaken by the eligible fund manager; remuneration to eligible fund manager must be not less than an amount calculated in a prescribed manner. The Schedule also prescribes conditions for eligible fund managers (not an employee or connected person; registration under specified regulations; ordinary course of business; profit interest cap of 20% for manager and connected persons).

Interpretation

The text reflects a legislative intent to create a safe harbour for certain foreign investment funds and their managers so that merely soliciting Indian capital or performing limited fund-management services does not constitute a business connection in India, provided objective thresholds and structural safeguards are met. The Schedule uses enumerated quantitative ceilings (5%, 10%, 25%, 50%, INR 100 crore) and qualitative conditions (registration, independence, non-resident status) to distinguish passive/fiduciary investment vehicles from entities establishing a taxable presence. The requirement of registration under "specified regulations" signals reliance on securities regulator oversight as a substitute for domestic regulatory touchpoints.

Exceptions/Provisos

Multiple carve-outs exist: (i) computation concession excluding certain managerial contributions up to INR 25 crore in the first three years from the 5% test; (ii) timing relief permitting four months after 1 April or 1 October to cure excess Indian participation; (iii) the corpus minimum not applying to funds wound up within the tax year and an 12-month grace period for newly established funds; (iv) paragraph (2) exempting paragraphs 1(e), (f), (g) (membership and concentration tests) for sovereign/state-backed funds and such others as notified by the Central Government; (v) in the Bill (Old Version) a power for the Central Government to by notification exempt any one or more conditions in sub-paragraph (1) (other than 1(c)) or (3) for IFSC-based eligible fund managers commencing operations on or before 31-03-2030.

Illustrations

• Example 1: A non-resident fund with 30 unconnected members, whose Indian-resident direct holdings are 4% of corpus on 1 April and 1 October, monthly average corpus INR 120 crore, with fund manager registered under SEBI PM Regulations (1993) and manager remunerated per prescribed method - the fund meets the Schedule's conditions and would not be a business connection in India (subject to other facts). (All facts consistent with the text.)
• Example 2: A fund where ten members together (with connected persons) hold 52% of corpus - this fails paragraph 1(g) and would not qualify for the safe harbour unless the fund falls within paragraph 2 or the Central Government notifies exemption. (Consistent with the text.)
• Example 3: A newly established eligible fund whose monthly average corpus only reaches INR 90 crore within twelve months - the Schedule permits twelve months from the end of the month of establishment to meet the INR 100 crore corpus minimum; if not met after that window, the condition would not be satisfied. (Consistent with the text.)

Interplay

The Schedule cross-references section 9(12) (to which it belongs), section 159(1) or (2) (agreements-likely double taxation or information exchange), section 184(5) (definition of connected person) and "specified regulations" (SEBI instruments). It contemplates implementation details to be prescribed and notifications by the Central Government for exceptions. The text also anticipates Board-prescribed guidelines for application. No further rules, circulars, or case law are mentioned in the document.

Differences between the two versions and practical impact

• Aggregation test - "directly or indirectly" removed: The Bill (Old Version) at paragraph 1(c) required that the aggregate participation or investment "directly or indirectly" by Indian residents does not exceed 5% of corpus; the Act version replaces this with "directly, by persons resident in India" (removing "indirectly").
  • Practical impact: the Act narrows the scope of Indian participation counted toward the 5% threshold by excluding indirect holdings (e.g., holdings through intermediate entities). This relaxes the restriction for some funds with indirect Indian exposures and reduces compliance complexity in tracing indirect interests, but may increase opportunities for circumvention unless other rules address substance.
• Carve-out for notification modifying conditions (IFSC exception): The Bill (Old Version) at paragraph 1(6) allowed the Central Government to exempt any one or more conditions in sub-paragraph (1) (other than paragraph (1)(c)) or (3) for eligible funds with an IFSC-based fund manager commencing operations by 31-03-2030. The Act version removes the specific exclusion of paragraph (1)(c) and instead permits notification to specify that any one or more of the conditions in sub-paragraph (1) or (3) may not apply or may apply with modifications when the fund manager is located in an IFSC and has commenced operations on or before 31-03-2030.
  • Practical impact: the Act broadens executive flexibility to relax or modify paragraph (1)(c) (the 5% Indian participation test) as well as other conditions for IFSC-located managers, potentially making IFSCs more attractive and enabling policy tailoring to attract fund managers.
• Specified regulations reference updated: The Bill (Old Version) defined "specified regulations" to include the Securities and Exchange Board of India (Portfolio Managers) Regulations, 1993; the Act version updates this reference to the Securities and Exchange Board of India (Portfolio Managers) Regulations, 2020.
  • Practical impact: brings the schedule into alignment with the contemporary regulatory regime governing portfolio managers; ensures terminology and cross-references align with current SEBI instruments.

Practical Implications

• Compliance and risk areas: Funds must monitor and document member composition, direct and indirect participation percentages (Bill requires counting indirect holdings), concentration limits, corpus averages, and arm's-length remuneration calculations for fund managers. Non-compliance with any enumerated condition risks losing the safe harbour and exposure to Indian taxation as a business connection. The Bill heightens compliance burden by requiring indirect participation tracking for the 5% test.
• Record-keeping/evidence: The Schedule mandates annual statement filing within 90 days of tax year end in prescribed form and furnishing other relevant documents; funds should maintain contemporaneous records demonstrating member identities, connected-person linkages (per section 184(5)), calculations of corpus and averages, investment allocations (entity-wise), and remuneration computation to substantiate compliance. (All procedural specifics beyond the 90-day statement timing are Not stated in the document.)

Key Takeaways

• The Schedule provides an enumerated safe harbour from being a business connection in India for non-resident investment funds and their managers subject to multiple quantitative and qualitative conditions.
• The Bill (Old Version) requires that the 5% participation cap account for direct and indirect Indian holdings, increasing compliance complexity for funds with layered ownership.
• Membership, concentration and single-entity investment ceilings aim to ensure widespread investor base and diversification; sovereign/state funds are exempt from these membership tests.
• Eligible fund managers must be independent, registered under specified regulations, act in ordinary course of business and have capped profit entitlements (20%).
• Funds must file prescribed statements within 90 days of the tax year-end; further procedural details are to be prescribed or notified.
• Several material procedural details and effective date are Not stated in the document.

Full Text:

SCHEDULE I CONDITIONS FOR CERTAIN ACTIVITIES NOT TO CONSTITUTE BUSINESS CONNECTION IN INDIA.