Analysis of Income-tax (Second Amendment) Rules 2025.

By | January 30, 2025
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Analysis of Income-tax (Second Amendment) Rules 2025.

The Income-tax (Second Amendment) Rules, 2025, bring several key changes to the Income-tax Rules, 1962, primarily focusing on Venture Capital Funds (VCFs), Finance Companies in International Financial Services Centres (IFSCs), and certain aspects of specified funds. Here are the key points:

1. Venture Capital Funds (VCFs):

  • Clarifies the definition of a VCF for claiming tax benefits under section 10(23FB).
  • A VCF, as defined under the IFSC Authority (Fund Management) Regulations, 2022, is now specifically recognized as a Category I Alternative Investment Fund.

2. Finance Companies in IFSCs:

  • Defines the permissible activities for a Finance Company located in an IFSC to qualify for benefits under section 94B. These activities include lending, factoring, forfaiting, and treasury operations.
  • Mandates that interest paid by such a Finance Company on debt issued by a non-resident must be in foreign currency.2

3. Specified Funds:

  • Introduces conditions for retail schemes and Exchange Traded Funds (ETFs) to be considered as specified funds under section 10(4D).
    • Retail Schemes: Must have at least 20 investors, with no single investor holding more than 25% of the scheme.3 Limits on investments in associates, unlisted securities, and single companies are also specified.
    • ETFs: Must be listed and traded on a recognized stock exchange and comply with the IFSC Authority (Fund Management) Regulations, 2022.4

4. Definitions:

  • Clarifies the definitions of “associate” and “fund management entity” by aligning them with the IFSC Authority (Fund Management) Regulations, 2022.

Effective Date:

  • The amendments came into effect on January 27, 2025, the date of their publication in the Official Gazette.6

These amendments aim to provide greater clarity and specificity to certain provisions of the Income-tax Rules, particularly those related to VCFs, finance companies in IFSCs, and specified funds.