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Rule 128Published

Rule 128: GAAR exclusions and pre-April 2017 investments

Rule 128 identifies cases in which Chapter XI GAAR does not apply. Its investment-transfer wording was substituted by Notification 55/2026 from 1 April 2026, so the current rule must be read with that amendment rather than the original March text alone.

Official notified Income-tax Rules, 2026

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This article is for general information. Read the official Rules and applicable Act amendments, including the Taxation and Other Laws (Amendment) Act, 2026. If you need professional advice for your situation, contact Bizeneed.

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Rule 128 - Chapter XI relating to General Anti Avoidance Rule not to apply in certain cases

(1) The provisions of Chapter XI shall not apply to — (a) an arrangement, where the aggregate tax benefit in the relevant tax year, to all the parties to the arrangement does not exceed a sum of three crore rupees; (b) a Foreign Institutional Investor, — (i) who is an assessee under the Act; (ii) who has not taken benefit of an agreement referred to in section 159; and (iii) who has invested in listed securities, or unlisted securities, with the prior permission of the competent authority, in accordance with the Securities and Exchange Board of India (Foreign Institutional Investors) Regulations, 1995 made under the Securities and Exchange Board of India Act, 1992 (15 of 1992), in relation to such investments; (c) a person, being a non-resident, in relation to investment made by him by way of offshore derivative instruments or otherwise, directly or indirectly, in a Foreign Institutional Investor; (d) any income accruing or arising to, or deemed to accrue or arise to, or received or deemed to be received by, any person from transfer of such investments which were made before the 1st April, 2017 by such person.

(2) The provisions of Chapter XI shall apply to any arrangement, irrespective of the date on which it has been entered into, in respect of the tax benefit obtained from the arrangement on or after the 1st April, 2017, except for that income which accrues or arises to, or deemed to accrue or arise to, or is received or deemed to be received by, any person from transfer of such investments which were made before the 1st April, 2017 by such person.

(3) For the purposes of this rule, — (a) ―Foreign Institutional Investor‖ shall have the meaning assigned to it in the section 210(6)(a); (b) ―offshore derivative instrument‖ shall have the same meaning as assigned to it in the Securities and Exchange Board of India (Foreign Institutional Investors) Regulations, 1995 made under the Securities and Exchange Board of India Act, 1992 (15 of 1992); (c) ―Securities and Exchange Board of India‖ shall have the same meaning as assigned to it in section 2(1)(a) of the Securities and Exchange Board of India Act, 1992 (15 of 1992); (d) ―tax benefit‖, as defined in section 184(11) and computed in accordance with Chapter XI, shall be with reference to— (i) section 184(11)(a) to (e), the amount of tax; and (ii) section 184(11)(f), the tax that would have been chargeable had the increase in loss referred to therein been the total income.

Rule breakdown

The ₹3 crore test aggregates all parties

The exclusion concerns an arrangement whose aggregate tax benefit in the relevant tax year to all parties does not exceed ₹3 crore. It is not a separate allowance of ₹3 crore for every participant.

Calculate tax benefit using the Act and sub-rule (3), and identify the relevant arrangement and tax year before applying the threshold.

The specified FII exclusion has cumulative conditions

The listed FII case requires the stated assessee status, no section 159 treaty benefit, and qualifying listed or unlisted securities investment with prior permission under the cited regulatory framework.

Apply all conditions and the in-relation-to-such-investments limitation. Do not summarise it as a blanket exemption for all foreign investors.

The non-resident investment limb is distinct

A separate clause covers a non-resident in relation to direct or indirect investment, through offshore derivative instruments or otherwise, in an FII.

Review the actual instrument, investor and investment chain against the statutory definitions rather than relying on a commercial label.

Current protection for transfer of investments made before 1 April 2017

The amended clause (1)(d) covers the stated income from transfer of such investments which were made before 1 April 2017 by that person. Keep evidence of the investment, acquisition date, holder and later transfer.

The protection is framed around that transfer income. It is not an unrestricted exemption for every later benefit connected in some way with an old arrangement.

Old arrangements are not automatically outside GAAR

Amended sub-rule (2) applies Chapter XI to tax benefits obtained on or after 1 April 2017 irrespective of when the arrangement was entered into, except the specified income from transfer of investments made before that date by the person.

Read the exception and general rule together. The arrangement’s age alone does not settle the result.

Measure the tax benefit correctly

For the listed section 184(11)(a)–(e) categories, the measure is the amount of tax. For the increased-loss category in clause (f), it is the tax that would have been chargeable if the increase in loss had been total income.

The ₹3 crore test therefore concerns the computed tax benefit, not simply gross transaction value or the face amount of an increased loss.

Key takeaways

All-party aggregate

The ₹3 crore condition is arrangement-wide for the relevant tax year.

Investor exclusions are specific

Check every condition and scope limitation.

Amended investment wording

Notification 55/2026 applies from 1 April 2026.

No blanket old-arrangement exemption

The post-1 April 2017 benefit rule retains the specific transfer-income exception.

Practical checklist

  • Aggregate the computed tax benefit across all arrangement parties.
  • Retain acquisition-date and transfer-income evidence.
  • Check every condition of any investor exclusion.
  • Apply the current amendment wording.

Avoid

  • Do not treat gross transaction value as the tax-benefit measure.
  • Do not assume the age of an arrangement alone provides an exclusion.

FAQs

Is the ₹3 crore limit separate for each party?

No. Clause (1)(a) refers to the aggregate tax benefit to all parties to the arrangement in the relevant tax year.

Does any arrangement made before 1 April 2017 automatically escape GAAR?

No. Amended sub-rule (2) applies to the specified later tax benefits irrespective of the arrangement date, subject to the stated investment-transfer income exception.

Is the increased-loss amount itself the tax benefit for this test?

Sub-rule (3)(d)(ii) uses the tax that would have been chargeable if that increase in loss were total income.

Which amendment is incorporated here?

Notification 55/2026, G.S.R.241(E), 31 March 2026 substituted clause (1)(d) and sub-rule (2), effective 1 April 2026.

Glossary

Aggregate tax benefit
The arrangement-wide benefit to all parties measured under the Act and this rule for the relevant tax year.
Investment-transfer exception
The current exception for the stated income from transfer of investments made before 1 April 2017 by the person.

Official sources