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Rule 274Published

Rule 274: Conditions and remuneration rules for an investment fund under section 9(12)

Rule 274 fills in the working details for an investment fund that wants the benefit of section 9(12) read with Schedule I to the Act. It explains when members are counted by looking through an institutional investor, when a short or bona fide failure to meet certain Schedule I conditions does not take away eligibility, when the fund is treated as controlling or managing a business, the minimum remuneration the fund must pay its fund manager, the accountant report in Form No. 172, and the definitions used in the rule.

Official notified Income-tax Rules, 2026

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Rule 274 - Procedure for investment fund for availing benefit under section 9(12) read with Schedule I to Act

(1) Where the investment in a fund has been made directly by an institutional entity, the number of members and the participation interest in such fund shall be determined by looking through the said entity, if it, —

(a) independently satisfies the conditions mentioned in paragraphs 1(1)(c), (e), (f) and (g) of Schedule I to the Act;

(b) has been set up solely for the purpose of pooling funds and investment thereof; and

(c) is resident of a country or specified territory with which an agreement referred to in section 159 has been entered into or is established or incorporated, or registered in a country or a specified territory notified by the Central Government in this behalf.

(2) A fund shall not be denied the benefit of being an eligible fund for the purposes of Schedule I to the Act, if, —

(a) non-fulfilment of any of the conditions specified in paragraphs 1(1)(c), (d) and (e) of the Schedule I to the Act, —

(i) is for reasons beyond the control of the fund and it does not exceed a period of ninety days; or

(ii) does not exceed a period of eighteen months, beginning from the date on which the fund is setup or is not beyond the final closing of the fund, whichever is earlier, and bona fide efforts are made to satisfy the conditions specified in the paragraph 1(1)(c), (d) and (e) of Schedule I to the Act; or

(iii) is for the reason that the fund is in the process of being wound up and it does not exceed one year beginning from the date on which the process of winding up has begun; or

(b) there is delay in furnishing the statement referred to in paragraph 1(4) of Schedule I to the Act and such delay does not exceed a period of ninety days.

(3) For the purposes of paragraph 1(1)(k) of Schedule I to the Act, a fund shall be said to be controlling or managing a business carried out by any entity, if it directly or indirectly holds such rights which results in the fund holding more than 26% of the total share capital or voting power or interest in the entity, as the case may be.

(4) The amount of remuneration to be paid by the fund to a fund manager, referred to in paragraph 1(1)(m) of Schedule I to the Act, shall not be less than the amount calculated in the following manner: —

(a) where the fund is Category-I foreign portfolio investor referred to in item (i) or (ii) or (iii), and sub-item (III) of item (iv) of clause (a) of regulation of the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2019 made under the Securities and Exchange Board of India Act, 1992 (15 of 1992), the amount of remuneration shall be 0.10% of the asset under management; and

(b) in other cases, the amount of remuneration, shall be —

(i) 0.30% of the asset under management; or

(ii) 10% of profits derived by the fund in excess of the specified hurdle rate from the fund management activity undertaken by the fund manager, where it is entitled only to remuneration linked to the income or profits derived by the fund; or

(iii) 50% of the management fee, whether in the nature of fixed charge or linked to the income or profits derived by the fund from the management activity undertaken by the fund manager, paid by such fund in respect of the fund management activity undertaken by the fund manager, as reduced by the amount incurred towards operational expenses including distribution expenses, if any, where the fund is also making payment of management fee to any other fund manager.

(5) Where the amount of remuneration is lower than the amount arrived at under sub-rule (4), the fund may apply to the Member, Central Board of Direct Taxes referred to in rule 275(2), seeking approval of the Board under said rule for that lower amount to be the amount of remuneration and, upon receipt of such application, the Board if satisfied, considering the relevant facts, may approve such lower amount to be the amount of remuneration.

(6) Where an application is made under sub-rule (5), the provisions of rule 275(3) to (12) shall, mutatis mutandis, apply to the said application as they apply to application made under sub-rule (2) of the said rule.

(7) The fund manager shall, in addition to any report required to be furnished by it under section 172, obtain a report from the accountant, as defined in section 515(3)(b), in respect of activity undertaken for the fund and furnish such report on or before the specified date in Form No. 172, duly verified by such accountant in the manner indicated therein and all the provisions of the Act shall apply as if it is a report to be furnished under section 172.

(8) For the purposes of paragraph 1(3)(a) of Schedule I to the Act, a fund manager shall not be considered to be a connected person of the fund merely for the reason that the fund manager is undertaking fund management activity of the said fund.

(9) For the purposes of paragraph 1(3)(d) of Schedule I to the Act, any remuneration paid to the fund manager, by the fund, which is in the nature of fixed charge and not dependent on the income or profits derived by the fund from the fund management activity undertaken by the fund manager, shall not be included in the profits referred to in the said clause, if -

(a) the conditions specified in paragraph 1(1)(m) of Schedule I to the Act are satisfied; and

(b) such fixed charge has been agreed by the fund manager in writing at the beginning of the relevant fund management activity.

(10) For the purposes of this rule, —

(a) "asset under management" means the annual average of the monthly average of the opening and closing balances of the value of such part of the fund as managed by the fund manager;

(b) "management fee" means the amount as mentioned in the certificate obtained from an accountant as defined in rule 10(a), for this purpose; and

(c) "specified hurdle rate" means a pre-defined threshold beyond which the fund agrees to pay a share of the profits earned by the fund from the fund management activity undertaken by the fund manager.

Rule breakdown

Looking through an institutional entity: Rule 274(1)

Where an institutional entity invests directly in the fund, the number of members and the participation interest are worked out by looking through that entity.

This applies only if the entity independently satisfies paragraphs 1(1)(c), (e), (f) and (g) of Schedule I, was set up solely to pool funds and invest them, and is resident in, or established, incorporated or registered in, a country or specified territory covered by the rule (a section 159 agreement country or territory, or one notified by the Central Government).

When eligibility is not denied: Rule 274(2)

Non-fulfilment of paragraphs 1(1)(c), (d) and (e) of Schedule I does not deny eligibility if it is for reasons beyond the fund's control and lasts no more than ninety days.

It is also excused for up to eighteen months from set-up, or until final closing if earlier, where bona fide efforts are made to meet those conditions.

It is also excused during winding up, for up to one year from the date the winding-up process began.

A delay of up to ninety days in furnishing the statement under paragraph 1(4) of Schedule I is also excused.

Control test: Rule 274(3)

For paragraph 1(1)(k) of Schedule I, the fund controls or manages a business of an entity if it directly or indirectly holds rights giving it more than 26% of the share capital, voting power or interest in that entity.

Minimum fund manager remuneration: Rule 274(4) to (6)

For a Category-I foreign portfolio investor of the kind described in sub-rule (4)(a): 0.10% of the asset under management.

In other cases: 0.30% of the asset under management; or 10% of profits above the specified hurdle rate where the manager is paid only a profit-linked fee; or 50% of the management fee (reduced by operational expenses, including distribution expenses) where the fund also pays a management fee to another fund manager.

If the remuneration is lower, the fund may apply to the CBDT Member referred to in Rule 275(2) to approve the lower amount; Rule 275(3) to (12) apply to that application with necessary changes.

As printed in the gazette, sub-rule (4)(a) refers to "clause (a) of regulation" of the SEBI (Foreign Portfolio Investors) Regulations, 2019 without a regulation number; it is reproduced here as printed.

Accountant report and other clarifications: Rule 274(7) to (10)

The fund manager must obtain an accountant's report on the activity undertaken for the fund and furnish it in Form No. 172 by the specified date, in addition to any report under section 172.

A fund manager is not a connected person of the fund only because it manages the fund (paragraph 1(3)(a) of Schedule I).

A fixed-charge remuneration agreed in writing at the start of the fund management activity is kept out of the profits referred to in paragraph 1(3)(d) of Schedule I, if paragraph 1(1)(m) conditions are met.

Sub-rule (10) defines asset under management, management fee and specified hurdle rate.

Key takeaways

Look-through

Members of a qualifying institutional investor are counted through that entity.

Grace periods

Ninety days, eighteen months or one year, depending on the reason for non-compliance.

Remuneration floor

0.10% or 0.30% of AUM, or the profit- or fee-based alternatives in sub-rule (4).

Form No. 172

Accountant report furnished by the fund manager by the specified date.

Practical checklist

  • Track the dates on which any Schedule I condition stops being met, so the ninety-day, eighteen-month or one-year window can be shown.
  • Agree any fixed-charge remuneration with the fund manager in writing at the start of the activity.
  • Calculate AUM using the monthly-average method in Rule 274(10)(a).

Avoid

  • Do not pay remuneration below the sub-rule (4) floor without seeking approval under sub-rule (5).
  • Do not treat the Form No. 172 report as a substitute for any report required under section 172.

FAQs

What is the control threshold for paragraph 1(1)(k) of Schedule I?

Holding rights that give the fund more than 26% of the total share capital, voting power or interest in the entity (Rule 274(3)).

Can a fund pay its manager less than the sub-rule (4) amount?

Only with approval. The fund may apply to the CBDT Member referred to in Rule 275(2), and the Board may approve a lower amount if satisfied (Rule 274(5)).

How is "asset under management" calculated?

As the annual average of the monthly average of the opening and closing balances of the value of the part of the fund managed by the fund manager (Rule 274(10)(a)).

Which form is used for the accountant report?

Form No. 172, verified by the accountant and furnished by the fund manager on or before the specified date (Rule 274(7)).

Glossary

Asset under management
The annual average of the monthly average of opening and closing balances of the value of the part of the fund managed by the fund manager (Rule 274(10)(a)).
Management fee
The amount stated in the certificate obtained from an accountant as defined in Rule 10(a) (Rule 274(10)(b)).
Specified hurdle rate
A pre-defined threshold beyond which the fund agrees to share profits with the fund manager (Rule 274(10)(c)).

Official sources

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