Rule 51: Resident participation limit in the original fund
Rule 51 sets an additional condition for the specified original-fund transfer where the resultant fund is a Category III Alternative Investment Fund. It measures aggregate direct or indirect participation or investment by Indian residents against the original fund’s corpus at the transfer time.
Official notified Income-tax Rules, 2026Need advice on Rule 51?
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Bare law
Rule 51 - Other conditions required to be fulfilled by the original fund
(1) For the purposes of section 70(2) [Table: Sl No.5, C(a)(A)(iv)], the original fund, in a case where a capital asset is transferred to a resultant fund being a Category III Alternative Investment Fund, shall fulfil the condition that the aggregate participation or investment in the original fund, either directly or indirectly, by persons resident in India does not exceed 5% of the corpus of such fund at the time of such transfer.
(2) For the purpose of sub-rule (1) the expressions "original fund" and "resultant fund" shall have the meanings respectively assigned to them in section 70(2) [Table: Sl No.5, C(a) and (c)].
Rule breakdown
Confirm that the specified transfer category applies
The rule is linked to the particular original-fund condition in section 70(2), Table row 5, and applies where the capital asset is transferred to a resultant fund that is a Category III AIF.
Identify the original fund, resultant fund and transfer under the statutory definitions. The rule is not a general ownership limit for every investment fund.
Aggregate direct and indirect Indian-resident interests
The condition covers participation or investment by persons resident in India, whether direct or indirect. The aggregate must not exceed 5% of the original fund’s corpus.
Review the actual ownership or participation chain rather than checking only the names of immediate investors. Keep the residency and investment evidence used for the calculation.
Measure at the transfer time
The rule expressly measures the condition at the time of the transfer. Use the fund corpus and relevant resident interests for that time, with a clear reconciliation to the transaction records.
Do not replace this with a year-end percentage or annual average without a legal basis.
Example and remaining statutory conditions
Hypothetical: the relevant corpus is ₹100 crore and aggregate direct or indirect Indian-resident participation is ₹5 crore at transfer. That is 5% and does not exceed the limit. ₹5.1 crore against the same corpus would exceed it.
Meeting this numerical test does not independently establish every condition of the parent section 70 transfer treatment. Retain the full eligibility analysis.
Key takeaways
Specified Category III AIF transfer
Check the exact parent statutory category.
Direct and indirect included
Aggregate Indian-resident participation or investment.
Maximum 5% at transfer
The rule uses the transfer-time corpus and interests.
Practical checklist
- Confirm the original and resultant fund definitions.
- Document direct and indirect resident interests.
- Measure and reconcile the percentage at transfer.
Avoid
- Do not test only immediate investor names.
- Do not treat this one condition as the full section 70 analysis.
FAQs
Is exactly 5% within the limit?
Yes. The condition is that the aggregate does not exceed 5%.
Are indirect interests ignored?
No. The rule expressly includes direct or indirect participation or investment.
Can the year-end percentage replace the transfer-time test?
The text specifies the time of transfer, so use the relevant facts at that time.
Glossary
- Original fund
- The fund defined in the parent section 70 table provision identified by Rule 51.
- Resultant fund
- The fund defined in the corresponding section 70 provision; Rule 51 addresses a Category III AIF case.