The Central Board of Direct Taxes (CBDT) has notified important changes to the Income-tax Rules, 1962 through Notification No. 136/2025 (G.S.R. 566(E)), dated 21st August 2025. The amendment specifically impacts Rule 21AIA, which deals with procedures relating to the income of certain investment funds.
The key highlight of this notification is the omission of sub-rule (4) and the substitution of the Explanation, which now clearly defines “specified fund” by linking it directly to Section 10(4D) of the Income-tax Act, 1961. This move aims to remove ambiguity, bring consistency between the Act and the Rules, and provide greater clarity to Alternative Investment Funds (AIFs) operating in International Financial Services Centres (IFSCs) and their investors.
🔑 Key Highlights of the Notification
1. Amendment to Rule 21AIA
The notification makes specific changes to Rule 21AIA, which deals with procedures relating to income of certain investment funds.
- Sub-rule (4) Omitted
The earlier sub-rule (4) under Rule 21AIA has now been omitted. - New Explanation Substituted
The Explanation under Rule 21AIA has been replaced to provide clarity on the definition of “specified fund”.👉 The amended Explanation now states that the term “specified fund” shall carry the same meaning as assigned under sub-clause (i) of clause (c) of the Explanation to clause (4D) of section 10 of the Income-tax Act, 1961.
2. Effective Date
The amendments came into effect immediately, i.e., from the date of publication in the Official Gazette – 21st August 2025.
3. Objective of the Amendment
The primary purpose of this amendment is to bring consistency between the Income-tax Rules and the provisions of Section 10(4D) of the Income-tax Act, 1961.
- Section 10(4D) provides for exemption of certain income earned by specified funds, primarily alternative investment funds (AIFs) located in IFSCs.
- By aligning the Rules with the Act, the CBDT has ensured clarity and reduced ambiguity in interpretation of the term “specified fund”.
📌 Why This Matters
This amendment is significant for:
- Alternative Investment Funds (AIFs) operating in International Financial Services Centres (IFSCs).
- Non-resident investors and fund managers relying on tax exemptions under Section 10(4D).
- Tax professionals and advisors, as it simplifies compliance and interpretation.
By removing inconsistencies, the amendment provides a clearer legal framework for taxation of specified funds and strengthens investor confidence in India’s IFSC regime.
✅ In Summary: The omission of sub-rule (4) and substitution of the Explanation in Rule 21AIA ensures that the meaning of “specified fund” under the Rules is exactly aligned with Section 10(4D) of the Income-tax Act, effective from 21st August 2025.
FAQ on CBDT Notification No. 136/2025
1️⃣ What has been changed in Rule 21AIA?
Two major changes:
- Sub-rule (4) has been omitted.
- The Explanation has been substituted, now clearly defining “specified fund” with reference to Section 10(4D) of the Income-tax Act, 1961.
2️⃣ What does “specified fund” mean now?
As per the new Explanation, the term “specified fund” will have the same meaning as in Section 10(4D) of the Income-tax Act, 1961.
👉 In simple terms, this generally refers to Alternative Investment Funds (AIFs) located in International Financial Services Centres (IFSCs) that are eligible for certain income-tax exemptions.
3️⃣ Why was sub-rule (4) removed?
Sub-rule (4) created overlap and ambiguity in interpretation. By removing it and directly linking the definition of “specified fund” to Section 10(4D), the CBDT has ensured consistency and clarity between the Act and the Rules.
4️⃣ From when is this applicable?
The changes are effective immediately from 21st August 2025, i.e., the date of publication in the Official Gazette.
5️⃣ Who will be impacted?
- Alternative Investment Funds (AIFs) in IFSCs – clearer rules for tax exemption claims.
- Non-resident investors in AIFs – easier compliance while availing benefits.
- Fund managers and tax advisors – simplified interpretation, reduced litigation risk.
6️⃣ What is the bigger purpose of this amendment?
The goal is to:
- Align the Rules with Section 10(4D) of the Income-tax Act.
- Provide regulatory certainty to IFSC-based funds.
- Boost investor confidence by creating a transparent tax environment for cross-border fund flows.
✅ Takeaway:
This amendment streamlines the definition of “specified fund”, removes confusion, and makes tax compliance easier for AIFs in IFSCs and their investors.