For years, there has been a slightly uncomfortable question in India’s investment-management industry.

If the investment talent is in India, why does the fund manager often need to sit in Singapore, Dubai, London or another offshore financial centre?

Part of the answer is commercial. Global investors may prefer established fund domiciles, familiar regulatory structures and international banking ecosystems. But tax has also played an important role. If the people making investment decisions for an offshore fund sit in India, the fund has historically had to consider whether those activities could create a business connection in India or, in the case of a foreign company, contribute to an Indian Place of Effective Management, potentially pulling the offshore vehicle into the Indian tax net.

India already has a safe harbour intended to prevent that outcome. The problem has been that qualifying for it has often been harder than explaining why it was needed.

That may now change.

The Taxation and Other Laws (Amendment) Bill, 2026 proposes a substantial relaxation of the eligibility conditions for offshore investment funds using India-based fund managers. The reform is intended to encourage fund-management activity in India and provide greater tax certainty. The proposal has attracted attention because it could remove several structural conditions relating to fund size, diversification and investor concentration that have historically made the safe harbour difficult for many real-world funds to use.

For PE and VC houses, family offices, emerging managers and global investment firms, the commercial question is potentially much larger than the amendment itself:

Can the investment team finally sit in India without accidentally making the offshore fund taxable here?

Why an India-Based Fund Manager Creates a Tax Question

Assume a Singapore investment fund raises capital from global investors and invests across Asia.

The legal fund is in Singapore, but its chief investment officer, research team and several senior investment professionals sit in Mumbai. They identify investment opportunities, evaluate companies, negotiate transactions and monitor portfolio investments from India.

That immediately creates a tax question.

Under section 9 of the Income-tax Act, 2025, income connected with a business connection in India may be deemed to accrue or arise in India. Separately, section 6 provides that a foreign company can become Indian resident where its Place of Effective Management is in India, meaning the place where the key management and commercial decisions necessary for the business as a whole are, in substance, made.

For a fund, this creates an obvious tension. The business wants investment professionals close to Indian markets and talent. The tax structure wants the offshore vehicle to remain genuinely offshore.

India’s fund-manager safe harbour was created to address precisely this tension.

What the Existing Safe Harbour Actually Does

Section 9(12) of the Income-tax Act, 2025 provides two important protections for an eligible investment fund.

First, fund-management activity carried out through an eligible fund manager in India does not, by itself, constitute a business connection in India for the offshore fund.

Second, the fund is not regarded as Indian resident merely because the eligible fund manager performing activities on its behalf is situated in India.

That sounds remarkably simple.

The difficulty sits in Schedule I.

Under the law presently published by the Income Tax Department, the offshore fund must satisfy a lengthy list of conditions. Among other requirements, Indian resident participation generally cannot exceed 5% of the corpus, the fund must operate under applicable investor-protection regulation, and it currently needs at least 25 unconnected members. An investor together with connected persons cannot generally hold more than 10%, and ten or fewer investors cannot collectively hold 50% or more.

The fund also cannot invest more than 25% of its corpus in one entity, cannot invest in an associate entity and must generally maintain a monthly average corpus of at least ₹100 crore. It cannot carry on or control and manage a business in India, and the Indian fund manager must receive at least the remuneration prescribed under the Rules.

For a large diversified global fund, these conditions may be manageable.

For an emerging VC fund, family office or concentrated private equity strategy, they can be commercially awkward.

Why the Existing Rules Do Not Fit Every Real Fund

Consider a USD 30 million venture capital fund.

It has eight institutional and family-office investors. One anchor LP contributes 30% of the commitments. The fund specialises in fintech and expects its first major investment to represent 35% of its corpus.

There may be nothing commercially unusual about that structure.

Yet under the existing Indian safe harbour, several of those facts can create eligibility difficulties because of the minimum investor requirement, investor concentration tests and portfolio concentration limit.

The strange result is that a fund may be perfectly legitimate from a commercial and regulatory perspective, but still decide that its senior fund-management team should remain outside India simply because the Indian safe harbour is too prescriptive.

The tax rule then begins influencing where people sit.

That is the business problem the 2026 reform is trying to address.

What the 2026 Proposal Changes

The proposed reform removes several of the existing size and diversification conditions. The changes reported in the Bill include removal of requirements relating to the minimum number of investors, investor concentration, concentration among the largest investors, investment limits in a single portfolio entity, investment in associate entities and the ₹100 crore minimum corpus requirement.

The policy direction is therefore important.

Instead of asking whether an offshore fund looks sufficiently diversified to qualify for Indian safe harbour, the framework moves closer to asking whether the offshore fund and its Indian manager have genuine substance and whether the Indian activity should, economically, create Indian taxation of the fund.

Some important safeguards remain. The proposal retains restrictions such as the limit on participation by Indian residents and the requirement that the offshore fund should not control and manage an Indian business.

This is not therefore an invitation to create an offshore vehicle, place all investment decisions in India and declare the structure tax-free.

It is a simplification of the entry conditions to the safe harbour.

This Does Not Make the Offshore Fund Exempt From Indian Tax

This distinction is perhaps the most important one in the entire discussion.

Section 9(12) is a fund-manager safe harbour, not a blanket exemption for offshore funds.

The Act specifically provides that income which would otherwise be included in the offshore fund’s Indian taxable income remains taxable irrespective of whether the Indian fund manager’s activities are protected by the safe harbour.

Suppose the offshore fund invests in Indian securities and earns income that is taxable in India under domestic law and the applicable treaty. Having an eligible Indian fund manager does not make that income disappear.

The safe harbour addresses a different risk: it prevents the presence and activities of the fund manager in India from automatically creating additional business-connection or residence exposure for the offshore fund.

That is a much narrower, but commercially very valuable, protection.

The Indian Manager Is Still Taxable in India

The safe harbour also does not exempt the Indian fund-management business.

Section 9(12) expressly states that the provisions do not affect the scope or determination of the income of the eligible fund manager.

In other words, if a Mumbai-based investment manager earns management fees from an offshore fund, those fees remain taxable in India under the normal rules.

The fund must also pay the manager at least the prescribed remuneration. Rule 274 contains the methodology for determining the minimum remuneration depending on the nature of the fund and management arrangement.

This is sensible policy.

India is essentially saying: the offshore fund should not become taxable merely because it hires genuine investment-management capability in India, but the Indian manager should pay Indian tax on the income it earns for performing those functions.

That is closer to the way independent cross-border service arrangements normally work.

POEM Still Needs Respect

The residence protection should also be interpreted carefully.

The statutory protection says that an eligible fund will not become resident merely because its eligible fund manager is situated in India.

That does not mean corporate governance becomes irrelevant.

For a foreign company, POEM continues to depend on where the key management and commercial decisions necessary for the business as a whole are made in substance.

Therefore, the offshore fund should still maintain genuine governance appropriate to its jurisdiction and structure. Board authority, investor committees, fund documentation, delegation arrangements and actual decision-making should reflect commercial reality.

An offshore board that simply approves every major investment decision already made by promoters in India creates a very different factual profile from an independent offshore fund that genuinely delegates specified portfolio-management activities to an Indian regulated manager.

Safe harbour should support substance. It should not be used to manufacture it.

Why Family Offices and Emerging Managers May Benefit Most

Large global asset managers already have enough scale to operate management entities across several jurisdictions.

The more interesting impact may be on smaller funds.

A family office may have one or two principal investors. An emerging private equity manager may launch a concentrated first fund. A sector-specific venture fund may deliberately invest heavily in three or four companies. A proprietary investment platform may simply never satisfy traditional diversification tests.

Under the existing framework, those commercial features can conflict with the safe harbour conditions.

Removing minimum corpus and diversification requirements could make India significantly more realistic as the location for the investment team.

For India, that could mean more high-value fund-management employment, investment research, transaction execution, portfolio monitoring and associated professional services being performed domestically.

That broader economic impact is professional interpretation, not a guaranteed consequence of the amendment. But it explains why the reform matters beyond tax practitioners.

Compliance Will Still Matter

Simplification does not eliminate the compliance architecture.

Under the existing framework, an eligible investment fund must furnish the prescribed annual statement within 90 days from the end of the tax year. The Income-tax Rules, 2026 prescribe Form 173, corresponding to the earlier Form 3CEK, together with accountant reporting requirements.

Fund managers should therefore still expect to maintain documentation supporting jurisdiction of the fund, investor composition, Indian participation, regulatory status, management agreements, remuneration, portfolio activity and governance.

The practical change is that fewer commercially arbitrary eligibility failures may stand between the taxpayer and the safe harbour.

The Bigger Question: Does the Fund Manager Still Need to Leave India?

For years, international fund structures often began with jurisdiction.

“Should the manager sit in Singapore?”

“Should we create the investment team in Dubai?”

“Should the fund be managed from London?”

The 2026 reform could shift that conversation.

The better starting question may become:

Where is the investment talent actually located, and can the tax structure support the business operating from there?

India has a deep ecosystem of PE and VC professionals, investment bankers, analysts, technology specialists, legal advisers and finance professionals. If the safe harbour becomes materially easier to access, there may be less tax-driven reason to move management functions offshore simply to protect the residence of the fund.

That does not mean Singapore, Dubai or other fund centres lose their commercial relevance. Fund domicile, investor expectations, treaty networks, regulation, capital markets, banking and exit infrastructure remain major considerations.

But tax may become less decisive in determining where the people need to sit.

Closing Perspective

The most interesting part of India’s proposed offshore fund reform is not the deletion of a few eligibility conditions.

It is the philosophy behind the change.

A safe harbour should protect genuine commercial activity from unintended tax consequences. It should not require a perfectly diversified institutional fund before an Indian investment professional can manage offshore capital from Mumbai or Bengaluru.

If the reform becomes effective substantially in its proposed form, concentrated funds, emerging managers and family-office structures may have a much more realistic pathway to using Indian fund-management capability.

But the analysis still needs discipline.

The fund must remain genuinely offshore. Indian participation limits matter. Indian business control matters. Manager remuneration matters. Governance matters. The fund’s own India-source income remains taxable where the law says it is taxable.

So the right conclusion is not:

“An offshore fund can now be run entirely from India without tax risk.”

It is:

“India may finally be making it easier for genuine offshore funds to use genuine Indian fund managers without the manager’s location, by itself, determining the fund’s tax residence or creating a business connection.”

That is a narrower statement.

For the global fund-management industry, it may also be the more important one.