Eligible investment fund

Before 2015, an overseas fund that let an India-based manager run its money risked being treated as resident in India for tax purposes, purely because the decision-making happened here. That risk discouraged global funds from ever using an Indian fund manager.

Section 9A of the Income-tax Act fixed this with a safe harbour. An eligible investment fund — a fund set up outside India that invests in India — is not deemed resident here, and is not treated as having a business connection here, just because it uses an eligible fund manager based in India. The safe harbour only applies if the fund, and its manager, both satisfy a detailed list of conditions.

Section 10.3 lists the conditions the fund itself must meet. It must: not be a person resident in India; be resident in a treaty country or a Central-Government-notified specified country; keep resident Indian participation in the fund's corpus at or below 5% (a contribution by the eligible fund manager in the fund's first three years, up to Rs 25 crore, is excluded from this 5% calculation); be subject to investor-protection regulation where it is established; have at least 25 members who are not, directly or indirectly, connected persons; ensure no single member (with connected persons) holds more than 10% of participation interest; ensure the top 10 or fewer members, with their connected persons, hold under 50% collectively; not invest more than 20% of its corpus in any single entity; not invest in its own associate entity; and maintain a monthly average corpus of at least Rs 100 crore (or reach that within 12 months of the last day of the month it was set up, if set up during the year).

The 25-member, 10% and 50% conditions are relaxed for a fund set up by a foreign government or central bank, a sovereign fund, or a Category I FPI. The remaining conditions — residency, treaty/notified country, 5% participation cap, 20% single-entity cap, no associate investment, Rs 100 crore corpus — still apply even to those relaxed categories.

Following the workbook's own conditions, applied to a worked case. Meridian Global Opportunities Fund, incorporated in Mauritius (a country India has a tax treaty with), wants to route its India investments through a Mumbai-based eligible fund manager.

Meridian clears every fund-side condition, so — provided its Mumbai manager separately meets the eligible-fund-manager conditions too — it is not treated as resident in India, and its fund-management activity through Mumbai does not create an Indian business connection for it.

Had Meridian's resident Indian participation instead been Rs 35 crore of the Rs 620 crore corpus (5.6%), it would breach the 5% cap and the safe harbour would not apply — the fund would then be exposed to the very residency risk Section 9A exists to remove.

Chapter 10, section 10.3 (Section 9A of ITA), lists the eligible-investment-fund conditions (a) through (m) in full, immediately before the separate conditions for the eligible fund manager. Expect a question testing one or more of the numeric thresholds — 5%, Rs 25 crore, 25 members, 10%, 50%, 20%, Rs 100 crore — against a stated fund structure.

• Four different percentages appear in this one section — 5% (resident participation), 10% (single-member cap), 20% (single-entity investment cap) and 50% (top-10-members cap) — mixing these up is the most common error.
• The Rs 25 crore manager-contribution exclusion applies only in the fund's first three years of operation, and only up to that cap — not to the fund's full life.
• The 25-member, 10% and 50% conditions are waived for government/central-bank funds, sovereign funds and Category I FPIs — the other conditions (residency, 5% cap, 20% cap, no associate investment, Rs 100 crore corpus) are not waived for anyone.
• This is the fund side of Section 9A. The manager-side conditions — not an employee of the fund, SEBI-registered, acting in the ordinary course of business, entitled to no more than 20% of the fund's profits — belong to the separate eligible fund manager.
• Stale reference. The workbook cites the Income-tax Act, 1961; the Income-tax Act, 2025 replaces it from 1 April 2026 and renumbers provisions. Use the workbook's Section 9A numbering for the exam.