The Central Board of Direct Taxes (CBDT) has amended the Income Tax rules to exempt Category I and Category II Alternative Investment Funds (AIFs), including those located in International Financial Services Centres (IFSCs), from the requirement of a Permanent Account Number (PAN), according to a notification dated July 21. Experts say this move will ensure continuity of reforms and facilitate faster onboarding of foreign investors.
Understanding the AIF Categories
The amendment substitutes a clause in Rule 157, which exempts persons from obtaining a PAN. The new clause defines a 'specified fund' as any fund established or incorporated in India in the form of a trust, company, limited liability partnership, or body corporate that has been granted a certificate of registration as a Category I or Category II AIF and is regulated under SEBI regulations or the International Financial Services Centres Authority (Fund Management) Regulations. Category III AIFs were already exempted.
| Category | Description | Examples |
|---|---|---|
| Category I | Invests in start-ups, early-stage ventures, social ventures, SMEs, infrastructure, or other socially/economically desirable sectors | Venture capital funds, SME funds, social venture funds, infrastructure funds |
| Category II | Does not fall in Category I or III; does not undertake leverage beyond day-to-day operational needs | Real estate funds, private equity (PE) funds, distressed asset funds |
| Category III | Employs diverse or complex trading strategies; may use leverage including derivatives | Hedge funds, PIPE funds |
Expert Reaction: Faster Onboarding and Continuity
According to Amit Maheshwari, Managing Partner at AKM Global, extending the eligibility from Category III AIFs to Category I and II — regulated by SEBI and the International Financial Services Centres Authority (IFSCA) — widens the ambit of the existing framework and aligns it with the evolving investment landscape. Obtaining a PAN has often been viewed by overseas investors, particularly those with passive investments, as an additional compliance requirement. Extending the PAN exemption framework to Category I and II AIFs removes a practical bottleneck in fund investments.
"This reform should facilitate faster onboarding of foreign investors while enhancing the competitiveness of India’s alternative investment fund ecosystem removing procedural barrier," Maheshwari said. "Collectively, such measures reaffirm the Government’s commitment to fostering a globally competitive fund management ecosystem and strengthening India’s position as an attractive international investment destination."
Richa Sawhney, Partner (Tax) at Grant Thornton Bharat, noted that the PAN exemption framework for eligible non-resident investors investing through specified funds existed under the earlier tax regime as well. The notification ensures that investors in Category I and II AIFs, including eligible IFSC-based funds, continue to remain covered under the new Rules by expressly including such funds within the definition of 'specified fund'. "The amendment therefore preserves the existing compliance relief available to investors in these funds and provides continuity and certainty to global investors," she said.
Implications for Foreign Investment and India's Fund Ecosystem
The move signals a continued effort by the government to streamline tax compliance for foreign portfolio investors. By removing the PAN requirement for a broader set of AIFs, the notification reduces a procedural hurdle that could delay capital deployment. For treasury professionals and finance executives tracking cross-border flows, this change lowers the administrative cost of investing in Indian AIFs, potentially increasing the attractiveness of India as a destination for alternative investments. The inclusion of IFSC-based funds further aligns India's framework with global best practices, supporting the government's push to make IFSCs a hub for fund management.
Background: Existing Exemption and New Coverage
Category III AIFs were already exempted from PAN requirements. The current amendment extends that exemption to Category I and II AIFs, which cover a wide range of investment vehicles including venture capital, private equity, and real estate funds. This expansion ensures that foreign investors in these funds can onboard more quickly, without needing to obtain a PAN — a requirement that had been cited as a compliance burden. The notification is dated July 21, 2026, and was published on July 22, 2026.
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