GAAR in India for Foreign Companies and Holding Structures (2026)

Written by Nihal Srivastava, Krystal7 Consultants. Last updated 2 October 2026.

India's General Anti Avoidance Rule (GAAR) sits in sections 178 to 184 of the Income Tax Act, 2025. That Act took effect on 1 Apr 2026. It replaced Chapter X-A, sections 95 to 102, of the 1961 Act. GAAR lets the tax officer deny a tax benefit, including a treaty benefit, from an impermissible avoidance arrangement. Rule 128 of the Income Tax Rules, 2026 switches GAAR off where an arrangement's tax benefit in a tax year is INR 3 crore or less.

This page explains how GAAR tests a foreign group's Indian structure in 2026. It covers the threshold, grandfathering, the four tainted elements and the Approving Panel. It also covers treaty PPT and LOB clauses and the substance evidence we keep on file. Two worked examples and a checklist close the guide.

What is GAAR in India?

GAAR is a statutory power to set aside an arrangement whose main purpose is a tax benefit. Section 178 of the Income Tax Act, 2025 lets the officer declare an arrangement an "impermissible avoidance arrangement" and fix the tax consequence. It applies "irrespective of anything contained in this Act" and to any single step of an arrangement.

India first enacted GAAR as Chapter X-A of the Income Tax Act, 1961, through the Finance Act, 2012. The Finance Act, 2015 deferred it by two years, as paragraph 30 of CBDT Circular No. 19/2015 of 27 Nov 2015 explains. Section 95(2) of the 1961 Act then applied it from assessment year 2018-19, which is income from 1 Apr 2017.

From 1 Apr 2026 the same rule lives in Chapter XI of the Income Tax Act, 2025. The wording is close to the 1961 text. The numbers changed, and "assessment year" became "tax year". Section 536 of the 2025 Act keeps circulars issued under the 1961 Act alive where they are consistent with the new Act. So CBDT Circular No. 7 of 2017, the GAAR FAQ, still guides officers.

Point	Income Tax Act, 1961	Income Tax Act, 2025
Chapter	Chapter X-A	Chapter XI
Applicability	Section 95	Section 178
Impermissible avoidance arrangement	Section 96	Section 179
Lack of commercial substance	Section 97	Section 180
Consequences	Section 98	Section 181
Connected person and accommodating party	Section 99	Section 182
Application and guidelines	Sections 100 and 101	Section 183
Definitions, including "tax benefit"	Section 102	Section 184
Procedure and Approving Panel	Section 144BA	Section 274
GAAR override of tax treaties	Section 90(2A)	Section 159(6)

Source: section pages for the 2025 Act and the 1961 Act on incometaxindia.gov.in, checked 2 Oct 2026.

For the wider set of changes in the new Act, see our guide to the Income Tax Act, 2025 for foreign owned companies.

When does GAAR apply in India, and what is the INR 3 crore threshold?

GAAR applies to any arrangement, whenever made, for a tax benefit obtained on or after 1 Apr 2017. It does not apply where the aggregate tax benefit to all parties in the relevant tax year is INR 3 crore or less. Rule 128 of the Income Tax Rules, 2026 sets this threshold and three other exclusions.

Rule 128 is headed "Chapter XI relating to General Anti Avoidance Rule not to apply in certain cases". It replaced rule 10U of the Income Tax Rules, 1962. Its four exclusions are below.

Clause of rule 128(1)	Who or what is outside GAAR	Limit or condition
(a)	An arrangement with a small tax benefit	Aggregate tax benefit to all parties in the relevant tax year "does not exceed a sum of three crore rupees" (INR 3 crore)
(b)	A Foreign Institutional Investor	It is an assessee, has not claimed a treaty under section 159, and invested under the SEBI (Foreign Institutional Investors) Regulations, 1995
(c)	A non resident investing in a Foreign Institutional Investor	Investment through offshore derivative instruments or otherwise, directly or indirectly
(d)	Income from transfer of investments made before 1 Apr 2017	The same person must have made the investment before that date

Source: rule 128 of the Income Tax Rules, 2026, as amended by Notification No. 55/2026.

Three points about the threshold catch foreign groups out.

1. It is measured on the arrangement. Circular No. 7 of 2017 (answer 14) says the INR 3 crore limit "cannot be read in respect of a single taxpayer only". Benefits to every party in the arrangement add up.
2. It is measured in India only. The same answer says what can be examined is the tax benefit "enjoyed in Indian jurisdiction". A tax cost abroad does not net off the Indian benefit.
3. It is measured year by year. The circular calls the benefit "assessment year specific", and rule 128(1)(a) now says "relevant tax year". A structure can sit under the limit for years and cross it in the year of a large dividend or exit.

Section 184(11) defines "tax benefit" widely. It covers a reduction, avoidance or deferral of tax, a larger refund, lower total income and a larger loss. It expressly includes a benefit under a tax treaty.

Clauses (b) and (c) still name Foreign Institutional Investors and the 1995 SEBI regulations. Rule 128(3) borrows the meaning from section 210(6)(a) of the 2025 Act. Foreign portfolio investors now invest under SEBI's later regulations. On our reading, an investor should not assume it fits clause (b) without checking that definition.

What is an impermissible avoidance arrangement?

An impermissible avoidance arrangement is one whose main purpose is a tax benefit and which shows at least one of four tainted elements. Section 179(1) of the Income Tax Act, 2025 lists them. The section replaced section 96 of the 1961 Act with the same two part structure.

Clause of section 179(1)	Tainted element	Example we would worry about
(a)	Creates rights or obligations not ordinarily created between persons dealing at arm's length	A parent guarantee priced at nil, or a loan with terms no lender would accept
(b)	Results, directly or indirectly, in misuse or abuse of the Act	A step taken only to fit a deduction that the step does not deserve
(c)	Lacks commercial substance, or is deemed to under section 180, in whole or in part	A holding company with no staff, board or decisions where it is resident
(d)	Uses means or a manner not ordinarily employed for bona fide purposes	Shares moved to a new entity a week before an exit, then moved back

Source: section 179 of the Income Tax Act, 2025.

Section 184(2) defines "arrangement" widely. It means "any step in, or a part or whole of, any transaction, operation, scheme, agreement or understanding, whether enforceable or not". So an informal understanding between group companies counts.

How does the main purpose presumption work?

Section 179(2) shifts the burden onto the taxpayer. If the main purpose of one step or part is a tax benefit, the whole arrangement is presumed to have that main purpose. The presumption holds even if the whole arrangement has another main purpose. The taxpayer must prove the contrary.

This presumption matters for group reorganisations. A commercial merger with one tax driven step can fail on that step alone. Section 178(2) also lets the officer apply Chapter XI to a single step or part.

When does an arrangement lack commercial substance?

Section 180(1) deems an arrangement to lack commercial substance in four cases. Each one maps to a common holding structure.

Clause of section 180(1)	Deemed lack of substance	What it means for a foreign group
(a)	Substance or effect of the whole differs significantly from the form of its steps	A "sale" that leaves the seller with the same risks and returns
(b)(i)	Round trip financing	Money that leaves India and returns as share capital or a loan
(b)(ii)	An accommodating party	An intermediate company that takes part mainly to obtain the tax benefit
(b)(iii)	Elements that offset or cancel each other	A loan in one direction and a matching deposit in the other
(b)(iv)	A transaction through one or more persons that disguises the value, location, source, ownership or control of funds	Layers of entities hiding who owns the Indian shares
(c)	Location of an asset, transaction or residence without substantial commercial purpose other than the tax benefit	A treaty company with no reason to exist except the treaty
(d)	No significant effect on business risks or net cash flows apart from the tax benefit	A licence or service fee that moves no real risk or work

Source: section 180 of the Income Tax Act, 2025.

Section 180(2) defines round trip financing without regard to tracing, timing or mode of transfer. So the officer does not need to trace the same rupee leaving and coming back.

Section 180(3) lists three facts that "may be relevant but shall not be sufficient". They are how long the arrangement has existed, whether tax was paid under it, and whether it offers an exit route. A ten year old holding company that pays some tax abroad can still lack substance. Circular No. 7 of 2017 (answer 12) refused a fixed safe period for the same reason.

What does an accommodating party or connected person mean here?

An accommodating party is a party whose main purpose in taking part is to obtain a tax benefit for the assessee. Section 184(1) says this applies whether or not it is a connected person. Section 182 lets the officer disregard an accommodating party, treat connected persons as one person, and look through any corporate structure.

Section 184(9) sets "substantial interest" at beneficial ownership of at least 20 percent of voting equity shares. A person with a substantial business interest is a connected person under section 184(5). So a 20 percent co investor can be treated as connected.

What happens if an arrangement is declared impermissible?

The officer can deny the tax benefit, including a treaty benefit, and recompute tax as if the arrangement had not been made. Section 181 of the Income Tax Act, 2025 gives a non exhaustive list of tools. It replaced section 98 of the 1961 Act.

Section 181 power	What the officer can do	Typical effect on a foreign group
181(1)	Deny a tax benefit or a benefit under a tax treaty	Treaty rate on a dividend replaced by the domestic rate
181(2)(a)	Disregard, combine or recharacterise any step or the whole arrangement	Two transfers treated as one sale
181(2)(b)	Treat the arrangement as if it had not been entered into	Interposed holding company ignored
181(2)(c)	Disregard an accommodating party or treat it as one with another party	Conduit company merged with its parent for tax
181(2)(d)	Treat connected persons as one person	Group entities taxed as one
181(2)(e)	Reallocate receipts, expenses and relief among parties	Income moved to the entity that earned it
181(2)(f)	Treat the place of residence or the situs of an asset differently	Treaty residence ignored
181(2)(g)	Look through a corporate structure	Tax charged on the ultimate owner
181(3)	Treat equity as debt or debt as equity, capital as revenue or revenue as capital, and recharacterise expenses	Interest on a hybrid instrument treated as a dividend

Source: section 181 of the Income Tax Act, 2025.

Two points from Circular No. 7 of 2017 shape the outcome. Answer 13 says a consequence applied to one participant does not trigger a corresponding adjustment for another, because GAAR is meant to deter. Answer 16 says penalty depends on the facts and is not automatic. No five year holiday from penalty exists, and the circular pointed to section 273A of the 1961 Act for relief.

Answer 11 says that, once an arrangement falls within the section, it is disregarded and "necessary consequences will follow". That includes the denial of expenses claimed through the arrangement.

How does GAAR interact with treaty PPT and LOB clauses?

GAAR applies on top of a tax treaty. Section 159(4) of the Income Tax Act, 2025 applies the Act only so far as it is more beneficial to the assessee. So a better treaty rate prevails. Section 159(6) still applies Chapter XI "even if such provisions are not beneficial" to the assessee. Treaty clauses such as the principal purpose test (PPT) and limitation of benefits (LOB) apply alongside it.

Section 159(6) replaced section 90(2A) of the 1961 Act. Section 159(8) also requires a tax residency certificate and prescribed information for any treaty claim. A certificate alone does not answer a GAAR question. Our guide to Form 10F and the tax residency certificate covers the paperwork.

What does Circular 7 of 2017 say about LOB?

Answer 2 says treaty anti abuse rules "may not be sufficient" against every avoidance strategy. It adds that GAAR need not be invoked where the treaty LOB "sufficiently" addresses the avoidance. So passing an LOB clause helps, but only for the abuse that clause targets.

Answer 1 says GAAR and specific anti avoidance rules (SAAR) "can coexist". Transfer pricing, thin capitalisation style limits and the deemed income rules can all apply with GAAR.

What does Circular 01/2025 say about the PPT?

CBDT Circular No. 01/2025 of 21 Jan 2025 guides officers on the PPT. The PPT came into India's treaties through the Multilateral Instrument (MLI), in force for India from 1 Oct 2019, and through some bilateral protocols. The circular asks for "an objective assessment of the relevant facts and circumstances". It also keeps the grandfathering clauses of the India Cyprus, India Mauritius and India Singapore treaties outside the PPT.

Feature	GAAR (Chapter XI, 2025 Act)	Treaty PPT (MLI Article 7 or bilateral)	Treaty LOB clause
Source	Domestic law, sections 178 to 184	The treaty itself	The treaty itself
Benefits it can deny	Domestic and treaty tax benefits	Treaty benefits only	Treaty benefits named in the clause
Purpose test	Main purpose is a tax benefit, plus one tainted element	One of the principal purposes is the treaty benefit	Objective tests such as ownership, spending or active business
Threshold	Tax benefit above INR 3 crore in the tax year (rule 128)	None	None
Grandfathering	Income from transfer of investments made before 1 Apr 2017	Cyprus, Mauritius and Singapore grandfathering clauses (Circular 01/2025)	Set by each treaty
Who decides	Assessing Officer, Commissioner, then Approving Panel	Assessing Officer, guided by Circular 01/2025	Assessing Officer
Official guidance	Circular No. 7 of 2017	Circular No. 01/2025	Circular No. 7 of 2017, answer 2

Source: sections 159 and 178 to 184 of the Income Tax Act, 2025; rule 128; CBDT Circulars 7 of 2017 and 01/2025.

The PPT is easier for the officer to apply. It needs only "one of the principal purposes", has no threshold and no panel. In practice we prepare a treaty claim for the PPT first. If the file passes the PPT, it usually has what a GAAR review needs too.

Treaties differ. The India US treaty has an LOB article (Article 24) and no MLI PPT, because the United States did not sign the MLI. The India Singapore treaty has Article 24A for its capital gains clauses and the MLI PPT for the rest. See our guides to the India Singapore DTAA and the India US DTAA.

Which holding structures are at risk under GAAR?

The riskiest structures interpose an entity with no staff, decisions or spending at home. Its only role is to reach a treaty rate or exemption. Risk falls when the entity runs a real regional business. Circular No. 7 of 2017 (answer 4) says GAAR "shall not be invoked merely on the ground that the entity is located in a tax efficient jurisdiction".

The table below is our practical grading of common structures. It is a view, not a rule from the Act.

Structure	Main GAAR hook	Our risk view	What lowers the risk
Treaty holding company with no staff, owned by a fund in a non treaty country	Section 180(1)(c) location without commercial purpose; 181(2)(g) look through	High	Real board, staff and investment decisions in the holding country
Holding company interposed shortly before a large dividend or exit	Section 179(2) step presumption; 179(1)(d)	High	Dated board papers showing a commercial reason that predates the tax gain
Funds leaving India and returning as FDI	Section 180(1)(b)(i) and 180(2) round trip financing	High	Clear source of funds and a business reason for the route
Back to back loan through a treaty lender	Section 180(1)(b)(ii) accommodating party; 180(1)(b)(iii) offsetting elements	High	Lender that bears real credit risk and has its own capital
Hybrid instrument turning dividend into interest	Section 181(3) recharacterisation of equity and debt	Medium	Terms a third party lender would accept; transfer pricing support
IP company in a low tax country charging royalty to India	Section 180(1)(d) no effect on risk or cash flow; transfer pricing	Medium	People in the IP company who develop, manage and protect the IP
Regional headquarters with staff, customers and management	Main purpose test	Low	Keep the evidence current each year
Investment made before 1 Apr 2017, now sold	Rule 128(1)(d) excludes the income from transfer	Outside GAAR for that income	Keep proof of the original investment date and holder

Source: Krystal7 practice, read with sections 179 to 181 and rule 128.

Circular No. 7 of 2017 (answer 3) also says GAAR will not interfere with a taxpayer's right to choose the method of implementing a transaction. Choosing a subsidiary over a branch, or equity over debt, is not by itself abusive. The question is whether the chosen form matches what happens.

How does the grandfathering for investments made before 1 Apr 2017 work?

Rule 128(1)(d) keeps GAAR away from income on the transfer of investments made before 1 Apr 2017 by the same person. Rule 128(2), as substituted from 1 Apr 2026, repeats that carve out. Otherwise, GAAR applies to any arrangement, whatever its date, for a tax benefit obtained on or after 1 Apr 2017.

The grandfathering protects investments, not arrangements. Circular No. 7 of 2017 (answer 6) says lease contracts and loan arrangements "are, by themselves, not 'investments'". So an old loan does not carry protection into 2026. Interest paid on it after 1 Apr 2017 can face GAAR.

Answer 5 extends grandfathering in three cases:

1. Shares issued after 31 Mar 2017 on conversion of compulsorily convertible instruments bought before 1 Apr 2017, on terms fixed at issue.
2. Shares created by a split or consolidation of a grandfathered holding.
3. Bonus shares on shares acquired before 1 Apr 2017 by the same investor.

Dividends on a grandfathered holding are not "income from transfer". So a pre 2017 holding company still faces GAAR on its dividends.

What changed in the grandfathering rule on 31 Mar 2026?

CBDT issued two notifications on 31 Mar 2026. Notification No. 54/2026 (G.S.R. 240(E)), the Income Tax (Tenth Amendment) Rules, 2026, substituted rule 10U(1)(d) and 10U(2) of the 1962 Rules from publication.

Notification No. 55/2026 (G.S.R. 241(E)) made the same change to rule 128 of the 2026 Rules from 1 Apr 2026.

The old rule 10U(2) applied Chapter X-A to any arrangement for a tax benefit obtained on or after 1 Apr 2017. It had no express exception for that income. Rule 128(2) now excepts income "from transfer of such investments which were made before the 1st April, 2017 by such person". Rule 10U(2) carries the same exception. On our reading, the amendment settles that rule 10U(2) does not cut back the grandfathering in clause (d).

On 15 Jan 2026 the Supreme Court decided Authority for Advance Rulings (Income Tax) v. Tiger Global International II Holdings (2026 INSC 60). It is a Mauritius case about an indirect transfer of Indian shares. The arguments turned on whether a tax residency certificate is conclusive, and how rule 10U(1)(d) and 10U(2) interact. The Supreme Court allowed the revenue's appeals and set aside the Delhi High Court judgment. Commentators read the ruling as limiting reliance on a tax residency certificate alone. Read the full judgment before relying on any summary of it.

How does the GAAR procedure and Approving Panel work?

GAAR runs through a three stage process under section 274 of the Income Tax Act, 2025. The Assessing Officer refers the case to the Principal Commissioner or Commissioner. The Commissioner either drops it or refers it to an Approving Panel chaired by a High Court judge. Section 274 replaced section 144BA of the 1961 Act.

Stage	Who acts	What happens	Time limit or rule
1	Assessing Officer	Issues a notice seeking objections, with the arrangement, the tax benefit, the main purpose reasons, the section 179(1) element and the evidence	Rule 129(1) and (2)
2	Assessing Officer	Refers the case to the Commissioner in Form 62 (old Form 3CEG)	Section 274(1); rule 129(3)
3	Commissioner	Issues a notice; the assessee may object within the time given, at most 60 days	Section 274(2)
4	Commissioner	If no objection, issues directions; if satisfied GAAR is not needed, records it in Form 63 (old Form 3CEH)	Section 274(3) and (5); rule 129(4); within one or two months under rule 130
5	Commissioner	If not satisfied after a hearing, refers to the Approving Panel in Form 64 (old Form 3CEI), in four sets	Section 274(4); rule 129(5) and (6); within two months of the final submission under rule 130(1)(b)
6	Chairperson of the panel	Circulates the reference and gives both sides a hearing	Within seven days of receipt under rule 131(1)
7	Approving Panel	Issues directions on whether the arrangement is impermissible	Within six months from the end of the month of the reference, section 274(13)
8	Assessing Officer	Passes the assessment with the Commissioner's prior approval	Section 274(12)

Source: section 274 of the Income Tax Act, 2025; rules 129 to 131 of the Income Tax Rules, 2026; form map on incometaxindia.gov.in.

Section 274(14) excludes some time from the six month limit. It covers time spent getting information from abroad, capped at one year, and any period of a court stay. Rule 129(5)(b) adds a step for an entity in an International Financial Services Centre. The Commissioner must first seek a factual report from the IFSC Authority.

Who sits on the Approving Panel, and are its directions final?

Section 274(18) gives each panel three members, including the chairperson. Section 274(19) says who they are. The chairperson is or has been a High Court judge. One member is an Indian Revenue Service officer not below Chief Commissioner rank. The other is an academic or scholar in direct taxes, business accounts or international trade. Section 274(20) sets tenure at one year, extendable up to three years.

Section 274(16) makes the panel's directions binding on the assessee and on the tax authorities. Section 274(17) says no appeal under the Act lies against those directions. Rule 132 pays panel members a sitting fee of INR 6,000 a day.

Circular No. 7 of 2017 adds three safeguards that still guide officers through section 536:

1. Answer 7: an arrangement held permissible by the Authority for Advance Rulings binds the Commissioner and subordinate officers for that applicant.
2. Answer 8: where a court "explicitly and adequately considered the tax implication" while sanctioning an arrangement, GAAR does not apply to it.
3. Answer 15: if the Commissioner or panel accepted an arrangement in one year, GAAR is not invoked later on the same facts.

The NCLT sanction point needs care. Answer 8 asks whether the court actually considered the tax implication. A scheme order that is silent on tax gives little protection.

How do you document commercial substance?

Keep a dated file that shows why each entity in the chain exists, who runs it, where it decides, and what it spends. Build it when the structure is set up and refresh it every year. The file should answer the four elements in section 179(1) and the deemed cases in section 180(1) before an officer asks.

Document	What it proves	Section it answers
Board note on why the group used this country, dated at set up	Commercial reason predates the tax benefit	179(1) main purpose; 179(2) presumption
Board minutes of the holding company approving dividends, funding and exits	Decisions taken where the company is resident	180(1)(c); 181(2)(f)
Employee list, roles and payroll of the holding company	People who do the work	180(1)(c) and (d)
Office lease and operating expense ledger	Real presence and spending	180(1)(c)
Audited accounts and local tax returns	The entity bears risk and pays its own costs	180(1)(d)
Source of funds trail for each capital or loan inflow into India	No round trip financing	180(1)(b)(i); 180(2)
Loan agreements, guarantee fee and rate support	Arm's length rights and obligations	179(1)(a)
Transfer pricing study for each intra group payment	Payments match functions and risks	179(1)(a); 180(1)(d)
Tax residency certificate and Form 41 data	Treaty eligibility under section 159(8)	159(8); PPT
Tax benefit computation by tax year	Whether the INR 3 crore threshold is crossed	Rule 128(1)(a)
Proof of investment date and holder for pre 2017 holdings	Grandfathering applies	Rule 128(1)(d)

Source: Krystal7 practice, mapped to sections 179 to 181 of the Income Tax Act, 2025 and rule 128.

We ask clients for a one page "reason for structure" memo signed by the board. It records the business reason in plain words, before any tax saving. Officers read that memo first, and it shapes how they read everything else.

The transfer pricing study does double duty. It supports the arm's length test under sections 161 to 173 and the rights and obligations test in section 179(1)(a). See our transfer pricing documentation guide.

Permanent establishment risk is a separate test, but the evidence overlaps. A holding company that takes decisions in India can lose treaty residence and create a PE. Our guide on how to avoid permanent establishment risk in India covers that side.

Does GAAR apply to dividends, interest and royalties paid by an Indian subsidiary?

Yes. Any treaty rate claimed on a dividend, interest, royalty or technical fee is a "tax benefit" under section 184(11). It can face GAAR once the arrangement's Indian tax benefit in the tax year is above INR 3 crore. Grandfathering covers only income from transfer of pre 2017 investments, not these payments.

The payer carries the first exposure. An Indian subsidiary that withholds at the treaty rate relies on the parent's certificate and Form 41. If GAAR later denies the treaty rate, the officer can raise the shortfall. Our guides to TDS on payments to non residents and dividends from an Indian subsidiary to a foreign parent cover withholding.

We see the most GAAR questions on dividends. A dividend is a single large payment, it is easy to compute the treaty saving, and the parent's substance is easy to test.

What changed in 2026?

The law moved to a new Act and new rules on 1 Apr 2026. CBDT also amended the grandfathering rule, and the Supreme Court allowed the revenue's appeals in Tiger Global. The GAAR tests themselves kept their substance.

Item	Old position	New position	Date	Instrument
GAAR chapter	Chapter X-A, sections 95 to 102, 1961 Act	Chapter XI, sections 178 to 184, 2025 Act	1 Apr 2026	Income Tax Act, 2025 (Act 30 of 2025)
Procedure	Section 144BA	Section 274	1 Apr 2026	Income Tax Act, 2025
Treaty override	Section 90(2A)	Section 159(6)	1 Apr 2026	Income Tax Act, 2025
Exclusions and threshold	Rule 10U, "relevant assessment year"	Rule 128, "relevant tax year"	1 Apr 2026	Income Tax Rules, 2026, G.S.R. 198(E) of 20 Mar 2026
Reference forms	Forms 3CEG, 3CEH, 3CEI	Forms 62, 63, 64	1 Apr 2026	Income Tax Rules, 2026
Procedure rules	Rules in the 1962 Rules	Rules 129 to 132 (notice, time limits, panel procedure, remuneration)	1 Apr 2026	Income Tax Rules, 2026
Grandfathering in rule 10U(2) and rule 128(2)	Rule 10U(2) applied GAAR to all benefits from 1 Apr 2017, with no express exception	Carve out for income from transfer of investments made before 1 Apr 2017	31 Mar 2026 (1962 Rules); 1 Apr 2026 (2026 Rules)	Notification Nos. 54/2026 and 55/2026
Tiger Global dispute	Delhi High Court judgment, under appeal by the revenue	Appeals allowed and the High Court judgment set aside	15 Jan 2026	Supreme Court of India, 2026 INSC 60

Source: Income Tax Act, 2025; Income Tax Rules, 2026; CBDT Notification Nos. 54/2026 and 55/2026; form map on incometaxindia.gov.in.

Pending GAAR references and assessments for years before tax year 2026-27 follow the 1961 Act provisions. Section 536 of the 2025 Act saves actions taken under the old Act.

Worked example

A Singapore holding company owned by a Cayman fund

A Cayman fund owns 100 percent of SG Holdco, a Singapore company. SG Holdco owns 100 percent of an Indian Private Limited company. The Indian company pays a dividend of INR 40 crore in tax year 2026-27. The Cayman Islands has no tax treaty with India, so a direct holding would face the domestic rate.

Line	Working	Amount (INR crore)
Dividend paid	Given	40.000
Domestic rate for a foreign company on dividend	20 percent under section 207, plus 5 percent surcharge (income above INR 10 crore), plus 4 percent cess: 20 x 1.05 x 1.04 = 21.84 percent
Tax at the domestic rate	40 x 21.84 percent	8.736
Tax at the India Singapore treaty rate	40 x 10 percent (holding of at least 25 percent)	4.000
Tax benefit from the arrangement	8.736 minus 4.000	4.736
Rule 128(1)(a) threshold	Aggregate for all parties in the tax year	3.000
Result	4.736 is above 3.000	GAAR can apply

Source: Krystal7 computation. The 10 percent treaty rate is from Article 10 of the India Singapore DTAA. Surcharge and cess are the rates for a foreign company. The flat treaty rate without surcharge and cess rests on tribunal practice.

If the dividend were INR 20 crore, the benefit would be 20 x 11.84 percent, which is INR 2.368 crore. That is below INR 3 crore, so rule 128(1)(a) keeps GAAR out for that tax year. The MLI PPT still applies, because it has no threshold.

In the INR 40 crore year, SG Holdco needs its substance file. It should show Singapore directors who decide, Singapore staff, a regional business and a dated reason for the structure. Without that, section 180(1)(c) deems the location to lack commercial substance. The officer can then look through SG Holdco under section 181(2)(g) and tax the dividend at INR 8.736 crore.

A Dutch holding company inside a US group

A US parent owns a Dutch BV, which owns 100 percent of an Indian subsidiary. The US treaty caps tax on dividends at 15 percent for a qualifying corporate holder. The Netherlands treaty caps it at 10 percent. Suppose the group cannot show any reason for the BV beyond the lower rate.

Line	Dividend of INR 50 crore	Dividend of INR 80 crore
Tax at the India US treaty rate, 15 percent	7.50	12.00
Tax at the India Netherlands treaty rate, 10 percent	5.00	8.00
Tax benefit from the BV	2.50	4.00
Above INR 3 crore?	No	Yes

Source: Krystal7 computation; treaty dividend rates from the India US and India Netherlands DTAAs. Figures in INR crore.

The same structure sits outside GAAR in the INR 50 crore year and inside it in the INR 80 crore year. Here the officer compares the BV route with the direct US route, not with the domestic rate. A board that plans a special dividend should test the threshold before it declares the dividend.

Common mistakes

1. Treating the tax residency certificate as the answer. Section 159(8) makes it necessary, and section 159(6) still applies GAAR. Fix: build the substance file alongside the certificate.
2. Testing the INR 3 crore limit per company. Circular No. 7 of 2017 says the limit covers the whole arrangement. Fix: add the Indian tax benefit of every party in the chain for the tax year.
3. Assuming a pre 2017 holding protects dividends. Rule 128(1)(d) covers only income from transfer of the investment. Fix: test dividends, interest and fees on their own.
4. Assuming an old loan is grandfathered. Answer 6 of the circular says loans and leases are not investments. Fix: review interest flows on legacy loans against sections 179 and 180.
5. Relying on how long the structure has existed. Section 180(3) says duration, tax paid and an exit route are not sufficient. Fix: show people, decisions and spending instead.
6. Writing the commercial reason after the tax notice. A memo dated after the event carries little weight against the section 179(2) presumption. Fix: minute the reason when the structure is set up.
7. Ignoring a single tax driven step. Section 179(2) presumes the whole arrangement is tainted. Fix: review each step of a reorganisation, not only the end state.
8. Missing the 60 day objection window. Section 274(2) caps the reply period at 60 days. Fix: prepare the objection file before the Commissioner's notice arrives.
9. Relying on an NCLT order that is silent on tax. Answer 8 protects only where the court considered the tax implication. Fix: disclose the tax effect in the scheme and keep the record.
10. Forgetting the PPT once GAAR is cleared. A structure below INR 3 crore still faces the PPT. Fix: run the PPT test on every treaty claim.

Checklist for a GAAR review of a foreign holding structure

1. Draw the full chain from the ultimate owner to the Indian company, with ownership percentages.
2. List every payment and transfer that crosses the Indian border, by tax year.
3. Compute the Indian tax benefit of each arrangement against the realistic alternative route.
4. Add the benefit across all parties for each tax year and compare it with INR 3 crore under rule 128(1)(a).
5. Check whether rule 128(1)(b), (c) or (d) excludes any income, and keep the evidence.
6. Test each step against the four elements in section 179(1) and the deemed cases in section 180(1).
7. Record the commercial reason for each entity in a dated board memo.
8. Collect proof of people, decisions, premises and spending in each holding country.
9. Trace the source of funds for every capital and loan inflow to rule out round trip financing.
10. Align the transfer pricing study with the GAAR file for every intra group payment.
11. Test each treaty claim against the PPT under Circular No. 01/2025 and any LOB clause.
12. Obtain the tax residency certificate and Form 41 before the first payment of the tax year.
13. Repeat the review before any large dividend, buy back, restructuring or exit.
14. Respond to a rule 129 notice with the file, within the time the notice gives.

If you want a second view on a holding structure before a dividend or exit, write to Krystal7 with the group chart.

Frequently Asked Questions

Which sections of the Income Tax Act, 2025 contain GAAR?+

Chapter XI, sections 178 to 184, contains GAAR. Section 178 gives the power, 179 defines an impermissible avoidance arrangement, 180 covers lack of commercial substance, and 181 sets the consequences. Section 182 deals with connected persons, 183 with application, and 184 with definitions. Section 274 holds the procedure and the Approving Panel. These replaced sections 95 to 102 and 144BA of the 1961 Act from 1 Apr 2026.

Is the GAAR threshold of INR 3 crore an amount of income or of tax?+

It is an amount of tax benefit. Rule 128(1)(a) of the Income Tax Rules, 2026 excludes an arrangement whose aggregate tax benefit in the tax year is INR 3 crore or less. The benefit of all parties counts. Section 184(11) defines tax benefit to include reduced, avoided or deferred tax and treaty benefits. A dividend of INR 20 crore can produce a tax benefit well below INR 3 crore.

Does GAAR apply to a foreign company with no Indian subsidiary?+

Yes, if it has Indian taxable income or claims an Indian treaty benefit through an arrangement. Section 178 applies to "an arrangement entered into by an assessee", and a non resident with Indian income is an assessee. A foreign company that sells shares of an Indian company, or receives Indian royalties, can face GAAR. The INR 3 crore threshold in rule 128 still applies.

Does GAAR override a tax treaty in India?+

Yes. Section 159(4) of the Income Tax Act, 2025 lets a more beneficial treaty prevail. Section 159(6) still applies Chapter XI "even if such provisions are not beneficial to him". Section 181(1) lets the officer deny "a benefit under a tax treaty". Section 159(6) replaced section 90(2A) of the 1961 Act.

What is the difference between GAAR and the PPT?+

The PPT is a treaty rule and denies only treaty benefits where one of the principal purposes was the benefit. GAAR is domestic law under sections 178 to 184. It needs a main purpose of tax benefit plus a tainted element under section 179(1). The benefit must also exceed INR 3 crore under rule 128. GAAR also runs through a Commissioner and an Approving Panel under section 274. CBDT Circular No. 01/2025 guides the PPT.

If a company passes a treaty LOB test, can GAAR still apply?+

It can, but less often. CBDT Circular No. 7 of 2017, answer 2, says GAAR has no occasion where the treaty LOB "sufficiently" addresses the avoidance. Where the abuse falls outside what the LOB clause tests, GAAR remains available. Section 159(6) of the 2025 Act keeps the override.

Are investments made before 1 Apr 2017 fully outside GAAR?+

No. Rule 128(1)(d) excludes only income from transfer of investments the same person made before 1 Apr 2017. Dividends and interest on those investments can face GAAR. Circular No. 7 of 2017 extends the protection to bonus shares, split shares and shares from pre 2017 compulsorily convertible instruments. Loans and leases are not investments, so they get no protection.

What did Notification 55/2026 change in rule 128?+

Notification No. 55/2026 (G.S.R. 241(E)) of 31 Mar 2026 substituted rule 128(1)(d) and rule 128(2) of the Income Tax Rules, 2026 from 1 Apr 2026. Rule 128(2) now expressly excepts income from transfer of investments made before 1 Apr 2017. Notification No. 54/2026 (G.S.R. 240(E)) made the same change to rule 10U of the 1962 Rules.

Who can invoke GAAR against a company?+

Only the Assessing Officer can start it, by referring the case to the Principal Commissioner or Commissioner under section 274(1). The Assessing Officer first issues a notice under rule 129 seeking objections. If the Commissioner is not satisfied after a hearing, the case goes to the Approving Panel in Form 64. The officer then needs the Commissioner's prior approval before passing the assessment, under section 274(12).

How long does the Approving Panel have to decide?+

Section 274(13) gives the Approving Panel six months from the end of the month in which it receives the reference. Section 274(14) excludes time spent getting information from abroad, capped at one year, and any period of a court stay. Rule 131 requires the chairperson to circulate the reference within seven days and give both sides a hearing.

Can I appeal against the Approving Panel's directions?+

Not directly. Section 274(16) makes the panel's directions binding on the assessee and on the tax authorities. Section 274(17) says "no appeal under the Act shall lie" against those directions. So the hearing before the panel, with the evidence file, is the main chance to win the point. Prepare for it as you would for a final hearing.

Does GAAR apply if the NCLT approved our merger scheme?+

Only partly protected. CBDT Circular No. 7 of 2017, answer 8, says GAAR will not apply where the court "explicitly and adequately considered the tax implication" while sanctioning the arrangement. An order that does not deal with tax gives little cover. Disclose the tax effect in the scheme and keep the record of the hearing.

Can GAAR apply to a structure that is ten years old?+

Yes. Section 180(3) says the period an arrangement has existed may be relevant but is not sufficient to show commercial substance. CBDT Circular No. 7 of 2017, answer 12, refused to set a safe period. Rule 128(2) applies GAAR to arrangements of any date for benefits obtained on or after 1 Apr 2017.

Is there a penalty if GAAR is applied?+

Penalty is possible but not automatic. CBDT Circular No. 7 of 2017, answer 16, says the levy "depends on facts and circumstances" and that no five year exemption exists. The usual penalty provisions of the Income Tax Act, 2025 apply on the facts of each case.

Will GAAR stop us choosing a subsidiary instead of a branch?+

No. CBDT Circular No. 7 of 2017, answer 3, says GAAR will not interplay with the taxpayer's right to choose the method of implementing a transaction. A subsidiary, a branch, equity or debt are all legitimate choices. GAAR looks at whether the chosen form is used for a main purpose of tax benefit with a tainted element under section 179(1).

Does GAAR apply to foreign portfolio investors?+

Only within limits. Rule 128(1)(b) excludes a Foreign Institutional Investor "who has not taken benefit of an agreement referred to in section 159" and invested under the SEBI FII regulations. Rule 128(3) takes the meaning of that term from section 210(6)(a). An investor that claims a treaty benefit falls outside this exclusion. Rule 128(1)(c) excludes a non resident investing in such an investor through offshore derivative instruments. CBDT Circular No. 7 of 2017, answer 4, says GAAR will not apply only because the fund sits in a tax efficient jurisdiction.

Sources

• Income Tax Department, Income Tax Act, 2025, section 178 (General Anti Avoidance Rule), read 2 Oct 2026, https://www.incometaxindia.gov.in/w/section-178-77
• Income Tax Department, Income Tax Act, 2025, section 179 (Impermissible avoidance arrangement), read 2 Oct 2026, https://www.incometaxindia.gov.in/w/section-179-80
• Income Tax Department, Income Tax Act, 2025, section 180 (Arrangement to lack commercial substance), read 2 Oct 2026, https://www.incometaxindia.gov.in/w/section-180-80
• Income Tax Department, Income Tax Act, 2025, section 181 (Consequences of impermissible avoidance arrangement), read 2 Oct 2026, https://www.incometaxindia.gov.in/w/section-181-79
• Income Tax Department, Income Tax Act, 2025, section 182 (Treatment of connected person and accommodating party), read 2 Oct 2026, https://www.incometaxindia.gov.in/w/section-182-79
• Income Tax Department, Income Tax Act, 2025, section 183 (Application of this Chapter), read 2 Oct 2026, https://www.incometaxindia.gov.in/w/section-183-79
• Income Tax Department, Income Tax Act, 2025, section 184 (Interpretation), read 2 Oct 2026, https://www.incometaxindia.gov.in/w/section-184-77
• Income Tax Department, Income Tax Act, 2025, section 274 (Reference to Principal Commissioner or Commissioner in certain cases), read 2 Oct 2026, https://www.incometaxindia.gov.in/w/section-274-72
• Income Tax Department, Income Tax Act, 2025, section 159 (Agreement with foreign countries or specified territories), read 2 Oct 2026, https://www.incometaxindia.gov.in/w/section-159-89
• Income Tax Department, Income Tax Rules, 2026, rule 128, read 2 Oct 2026, https://www.incometaxindia.gov.in/w/rule-128-2
• Income Tax Department, Income Tax Rules, 2026, rule 129 (Notice and forms for reference under section 274), read 2 Oct 2026, https://www.incometaxindia.gov.in/w/rule-129-2
• Income Tax Department, Income Tax Rules, 2026, rule 130 (Time limits), read 2 Oct 2026, https://www.incometaxindia.gov.in/w/rule-130-2
• Income Tax Department, Income Tax Rules, 2026, rule 131 (Procedure before Approving Panel), read 2 Oct 2026, https://www.incometaxindia.gov.in/w/rule-131-2
• Income Tax Department, Income Tax Rules, 2026, rule 132 (Remuneration), read 2 Oct 2026, https://www.incometaxindia.gov.in/w/rule-132-2
• Central Board of Direct Taxes, Notification No. 54/2026, Income Tax (Tenth Amendment) Rules, 2026, G.S.R. 240(E), 31 Mar 2026, https://www.incometaxindia.gov.in/documents/d/guest/notification-no-54-2026-pdf
• Central Board of Direct Taxes, Notification No. 55/2026, Income Tax (Amendment) Rules, 2026 (rule 128), G.S.R. 241(E), 31 Mar 2026, https://www.incometaxindia.gov.in/documents/d/guest/notification-no-55-2026-1-pdf
• Income Tax Department, Income Tax Act, 1961, section 95 (Applicability of General Anti Avoidance Rule), https://www.incometaxindia.gov.in/w/section-95-68
• Income Tax Department, Income Tax Act, 1961, section 98 (Consequences of impermissible avoidance arrangement), https://www.incometaxindia.gov.in/w/section-98-64
• Central Board of Direct Taxes, Circular No. 7 of 2017, Clarifications on implementation of GAAR provisions, F.No. 500/43/2016-FT&TR-IV, 27 Jan 2017, https://www.incometaxindia.gov.in/w/circular-no.-7/2017-clarification-on-implementation-of-gaar-provsions-under-the-income-tax-act-1961
• India Code, Circular No. 7 of 2017 (full text), 27 Jan 2017, https://upload.indiacode.nic.in/showfile?actid=AC_CEN_2_2_00039_196143_1524045010860&type=circular&filename=ita-circulars-chapter-xa-circular-no-7-2017-dated-27-1-2017.pdf
• Central Board of Direct Taxes, Circular No. 01/2025, Guidance for application of the Principal Purpose Test under India's DTAAs, 21 Jan 2025, https://www.incometaxindia.gov.in/documents/d/guest/circular-1-2025-pdf
• Central Board of Direct Taxes, Circular No. 19/2015, Explanatory notes to the Finance Act, 2015 (paragraph 30, deferment of GAAR), 27 Nov 2015, https://www.incometaxindia.gov.in/documents/20117/6507196/CIRCULARNO19-2015.pdf/e13bbcc6-5db2-6021-9202-48dc70fb85f0
• Income Tax Department, Form No. 64 (reference to the Approving Panel), https://www.incometaxindia.gov.in/documents/d/guest/form-no-64-1
• Income Tax Department, FAQs and Guidance Notes on Forms as per Income Tax Rules, 2026 (form map), https://www.incometaxindia.gov.in/faqs-and-guidance-notes-on-forms-as-per-income-tax-rules-2026
• Income Tax Department, General Anti Avoidance Rules (GAAR) page, https://www.incometaxindia.gov.in/w/gaar
• Supreme Court of India, Authority for Advance Rulings (Income Tax) v. Tiger Global International II Holdings, 2026 INSC 60, 15 Jan 2026, https://api.sci.gov.in/supremecourt/2025/1251/1251_2025_7_1501_67552_Judgement_15-Jan-2026.pdf